How can some states ‘afford’ to charge little or no income taxes?

Californians might wonder how other states can “afford” to charge their residents little to no income tax.

Let’s politely say “small government” sometimes gets a lot of help from the biggest government – Uncle Sam.

Income-tax burdens on residents vary widely by state. The federal government’s financial input into local economies also fluctuates across the nation.

My trusty spreadsheet, looking at rankings of state-by-state tax burdens and federal-dollar dependency from WalletHub and SmartAsset, found that low-tax states often get more generous financial inflows from the U.S. government than higher-tax states.

Taxing matters

Let’s note that taxpayers in the 17 states with the lowest individual income-tax burdens pay only an average 0.7% of their incomes to the state. Compare that with the 17 states with the highest income-tax burdens where taxpayers are charged an average 3.1% of incomes.

FYI: California’s 3.05% income tax burden was the seventh highest among the states.

The spreadsheet found that one way low-tax states balance their books is through higher sales taxes.

The burden of sales and excise taxes averaged 3.9% of incomes in states with low-income taxes vs. 3% in high-tax states. California’s 3.05% burden ranked 31st highest.

Curiously, that pattern wasn’t true with the real estate levies collected.

The property-tax burden averaged 2.7% of incomes in states with low-income taxes vs. high-tax states’ 3.2%. California’s 2.79% burden was the 23rd highest.

However, local tax burdens don’t vary as much as you may think. State taxes, as a share of incomes, averaged 7.2% in states with low-income taxes vs. 9.2% in high-tax states.

California’s 8.89% overall tax burden was 12th highest. Its main economic rivals? Texas, at 8%, ranked No. 29. Florida, at 6.33%, was the fifth-lowest.

Uncle Sam’s help

Do not forget the huge impact federal spending has on state economies.

Various Uncle Sam dollars flow to individuals, such as Social Security, Medicare and welfare grants. Other federal expenditures are indirect economic boosts, such as support for certain industries, government workers at military bases or other federal agencies.

Do not forget these federal expenditures can be significant chunks of a state economy. Consider the U.S. cash flow vs. a state government’s total revenues. These dollars averaged 43% of state revenues in low-tax states vs. 35% in high-tax states. California’s 32% share was 11th lowest.

Now federal employees average 3.1% of the workforce in both low-tax and high-tax states. But U.S. government workers were just 1.9% of all California jobs.

Or ponder how federal cash runs into and out of a state this way: the 17 low-tax states got $1.07 in federal funding compared with every $1 in U.S. income taxes coming from those states. The 17 high-tax states get just 86 cents from the feds.

And California got only 43 cents for every $1 in taxes paid to the IRS, by this math, the seventh-lowest return.

Bottom line

Let’s be fair: Federal funding gaps can be tied to long-standing contrasts between state populations and their economies.

There are places with older populations getting more federal retirement benefits. Certain states are out-sized hubs for military operations or government agencies. Others locations have concentrations of industries getting significant U.S. incentives.

Yet ponder what the spreadsheet found when combining the rankings of federal overall financial dependency by Smart Asset and WalletHub: The 17 low-tax states on average had the 18th largest dependency on federal dollars – well above the 31st average reliance rank for the 17 high-tax states. By this math, California had the 16th-lowest dependency.

Taking a very “federalist” view, these fiscal differences are what the nation’s founders had in mind when they gave great powers to each state. And we see voters have divergent views on how much the state should tax and how those dollars are spent.

I am not saying the rankings excuse unwise taxing, bad state spending habits or poor fiscal management. But these numbers suggest that extra federal dollars may help many low-tax states keep their state budgets balanced and local economies humming.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com