Is Californians (and New Yorkers) Paying Too Much Federal Tax?

As you know, we hear quite bit about California state's budget crisis. GDP of California is equivalent of that of France, 6th largest economy in the world. Thus everyone loves to talk about California's budget crisis.

Having said that, I think it is worth analyzing Federal and States' tax system and dig down the real issues.

Let's look at Federal Tax system first. In Federal Tax system, personal income tax and corporate tax represents majority of total tax revenue; 83% and 13% respectively. These tax are progressive tax.

The issue of progressive tax is that residents in high income and high cost of living states such as California and New York are taxed at much higher rate than the residents from low income and low cost of living states.

Below is the ranking for Per Capita Tax Burden and Return on Federal Tax Dollar: Fiscal 2005. Residents in state of New Jersey receive 65 cents per capita though they pay $1 for Federal tax.

http://bit.ly/wTXDJ
http://bit.ly/oNHCE

- The return for California and New York residents is 0.80 and 0.82 respectively. I believe return for high income residents in NY, LA and SF metropolitan area is much lower. I

- On the contrary, residents in Mississippi、New Mexico、Alaska and Louisiana receive approx. $2 on $1 Federal Tax payment.

- While Texas is third largest economy after California and New York, the return is 0.97, much higher than CA/NY residents. I guess federal government is afraid the independence movement of Lone Star so they put "moderate" federal tax burden on the state of Texas;)

Per Capita Tax Burden and Return on Federal Tax Dollar: Fiscal 20051
http://bit.ly/Z78te

Rank State Return
50 New Jersey 0.65
49 Nevada 0.67
47 Conneticut 0.73
48 Minnesota 0.73
46 New Hampshire 0.75
45 Illinois 0.78
43 Delaware 0.80
44 California 0.80
42 New York 0.82
41 Colorado 0.83
40 Massatusetts 0.85
39 Wisconsin 0.88
38 Washington 0.89
37 Oregon 0.93
36 Michigan 0.94
35 Florida 0.95
34 Texas 0.97
33 Rhode Island 1.01
32 Georgia 1.03
31 Ohio 1.06
30 Indiana 1.07
27 Pennsylvania 1.08
28 North Calorina 1.08
29 Utah 1.08
23 Vermont 1.09
24 Iowa 1.09
25 Nebraska 1.09
26 Wyoming 1.09
22 Kansas 1.13
20 Arizona 1.19
21 Idaho 1.19
19 Tennesee 1.29
18 Maryland 1.30
17 Missouri 1.32
15 Oklahoma 1.35
16 South Calorina 1.35
14 Arkansas 1.40
13 Maine 1.41
11 Hawaii 1.43
12 Montana 1.43
10 South Dakota 1.48
8 Kentucky 1.51
9 Virginia 1.51
7 Alabama 1.63
6 North Dakota 1.65
5 West Virginia 1.75
4 Alaska 1.83
3 Louisiana 1.85
2 New Mexico 2.00
1 Missisippi 2.02

* If you are interested in per capita expenditure by states and its allocation, please download "Consolidated Federal Funds Report 2006" and look at page ２４.

* Federal tax expenditure per capita in Washington DC is approx. $70,000! No wonder Washington DC economy is booming now.

California and New York both face approx. 30% state tax revenue deficit on 2010 budget. I bet, if CA and NY receives 100% return on its federal tax burden, story should be quite different. But, under current US legislation, non-coast states have much more say and control over federal tax allocation.

I personally think federal government's exploitation of California and New York (and NJ/CT) is the key issue facing growth of their economy. State governments had to charge high state tax to compensate for low return on federal tax. Therefore business and residents are migrating to low-tax states.

That's it for today. Please look for follow up posting on state tax issues.

Happy Investing!!!!!