Winners and Losers in the Tax Game

By Christine Hall | July 7, 2008 | 8:19 PM EDT

( - When it comes to federal tax dollars, not all states are created equal. Every year for the past nine years, Harvard University's Kennedy School of Government tracks the flow of federal tax dollars to see which states are net winners and losers. Every year, the study reveals a consistent pattern. The Northeast and Great Lakes states are net donors, to the benefit of the South and West.

Ten states remain the largest net donors to other states, compared to a year ago, with Connecticut taxpayers topping the donor list at a loss at nearly $2,800 per person, on average. That's because it's also the state with the highest per capita income. Under the nation's "progressive" income tax code, the wealthiest one percent of Americans pay one-third of the taxes. The other states are similarly situated, with the wealthiest states getting less back on the dollar than they send to Washington.
New Mexico gains the most from taxpayers nationwide: about $3,944 per person.

Connecticut's Commissioner of the Department of Revenue says that's just fine with him. "As Gov. Rowland would say, Connecticut is as strong as its weakest city. Similarly, on a federal level, we're as strong as our weakest state," said Commissioner Gene Gavin. "The philosophy would be in a progressive income tax system that you've got to share the monies properly," he said. "I think it's the right way to go."

Rep. Nancy Johnson (R-CT) says she isn't so content with the status quo. "The study clearly shows how deeply Connecticut taxpayers are being hurt by high taxes," she said. "Working families in Connecticut are getting a raw deal, and we need to continue pushing for tax relief. That's why I'll continue to support a variety of tax cuts in the upcoming Congress that will lift the burden on Connecticut taxpayers, including repeal of the marriage penalty tax, tax deductions for people who pay for their own health insurance, and repeal of the estate tax," said Johnson.

Patrick Fleenor, chief economist for the Tax Foundation, says that one of the consequences of the current system of taxation and redistribution is that it hurts middle-income workers in high-cost areas like Manhattan. The system, in other words, doesn't take cost of living into account. "What the federal government tries to do is apply a general rule to a very diverse country," said Fleenor. "$80,000 in Manhattan is very different than $80,000 in Mississippi," he said. "However, the federal tax code essentially treats them as if they're the same."

Fleenor says that the best way to create tax equity between the states would be to adopt a flat tax system, where, roughly speaking, each worker pays the same percentage of their income in taxes. But, according to Fleenor, the high tax states don't seem to mind their situation.

"New Yorkers should be all upset about this, and southerners should be happier," said Fleenor. New York is the 10th biggest donor state. "Yet if you look at the voting patterns, just the opposite: liberals are from the Northeast and conservatives in the South," he said. "Very few of them argue that you should bring down the top marginal tax rate" or adopt a flat tax, said Fleenor. "You'd expect such a dynamic to breed fiscal conservatism in the Northeast and widespread liberalism in the South [but] I think that shows you the power of ideology," he said. "People aren't in it just for their own financial gain."