One interesting economic topic in the United States is how federal funding is distributed among the states. This is a regular point of contention for two reasons. First, federal officials of either party sometimes clash with states on the use of federal funds. Second, an apparent irony is often pointed out, using analyses like the embedded chart from WalletHub, that while the Republican Party favors a smaller federal government, red states tend to have a higher ratio than blue states of federal spending to federal tax revenue generated by the state’s residents. We will discuss this in more detail in a forthcoming AIER brief, but in this blog I will provide a brief overview of how this outcome is driven more by state economies than federal discretionary spending.
There is a wide variation in state gross domestic product per capita. Many of the wealthier states are large, urbanized states such as Connecticut, New York, and California (along with resource-heavy small states like North Dakota and Alaska). Rural states in the South and Appalachia, such as Arkansas, West Virginia, and Mississippi are among the poorest states, although as this chart on AEIdeas by Mark J. Perry shows, even these states, adjusted for purchasing-power parity, have comparable per capita GDP to nations such as the UK, France, and Japan.
According to a Pew study using 2014 data, federal spending per state varies less than state per capita GDP, and federal per capita spending is not strongly correlated with state GDP. For example, Massachusetts and Mississippi, California and Idaho, and Connecticut and Kentucky are three matched pairs in which per capita federal spending is within a few hundred dollars, but the state per capita GDPs are very different. In all of those cases, most spending is on individual benefit programs, primarily Social Security and Medicare, whose payments don’t rise one-to-one with taxpayer wealth. The differences in spending-to-revenue ratios between states are less about intentional federal differences in state investment and more about the way federal entitlement programs are funded.