Well, probably, anyway.
Tax Day 2011 is different from any other, and not just because this year’s deadline falls on April 18. States across the country are facing budget crises, many due to the withering of federal stimulus funds. Congress and President Obama are just now settling on a budget for 2011 — the fiscal year that’s already half over — and contemplating steep cuts in future years. All this as we come off a year of Republican electoral victory, much of it won on a wave of anti-federal, state’s-rights sentiment.
But who really comes out ahead in this relationship, in real dollar terms? Does Alabama get a dollar back for every dollar we pay in taxes to the federal government?
Answers are hard to come by. State officials say it’s not something they track. And it appears that federal agencies aren’t keeping score either.
And the one widely-known study on the topic is based on years-old data.
A partisan topic?
During his campaign, Gov. Robert Bentley promised to “ensure that Alabama receives $1 back from the federal government for every dollar that our citizens pay in taxes of all kinds.” The statement implied that the state is now getting a less-than-impressive bang for its federal tax buck.
Some commentators disagree. Washington Post columnist Ezra Klein recently included Alabama among the states that benefit from a “red-state rip-off.” On his blog, Klein posted a map showing which states pay more in federal taxes than they receive in federal aid. Klein’s map suggests that, with few exceptions, the states that voted Republican in 2008 are getting more from the feds than they pay — and, arguably, are being “subsidized” by taxpayers in blue states, where voters tend to elect Democrats.
The meme has caught on in Alabama, where some bloggers and online commentators are quick to point out that Alabama gets $1.66 in federal funding for every dollar Alabamians pay in taxes.
A surprising source
Both Klein’s map data and the $1.66 figure seem to come from the same surprising source — a tax reform group known as the Tax Foundation. Officially a non-profit, non-partisan group, the Tax Foundation doesn’t advertise itself as conservative — but it was founded in 1937 by business leaders who were alarmed at the increase in personal taxes under the New Deal. Foundation spokesman Richard Morrison told The Anniston Star that the group favors a “broader tax base and lower overall taxes.”
In 2007, the foundation did a study of the state-by-state collection of taxes and distribution of federal funds. Morrison said the study used 2005 income tax data from the Internal Revenue Service and compared it to outlays of funding to various states for the same year. The group also looked at numbers going back to 1981.
If the foundation’s numbers are accurate, Alabama has been a net winner in the federal tax game, and the deal gets better every year. In 1981, Alabama got $1.29 for every dollar paid to the federal government, according to the foundation’s numbers. In 2005, it was $1.66 for every dollar we pay in taxes — the same figure that keeps popping up in the political debate.
Alabama ranked among the top 10 winners in the federal tax situation for all but two years of the 1981-2005 period. New Mexico was in the top spot in 2005, with $2.03 in federal funding for every dollar in taxes paid. The Northeastern states were the biggest losers in 2005. New Jersey residents got 61 cents’ worth of federal programs for every dollar of taxes.
A difficult analysis
Checking up on the Tax Foundation’s numbers is harder than it might sound.
The IRS does track the amount of personal tax revenue collected from each state: in 2008, the last year for which numbers are available, Alabamians owed $11.5 billion in personal taxes.
But the IRS won’t give state-by-state accounts of corporate taxes, because the numbers are too difficult to estimate, according to Ruth Schwartz, who works in the Statistics of Income Division of the IRS.
The problem is that corporations often locate their headquarters in tax-friendly states — Delaware is popular — even if they do business elsewhere. With so many companies filing taxes from a single state, the numbers could easily get distorted.
The money states get back from the federal government is just as hard to calculate. According to officials in the state’s Legislative Fiscal Office, Alabama’s government agencies got $6.8 billion in federal funding in 2008. But LFO officials are quick to point out that the $6.8 billion is not the whole story — because it doesn’t include military installations and other federally-owned facilities, nor does it include funds paid directly to Alabama residents, such as Social Security or military pensions.
That’s where the Tax Foundation comes in. Morrison said that in its 2007 study, the foundation did the hard work of sifting through both corporate taxes and federal budgets for the year in question, sorting out where the corporate tax is really from, and where the tax money goes.
And the results, Morrison said, are not all that surprising. Because the federal government has a progressive system of taxation — taxing high-income wage earners at a higher rate than low-income people — states with large numbers of people in poverty are likely to be net recipients of federal tax dollars.
At least, that’s the case in normal times. But what about post-recession, stimulus-funded America?
No one seems to know. The latest numbers available from the IRS are the figures from 2008.
And the Tax Foundation numbers have stood for so long because no new study has emerged to challenge them. Officials at the IRS and other agencies referred The Star to the Tax Foundation study repeatedly as the only known source of information on the topic.
Morrison, the Tax Foundation spokesman, cautions against reading too much into the numbers — particularly when it comes to talk about states “subsidizing” other states.
He noted that the federal government collects taxes from individuals, not states. And the numbers aren’t likely to change much unless there’s a major change in the tax code — or unless a lot of individual Alabamians get significantly richer.
“It’s tied to the incomes of the individual people in the various states,” Morrison said.
Assistant Metro Editor Tim Lockette: 256-235-3560.