Associate Professor of Sociology at the City University of New York, Queens College

Research Note

State Contributions to Federal Tax Revenues

State differences in federal tax payments seem driven by rich people, profitable businesses, and higher-income middle-class earners.
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This analysis examines the structure of federal taxes through an examination of state-level federal tax payments data that is disaggregated by tax type. A look at this data provides a more concrete and precise estimate of which communities serve as the economic engines upon which federal government operations depend. This analysis uses a compiled set of state-level public finance and socioeconomic variables detailed here.1 The data is from 2018.

Deconstructing Federal Taxes by Tax Type

Federal taxes are mostly comprised of income taxes. The largest source is personal income taxes, levied on people’s new money receipts. This is a progressively redistributive tax, in the sense that richer people pay proportionally more of their incomes. These yields will be higher in states that house proportionally more very high income households.

The second largest tax source is payroll taxes – the Social Security and Medicare deductions on people’s paychecks. Although these taxes are sometimes considered a form of personal savings or investment in some public retirement fund, the reality of the program is that the services that these taxes fund are financed in the year that they were drawn. It is a tax on current earners to finance benefits by current recipients, and thus the same kind of taxation for current redistribution as any similar redistribution program. These taxes are levied on middle class tax payers, as the rate only applied to the first $132,900 in income, and so their burden is proportionally lighter on those who earn more than this amount, and become proportionally lighter as one earns more money.

The third major income tax is corporate income taxes. This rate is flat. These tax yields will be higher in states where corporations make more money. Combined these income taxes comprise 90% of federal tax receipts.

THe remainder of federal revenues come from a variety of sources. Excise taxes are special taxes on goods like motor fuel, airline tickets, tobacco, and other targeted products. Estate and gift taxes are taxes on larger personal transfers, which in 2018 was in excess of $5.6 million. In 2020, these taxes were on gifts and estates over $11.4 million. Customs are taxes on imports. The remainder is comprised of an assortment of special taxes, fees, and other revenue sources.

Figure 1 (below) presents a pie chart depicting this distribution:

Pie chart depicting the distribution of federal income taxes by tax type, 2018
Figure 1: Distribution of Federal Taxes across Tax Type, 201

Where are these Taxes Collected?

Below, our analysis focuses on state-level differences in per capita tax payments by these major federal tax types. The analysis gives us a refined sense of which communities generate the revenues that sustain government operations.

Personal Income Taxes

Personal income taxes are progressive,in that wealthier people are supposed to pay higher tax rates and thus give up proportionally more of their income to taxes than poorer people. For example, an individual earning $30,000 per year would have been expected to pay 12% of their income to federal taxes (before adjustments like deductions, credits, etc.). Someone earning $150,000 would pay 24%, and those earning above $501,300 paid 35% of their income in federal taxes.

Of course, wealthy people are known to have the means to reduce their taxes, and we have all seen media stories about super-rich people who pay proportionally less in taxes than poor people. Despite such stories, America’s highest income households appear to be a major source of revenue for the federal government. According to IRS estimates2, America’s top 0.001% paid about 2.1% of all personal income taxes. Its top 0.01% paid about 9% of all personal income tax revenues, the top 0.1% paid 20%, and the top 1% paid 40% of these taxes. Federal revenues from personal income taxes are very heavily comprised of payments from very high income households.

The figure below shows per capita personal income tax payments by state. A table at the end of this post gives precise estimates. The range of per capita payments is considerable, ranging from $2,302 per person in Mississippi to $8,708 in Connecticut. Oregon was the median state, paying $4,225 per person in federal taxes on personal incomes.

Per capita personal income taxes paid, 2018
Figure 2: Per Capita Personal Income Taxes Paid, 2018

Per capita personal income taxes are higher in states whose populations include more high-income earners. Personal taxes are highest in states whose populations are dominated by residents of the country’s high-income and high value-added major metropolitan areas: New York, Boston, Los Angeles, San Francisco, Philadelphia, Chicago, and the District of Columbia regions. Wyomng and South Dakota are outliers among the states that remit large personal taxes on a per capita basis, in that they are not connected to such “mega-cities”. It may be that these states high aggregate payments reflect these states’ very small populations and their success in attracting wealthy residents. Jackson Hole is reputed to be a venue for vacation property ownership among the very wealthy. South Dakota established niche industries in the financial sector. Their small populations could make these cases similar to those of, say, Barbados or the Cayman Islands when examining international differences in macro-finance metrics.

Scatterplot of federal taxes on personal income with per capita gross state product and the population concentration in major metro areas.
Figure 3: Per Capita Production & Metro Population’s Relationship with Personal Income Taxes Per Capita

Payroll Taxes

Payroll taxes are mainly comprised of people’s Social Security and Medicare payroll deductions. Unlike personal income taxes, payroll taxes fall most heavily on the upper-middle class, while their impact on very high income households is more limited. In 2018, these taxes were due on the first $128,400 of wages. As such, a person earning $1 million and someone earning $150,000 would pay the same amount in payroll taxes. The rate was the same for all those earning below $128,400

Per capita social insurance taxes paid, 2018
Figure 4: Per Capita Social Insurance Taxes Paid, 2018

States tend to pay more of these taxes on a per capita basis when their wage-earning population is generally earning more. The figure below demonstrates how per capita payroll tax receipts are higher in states with higher median incomes and lower poverty rates.

Scatterplot of federal  payroll taxes on state median income and poverty rate, 2018
Figure 5: Per Capita Production & Metro Population’s Relationship with Personal Income Taxes Per Capita

It is also worth noting that population concentration in major metro areas and payroll taxes are also higher, because wages are generally higher in highly-productive and -profitable metro regions.

Scatterplot of metro population concentration and per captia federal payroll tax revenues by state, 2018
Figure 6: Metro Population Concentration and Personal Income Taxes

Corporate Income Taxes

Per capita corporate income taxes are the total income taxes levied on a state’s corporation’s income, divided by the total population. The figure gives the reader a sense of how the business activity generated by a state also sustains federal government finances. Tax hauls seen to be higher in states where higher personal incomes prevail. Ultimately, there are a set of states who are experiencing high production or profit, which creates both high income people and enterprises.

Per capita federal corporate income taxes by state, 2018
Figure 7: Corporate Income Taxes

Lessons

The federal government’s finances are primarily sustained by tax levies on the personal incomes of higher income households, and secondarily by taxes on the incomes of wage earners and corporations. All three tend to prevail in states whose populations are concentrated in “rich states” that house the country’s major metropolitan economic powerhouses.

Insofar as taxation levels across states are concerned, US federal government finances looks quite progressive, in that it redistributes money away from communities with high earners and profitable businesses to communities with low wages, less business activity, and less attraction to the wealthy. The benefits of this redistribution to those who live in communities sidelined by the rich and big businesses is obvious – it allows their communities to finance federal services that are better funded than what local taxes could afford on their own. It is progressive in the sense that it takes money from economically dynamic communities to those where such dynamism is in shorter supply.

However, what about the poor who live in these wealthy regions. Are their interests necessarily ensured by this redistribution. It depends on whether the money that is drawn from their community is spent on federal services that benefit the typical, run-of-the-mill family living in metro New York, Los Angeles, Boston, or so on.

Appendix

StateMean
Personal
Income
StateMean
Payroll
StateMean
Corporate
Connecticut8709New Jersey8709Delaware8709
Massachusetts8333Connecticut8333New York8333
New York7587Maryland7587Connecticut7587
New Jersey7418New Hampshire7418Massachusetts7418
Washington6262Massachusetts6262Minnesota6262
California6215Nebraska6215Iowa6215
New Hampshire6200Minnesota6200Washington6200
Wyoming6050Virginia6050Illinois6050
Delaware5949New York5949Wisconsin5949
South Dakota5913Washington5913Indiana5913
Florida5818North Dakota5818California5818
Maryland5749Rhode Island5749Nebraska5749
Illinois5717California5717Ohio5717
Colorado5618Delaware5618South Dakota5618
Nevada5568Illinois5568New Jersey5568
Virginia5423Hawaii5423Pennsylvania5423
Minnesota5280Pennsylvania5280North Dakota5280
Rhode Island4951Alaska4951Texas4951
Texas4948Vermont4948North Carolina4948
Pennsylvania4926Wisconsin4926Kansas4926
Alaska4730Colorado4730New Hampshire4730
North Dakota4617Wyoming4617Michigan4617
Wisconsin4360Kansas4360Georgia4360
Michigan4233South Dakota4233Oregon4233
Oregon4225Iowa4225Louisiana4225
Hawaii4204Michigan4204Tennessee4204
Vermont4152Oregon4152Missouri4152
Georgia3994Indiana3994Colorado3994
Kansas3993Texas3993Utah3993
Nebraska3928Tennessee3928Rhode Island3928
Ohio3908Georgia3908Virginia3908
Missouri3861Ohio3861Kentucky3861
Tennessee3810Missouri3810Arkansas3810
Arizona3742North Carolina3742Alaska3742
Iowa3723Utah3723Maryland3723
North Carolina3722Maine3722Alabama3722
Utah3629Montana3629Nevada3629
Montana3605Florida3605Oklahoma3605
Indiana3597Arizona3597South Carolina3597
Maine3597South Carolina3597Vermont3597
Louisiana3341Oklahoma3341Maine3341
South Carolina3338Alabama3338Arizona3338
Oklahoma3292Arkansas3292Idaho3292
Idaho3158Kentucky3158Florida3158
Arkansas3151Louisiana3151Mississippi3151
Alabama3093Idaho3093West Virginia3093
Kentucky2964Nevada2964Hawaii2964
New Mexico2876West Virginia2876Montana2876
West Virginia2577New Mexico2577New Mexico2577
Mississippi2302Mississippi2302Wyoming2302

  1. Cohen, Joseph N. 2020. “State Balance of Payment Data, 2018.” Retrieved (<osf.io/eh2d9>).
  2. IRS (2020) “Number of Returns, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in Current and Constant Dollars, and Average Tax Rates, 2001 – 2018” Online data set. https://www.irs.gov/pub/irs-soi/18in01etr.xls

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