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Economic Analysis: Federal Income Tax Revenue Varies Widely Across U.S. States

Posted on May 12, 2020

How should the federal government support the states? The COVID-19 disaster has put a shot of adrenaline into this usually soporific debate.

The two live issues members of Congress are considering right now are (1) loosening restrictions on the $150 billion in aid already granted to the states in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) and (2) whether further aid — amounts up to $500 billion — should be provided to states. Some of our leaders have complained that states fortunate enough to avoid the worst effects of the pandemic might be required to support the states that have not.

It turns out that there is a strikingly high correlation between states suffering the most from COVID-19 and states with the largest federal individual income tax burdens. The more empathetic among us might hope that helping those most in need in a time of crisis would be sufficient motivation for providing aid. But for those who might have other considerations, the data suggest that the most pandemic-stricken states would not necessarily be enjoying a “bailout” (as some have called it), but simply getting above-average one-time assistance from the federal government for years of above-average contributions to it.

In the table below, federal income tax burdens for the 50 states and the District of Columbia are measured in three ways. All three measures start with state-by-state total income tax liability as reported on individual returns for 2017 (the latest available) as published by the IRS Statistics of Income division. The first measure is individual income tax liability divided by population. The national average is $4,892.  The five jurisdictions with the highest per capita liability — District of Columbia ($8,706), Connecticut ($8,230), Massachusetts ($7,902), New York ($7,173), and New Jersey ($7,069) — have also been among the most severely affected by COVID-19.

A Bit More Detail

These five jurisdictions also have above-average incomes. State-by-state burdens as measured by the average tax rate per dollar of adjusted gross income are presented in the second set of columns in the table. This is an approximate measure of burden if all state average incomes were approximately the same. But the distribution of income matters as well, because we have progressive federal income tax rates. States with larger disparities in income will move up in the rankings.

The third set of columns uses GDP instead of AGI as the measure of state income in the denominator of the average tax rate. GDP is a measure of income by location of production. AGI is a measure of income by residence of individuals. So jurisdictions will have proportionately more AGI relative to GDP when their populations have more retirees and workers who commute to work in other states. These jurisdictions — most notably Florida — will move up in the ranking relative to their per capita rank.

These alternative measures do not change the main conclusion here: In general, jurisdictions suffering the most from the COVID-19 epidemic proportionately bear a much larger federal individual income tax burden than the rest of the nation.

Individual Income Tax Burden, by State, 2017
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