Federal Tax and Spending in the Ocean State
An Overview

Federal tax and spending policies have a significant impact on the fiscal health of Rhode Island’s State and municipal governments. Federal aid and grants are the largest single source of State government revenue. The FY 2001 State budget as enacted includes $1,439.3 million of federal aid and grants. This represents approximately 30.0 percent of the State’s total budget, with Medicaid supported expenditures representing nearly half of all federal fund expenditures.

According to the Tax Foundation, the federal government spends $1.11 in Rhode Island for every $1.00 Rhode Islanders send to Washington, and federal per capita expenditures in Rhode Island are the 12th highest among the 50 states.

This RIPEC Comments briefly compares per capita federal tax burdens and expenditures among the 50 states and shows where, how much and what types of federal aid Rhode Island receives.

 
Federal Tax Burdens in Rhode Island
In FY 1999 Rhode Islanders had the 17th highest per capita federal tax burden among the 50 states, with each Rhode Islander paying an average of $6,605 to the federal government. This was $16 per resident above the national average federal tax burden of $6,589. It is estimated that in FY 2000 Rhode Island’s federal tax burden per resident will be $6,931 — or $50 below the national average of $6,981. Table 1 displays per capita federal taxes for the New England and Mid-Atlantic States. Federal taxes include individual and corporate income, social insurance, excise, estate and gift and customs taxes.

Generally, New England and Mid-Atlantic States had higher per capita federal tax burdens than did states in other regions. As shown on Table 1, the Tax Foundation estimates that seven of the 11 New England and Mid-Atlantic States will rank in the top ten nationally in terms of per capita federal tax burdens in FY 2000. The fact that northeastern states rank among those with the highest per capita federal tax burden is a reflection of the higher average income of residents in this region of the country.

Federal Spending in Rhode Island

Most tax dollars sent to Washington are returned to the states in the form of defense and other federal procurements, Social Security, Medicare and Medicaid payments, grants to states and local governments, federal payrolls and other components of federal spending.

Patterns of federal spending in each state reflect the age of the population, income distribution, the portion of each state’s economic base that is defense related and geography. The U. S. Census Bureau annually estimates how much federal spending is allocated to each state. The most recent federal spending data available is for FY 1999.

Table 2 shows per capita federal expenditures for the New England and Mid-Atlantic States. In FY 1999, per capita federal expenditures in Rhode Island were the fourth highest among the 11 states that make up these regions. When compared to the other New England States, only Massachusetts received more federal dollars as measured on a per capita basis than the Ocean State.

In FY 1999 federal per capita expenditures in Rhode Island of $6,097 ranked 12th highest among the 50 states -- 10.9% over the national average of $5,498.

The Tax Foundation’s report and analysis divides federal expenditures in each state into five categories: retirement and disability, other direct payments, grants to state and local governments, federal procurement, and salaries and wages. In terms of federal expenditures for retirement and disability, which includes Social Security and Medicare, Rhode Island’s per capita share was 15% above the national average. Per capita federal grants to Rhode Island’s State and local governments, which encompass spending on Medicaid, public assistance, highways and other payments, were 34% above the average of all 50 states. Federal procurement per capita in the Ocean State was 39% below the national average and per capita expenditures on federal payroll in Rhode Island were 15% above the national average.

Relationship of Federal Taxes Paid to Federal Spending

Table 3 relates per capita federal tax collections to federal expenditures for the New England and Mid-Atlantic States. Rhode Island received $1.11 in federal spending for every $1.00 its residents sent to the federal government in FY 1999. A decade earlier Rhode Island received $0.97 for every dollar paid in federal taxes. As a result, Rhode Island ranked 23rd in the nation in federal expenditures per dollar of federal taxes paid by its citizens in FY 1999. This was a marked improvement over Rhode Island’s ranking of 32nd in 1989.

Table 3 also shows that Massachusetts and Connecticut received significantly less back from the federal government than their residents paid in federal taxes. In FY 1999 Connecticut and Massachusetts received $0.65 and $0.86, respectively, for every dollar the people of those states paid in federal taxes.

Federal Aid and the State Budget

Another way to measure the impact of federal aid on Rhode Island is to look at the State budget. In FY 2001 it is anticipated that $1,439.3 million, or 29.9% of all State expenditures, will be financed by the federal government. In fact, federal aid is the largest single source of state revenue in the Ocean State.

The use of federal funds varies considerably among the functions of State government. As set forth on Table 4, federal funds are estimated to represent 51.7% of all State spending on human services programs, and 58.2% of all State transportation expenditures. Conversely, federal aid accounts for less than 10.0% of all education spending and 8.2% of public safety expenditures.

As presented on Table 4, when federal funds for human services and transportation programs are combined, they represent 84% of all federal aid the State of Rhode Island anticipates receiving in FY 2001. Any changes in the federal-state Medicaid program or in federal transportation formulas can have a significant impact on Rhode Island’s fiscal condition.