How Much Does Your State Rely On Federal Aid?

It’s well known that some states tax their residents at a much higher rate than others.  The reasons behind each states respective tax rate are of course very complex.  One contributing factor that many do not consider is how much funding and aid a state gets from the Federal Government.

The Tax Foundation recently released a report detailing how much each state relies on assistance from the Federal Government.  They used data from fiscal year 2016 which is the most recent available. 

Why do states get Federal Aid?  As the Tax Foundation puts it:

Federal aid is allocated to states for a variety of purposes, primarily to supplement state funding for programs or projects deemed to be of national interest. Some federal aid is awarded in the form of competitive grants, while other federal funding is allocated according to formulas established by law. 

With that said, here is the map from the Tax Foundation report.

 

The top 5 states whose general revenue funds comprised the highest percentages in federal aid are,

• Mississipi, 43.4%
• Louisiana, 42.7%
• New Mexico, 41.2%
• Arizona, 41.2%
• Kentucky, 40.9%

The top 5 states whose general revenue funds comprised the lowest percentages in federal aid are,

• Virginia, 21.1%
• Hawaii, 22.7%
• Kansas, 23%
• North Dakota, 23.8%
• Utah, 25.7%

The Tax Foundation article claims “States that rely heavily on federal grants-in-aid tend to have sizable low-income populations and relatively lower tax revenues.” 

I’ve done posts related to those two topics , income and taxes, before.  So naturally my next inclination was to do some data sleuthing.  Does the statement from the Tax Foundation above show in the data?

The assumption: the states that receive a greater portion of their general revenue funds as aid from the Federal Government should have generally lower median household incomes, and/or should also have generally lower tax revenues.  I use “and/or” since one could outweigh the other.  But if the assertion from the Tax Foundation is correct we should see one of the two factors to be true.

I’m aware that aggregating at the state level isn’t perfect analysis since states are obviously not homogeneous.  But the federal aid data is only provided at the state level, rendering it impossible to get more granular. 

Regular readers will recall my last median household income map (2018 data has not yet been released):

 

 

To measure how much states collect in taxes WalletHub does an annual analysis of the respective tax burdens by state. 

Here’s their interactive state tax map of overall tax burdens (defined as a combination of sales tax, property tax, and income tax, by percentage) from WalletHub: 

 

I compiled the data from these three sources and entered it into a simple spreadsheet for analysis.  

In the first column below the states are ranked by the amount of aid they receive from the Federal Government based on the first map above from the Tax Foundation (Mississippi first, Virginia last).

In the second column below is the median household income rank (not the income number but the rank out of 50) for each state from lowest to highest.

In the third column below is the tax burden for each state, again from low to high.  Lower ranking states do not tax their citizens as high as higher ranking ones.

So based on the assertion from the Tax Foundation we should see some correlation in the ranking numbers.  In other words, the states that get the most federal aid money (column #1) should also tend to have lower median incomes (column #2) and should also tend to have lower tax burdens (column #3).  

 

State	Federal Aid Money Received (Rank, Highest-Lowest)	Median Income Rank (Lowest-Highest)	Tax Burden Rank (Lowest – Highest)
Mississippi	1	2	37
Louisiana	2	4	24
New Mexico	3	5	31
Arizona	4	23	19
Kentucky	5	7	30
Montana	6	14	9
Tennessee	7	10	3
Wyoming	8	32	14
Alaska	9	44	1
Missouri	10	15	13
Alabama	11	6	8
West Virginia	12	1	38
Arkansas	13	3	32
Indiana	14	17	27
Oregon	15	31	23
Ohio	16	16	40
Vermont	17	24	47
Georgia	18	19	15
Maine	19	20	48
South Dakota	20	22	7
Oklahoma	21	8	6
New York	22	37	50
Michigan	23	18	25
Florida	24	12	4
Texas	25	28	17
Rhode Island	26	36	44
Idaho	27	11	11
Pennsylvania	28	27	28
California	29	43	41
New Hampshire	30	45	5
Iowa	31	26	36
Nevada	32	25	20
South Carolina	33	9	12
North Carolina	34	13	21
Colorado	35	40	16
Nebraska	36	30	34
Maryland	37	50	39
Washington	38	41	18
Massachusetts	39	47	33
Illinois	40	35	43
New Jersey	41	49	42
Connecticut	42	46	45
Delaware	43	34	2
Minnesota	44	39	46
Wisconsin	45	29	35
Utah	46	38	22
North Dakota	47	33	29
Kansas	48	21	26
Hawaii	49	48	49
Virginia	50	42	10

 

As you can see the first five states on the list that get the most federal aid do generally have low median household incomes.  They also, however, collect pretty substantial taxes from their citizenry as compared to the rest.  But higher tax rates on lower incomes will still not generate as much revenue as more modest rates on high incomes.

The bottom of the list shows more correlation to support the assertion from the Tax Foundation.  Most of the numbers are high.  Those states get less federal aid, have higher household incomes, and generally tax their citizens at a higher rate. 

Delaware is a noticeable standout with the second lowest tax rates in the country, but also ranking low in federal aid received. 

The state that stood out the most to me was South Carolina, which is ranked #33 in federal aid received.  That’s a pretty low ranking, but as you can see South Carolina has the 9th lowest median household income of the 50 states, and is ranked 12th in relative tax burden.  So SC doesn’t tax their citizens very high, and their citizens don’t make very much money.  Yet they’re also not receiving nearly as much federal aid as states with better numbers in these measures.

Like my other geo-data posts, I hope these resources can help you if you are considering a move or if you are living the nomadic lifestyle.  Be sure to check out my Geoarbitrage Resources Page that has tons of great tools to help you find your perfect location.

I hope to continue to research various aspects of finance as related to geography going forward.  And I certainly hope you find these kinds of posts helpful!