The tax filing deadline in the United States is April 18, but some states receive more federal aid than what they pay in taxes.
WalletHub released it report on 2023’s Most & Least Federally Dependent States, which illustrates the extent to which states are independent economically. The personal finance website compared 50 states across three key metrics: return on taxes paid to the federal government, federal funding as a share of state revenue and share of federal jobs.
The most federally dependent state is Alaska, followed by West Virginia, Mississippi, Kentucky and New Mexico. The least federally dependent states are New Jersey, Washington, Utah, Kansas and Illinois.
Despite the prevalence of military bases and federal employment positions in the Commonwealth, Virginia ranks no. 32 on the list of most dependent.
According to WalletHub, red states are more reliant on federal funding than blue states at 20.32 to 30.68. A 57.2 percent correlation exists between a state’s federal dependency and its per-capita GDP, which means the least wealthy states receive the most federal funding.
Alaska has the lowest tax rates because it is the most federally dependent state.
Dimitri Papadimitriou, president of the Levy Economics Institute and a professor at Bard College said the idea of the United States is “based on federal resources being allocated to states and local governments irrespective of the tax revenues their residents provide to the federal government. We observe the abysmal results for some member states in the EU and especially the euro members. All states use the federal currency which must include both a monetary and a fiscal union. If there is a common monetary policy it should hold true for a fiscal policy as well.”
“This goes too far in allowing the autonomy of states to overshadow serving the common good of all under a federative system,” Dr. Jamshid Damooei, a professor and Director of the Economics Program, Executive Director of the Center for Economics of Social Issues (CESI) at California Lutheran University, said. In addition, a significant proportion of states’ spending may relate to providing public goods and services which offer certain entitlements in those states. Holding every state as an independent economic entity may compromise the good of all, regardless of their geographic location. One essential feature of the system is the free movement of labor and capital. This possible change, with some reluctance, will ultimately bring the necessary changes. The system’s strength requires a different understanding of what should be considered as the benefit of all, and this certainly is not or should not be based on the economic power of each state.”
So, what is the fairest way to redistribute federal resources to the states?
“We should start with what constitutes an acceptable meaning of fairness when the redistribution of financial resources toward meeting the interest of people in a society is concerted. It is the needs of people rather than their contribution. A society should be viewed as an interrelated community in constant change. Paying for others does not just serve the recipients but the payers too. We should use the same thinking between the people in one nation and the entire family of nations. The answer to this question is simple. Serving the common good of all means setting a safety net and not allowing anyone to fall below. This will inevitably bring a higher level of commitment at the federal level. The other side of this plan is enhancing the ability of the states to serve their own interest. The federal government is primarily responsible for creating an investment plan to increase human resource capacity, and the dividend will benefit all. An excellent example of this is eradicating poverty, homelessness, universal healthcare and free education,” Damooei said.
According to Dr. Michael J. Hicks, Distinguished professor at and director of the Center for Business and Economic Research at Ball State University, the goal is not just fairness to Americans who live in a state, but to assist with feeding, education, housing and healthcare of poorer Americans in that state, and individuals unable to work.
Which programs should be a state/local responsibility, and which should be a federal responsibility?
“The highest proportion of states’ spending is on education and healthcare. There are significant differences among the states. Both areas are vital for the health and well-being of every person in the United States and provide the essential segments of investing in creating human capital. However, federal responsibilities come with the possibility of additional allocation of resources. We need to make some reasonable standards, such as federal standards for health benefits or educational advancement. The other important issue here is the role of the private sector as for-profit or nonprofit. The federal government can strengthen its capacity to serve a more significant segment of the community. The most promising element of a positive change in the future can and should be restructuring the provision of public goods and services to universal assistance instead of using deficient means-tested methods. This rethinking will inevitably change our existing tax provision and its increase by expecting a higher share from large corporations and the rich,” Damooei said.