How Does Minnesota Compare -- A Federal Government Reliance Postscript

One likely contributing factor in Minnesota’s above average tax burdens is the state’s below average receipt of financial support from the federal government.   From our latest 2019 edition of How Does Minnesota Compare based on the latest Census of Government information, Minnesota is about 12% less reliant on federal revenues to support state and local spending than the U.S average. 

An annual report from the Rockefeller Institute of Government -- now just updated for 2018 -- offers more detail on the nature of the fiscal relationship between states and the federal government.   In its annual “Balance of Payments” study, the Institute calculates the amount of money states send to the federal government and compares it to the financial support states receive from the federal government.  In essence, the report captures the nature and results of the federal government’s redistributive economic activities and policies.  It identifies which states are “net givers” to the federal government and which are “net getters.”

Federal payments include all federal income and employment taxes, corporate income taxes, excise taxes, estate taxes, duties and fees, and miscellaneous receipts originating within the state.    State receipts include both direct federal payments for individuals in the state and other federal spending contributing to state economic activity.   Direct federal payments for individuals are dominated by Social Security and medical care spending but also include a wide variety of other income assistance programs targeting lower-income households and students.  Other federal spending includes federal grants, federal contracts, and compensation from federal employment.

Some Minnesota-related findings:

  • Minnesota was one of only eight states in the nation in 2018 with a negative balance of payments.  (Others are New York, New Jersey, Massachusetts, Colorado, Connecticut, Utah, and Nebraska.)  Minnesota got a 99 cent return for every dollar sent to the federal government.  All told Minnesota paid $725 million more to federal coffers than what was spent by the federal government in the state.   Adjusted for population, that balance of payments ranks 43rd in the nation. 
  • Looking at per capita federal government expenditures in the state by category, Minnesota ranks 45th in direct payments for individuals, 25th in grants, 17th in contracts, and 42nd in wages.   The $10,166 total of in-state per capita federal spending ranks 43rd in the nation or about 11.5% below the U.S average.
  • Looking over a longer four year period, Minnesota has more or less been a break even state - a net contributor in 2015 and 2018 but a net receiver in 2016 and 2017.  The four year average difference in balance of payments per capita is a positive $231 which is $1,528 below the U.S. average.

The biggest balance of payments loser is New York, which contributed $22 billion more to the federal government than the federal government expended in the state in 2018.  That’s larger than the next two states (New Jersey and Massachusetts) combined.    The winner of the “We Don’t Want to Admit It But Thank Goodness for Big Government’s Involvement in our Economy” Award for having the largest balance of payments surplus goes to Kentucky which got a healthy $2.41 return for every dollar it sent to Washington.   Most interestingly (but perhaps not surprisingly) Kentucky features a whopping $5,649 in federal contract spending per capita, second in the nation only to Virginia, larger than Maryland, and over 4.5 times larger than the average of all states not bordering on D.C.

What makes this year’s report particularly interesting is the impact of federal economic redistributive policies in the context of the TCJA and the limitation on state and local tax (SALT) deductibility.  The report found the reduction in corporate income taxes in New York has resulted in an increased share of federal revenue generated from individual income taxes -- a shift which places a larger portion of the tax burden on states with a greater number of high-income earners. 

For New York the TCJA is a bit of a double whammy – making the state’s reliance on its progressive income taxes for its own purposes more difficult while at the same time making the highly progressive federal income tax – to which its citizens are major contributors – take on a greater role in federal redistribution efforts.    Examples like this make it clear why SALT cap workarounds have been such a topic of interest in many states.   With the SALT cap scheduled to expire in 2025 and Treasury guidelines having put SALT workarounds in the intensive care unit, the issue is not going to go away.

It’s been argued the SALT deduction creates a federal subsidy by forcing people in lower tax states to subsidize more expensive governments in places with higher-than-average state and local tax burdens.  That’s true insofar as it goes.   But “more expensive states” also may be more expensive in part due to the federal government’s role in progressive economic redistribution providing the resources and services for many “lower tax states” to maintain their economies.