Updated: 2021’s Most & Least Federally Dependent States

Congress passed another COVID-19 relief package that, at a cost of $1.9 trillion, is almost as much as the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted a year ago in March 2020. $195.3 billion for states and the District of Columbia, $25.5 billion of which will be equally distributed among states and the District of Columbia, while the remaining will be allocated based on each state’s unemployment rate.

Enhanced federal supplemental unemployment benefits of $300 per week will run through September 6 – with the first $10,200 in unemployment benefits exempt from taxes for households making less than $150,000 a year. The State Small Business Credit Initiative, which provides funding for state-run small business financing programs, will receive $10 billion to provide support to small businesses responding to the economic effects of the pandemic and ensure business enterprises owned and controlled by socially and economically disadvantaged individuals.

With states having received hundreds of billions of dollars in federal aid during the COVID-19 pandemic, the personal-finance website WalletHub today released updated rankings for 2021’s Most & Least Federally Dependent States.

The report illustrates the extent to which states are independent economically. However, the oxymoron in this situation is that states with a higher level of federal dependence are likely better positioned to handle the coronavirus pandemic, given that a lot of relief has come from the federal government. In order to identify which states most and least depend on federal support.

They compared the 50 states across three key metrics: return on taxes paid to the federal government; federal funding as a share of state revenue; and share of federal jobs.

Key Stats

• With an average dependency rank of 20.68, Red States are altogether more reliant on federal funding than Blue States, which rank 30.32 on average. (The lower the rank, the more dependent the state is.)
• There is a 55.85 percent correlation between a state’s federal dependency and its per-capita GDP. That means the least wealthy states tend to receive the most federal support.
• Illinois is the eighth least federally dependent state, which helps explain the fact that it has the highest tax rates in the nation. On the flip side, Alaska is the second most federally dependent state and has the lowest tax rates.

WalletHub Q & A

Should federal resources be allocated to states according to how much they pay in federal taxes, or should some states subsidize others?

“The principles of ability to pay and pay-for-use are at odds here, as they are with most tax policies, said Christopher Z. Mooney, University of Illinois, Chicago. “I am not a should person, but the ability to pay principle is enshrined in our federal tax code (if imperfectly) and most state income taxes.”

“No. Each federal program should have criteria that are the same for people wherever they live in the U.S., and the distribution of federal funds by using these criteria should be accepted,” said Laurence Seidman, University of Delaware. “I think it is very interesting to see how funds are distributed across states, but the distribution of funds should be generated by the criteria of programs that are the same for people wherever they live in the U.S.”

Which programs should be a state/local responsibility, and which should be a federal responsibility?

“This question is more straightforward,” said Zach Mohr, PhD, CGFM, The University of North Carolina at Charlotte. “Public finance theory would say that those programs that do not spill over into other states should be handled by state and local governments. “

“But even some services like elections administration may have spillover into general trust and confidence in a democracy that may suggest that some funding by the federal government in instances of the COVID-19 emergency or election security may be appropriate.”

“This also is an interesting question,” said William M. Gorman, Monmouth University. “If one looks back historically, this question changes as the nature, size, focus, and scope of the federal government have evolved. By this, I mean that at the outset of the creation of the United States, the central government’s most important powers and responsibilities were (both in terms of expense and power distribution) related to the defense and protection of the country from internal and external threats. As the government in the modern era has evolved, you see a more regulatory climate that has emerged dating back to the Progressive era of American History. Traditionally, functions like education, local protection (police/fire, etc.) were and have always been handled on the local level. As the government has evolved as noted above, you have seen with the growth of government, the blurring of the line between federal and state government functions/responsibilities. I use the classic example of the Elementary and Secondary Education Act of 1964 which for the first time had the Federal government contributing some aid to the states for funding education. Additionally, one could reference the “No Child Left Beyond” statute under George W. Bush and the “Race to the Top” statute for Educational funding under Barack Obama. Where this has caused friction is that for states to receive funding from these statutes there are typically federal conditions or “mandates” that can be attached.”

What more can the current administrations do to help reduce the impact of revenue shortfall in state budgets during this economic downturn?

“Certainly, many states are looking at the pending stimulus package as a starting point,” said Mark Morris, Miami University. “We have seen one-time dollars like this be effective in restarting stalled economies in the past. However, states and their citizens need to reassess the bundle of services provided to determine future spending and the required taxation levels to deliver them. Then they need to take action.”

“The current ongoing pandemic has resulted in substantial revenue shortfalls in state and local budgets,” said Yonghung Wu, University of Illinois at Chicago. “What the current administration can do is to provide more unrestricted direct assistance to state and local governments. The distribution of federal assistance should be based on the actual impact of the pandemic on a state’s revenues and expenditures.”

To view the full report and your state’s rank, please visit:

https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700

Courtesy: WalletHub