Statewide NewsTaxes & SpendingTexas Ranks 29th in Reliance on Federal Funding

Due to Texas' rich private sector, the state is less dependent on federal monies compared with its neighbor New Mexico, which relies heavily on its public sector economy.
October 29, 2020
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According to an analysis of states’ federal funding dependency, Texas ranks 29th for its reliance on federal funding.

The analysis, conducted by personal finance and data company MoneyGeek, calculates a “dependency score” — scaled from zero to 100 — based on the rate of return states receive from their residents’ federal tax dollars, percentage of state budgets that come from federal monies, and the projected decline in revenues due to coronavirus and the economic downturn therein.

Texas’ dependency score is 21.2 out of 100, the second-lowest among its adjacent states with Arkansas scoring 16.8. Notably, New Mexico ranks first with a 100 dependency score.

One explanation for the wide differences in dependency score MoneyGeek provides is states whose workforces are more heavily reliant on the public sector, such as military personnel or government employment, for their incomes. The top two dependency score states, New Mexico and Alaska, have public sector employment percentages of 22.5 and 25 percent, respectively.

According to MoneyGeek, just over a quarter of Texas’ budgetary revenues come from federal monies, and its federal tax dollar return is $0.88 for every dollar.

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The analysis also projects a 15 percent decline in state revenues as a result of the pandemic and the related economic downturn. This is significantly higher than the 8.4 percent adjustment the Texas comptroller projected back in July.

In a statement to The Texan, Comptroller Glenn Hegar said, “Texas has always had an independent spirit, so it’s no surprise that we are less dependent on the Federal Government than the majority of states.” 

“However, as the CFO for Texas, I remain concerned that Texas continues to be a donor state with Texas taxpayers sending more tax dollars to Washington than we get back. But we also have important partnerships with Federal institutions that are key to the state and national economy as well as national security,” he continued. 

Pointing to an agency study, Hegar added, “US military installations in Texas contributed $123.6 billion to the Texas economy in 2019 and directly employed more than 225,000 people. Those installations are part of the fabric of our communities and are crucial to local and regional economies.”

Other examples of federal partnerships Hegar pointed to were higher education military institutions teaming up to tighten cybersecurity.

“And as the nation’s top exporting state, Texas’ infrastructure brings products made all over the country to the global market, so we rely on continued free trade policies in Washington and safe, consistent and secure border operations to keep American products moving out of Texas’ 29 ports of entry,” he concluded.

MoneyGeek in one section pits “red” states against “blue” states in its analysis, but the real divide is between wealthy states and poorer states. Nearly two-thirds of the states with sub-$100 billion gross domestic products (GDP) fall within the first dependency score tertile.

Mark Shepard, assistant professor at the Harvard Kennedy School Government, said of the red-blue state comparison, “If red states pay less in taxes than they receive in benefits, that’s because they are generally poorer and program rules are progressive — not because they are ‘takers’ while blue states are ‘donors’ in any value-laden sense.”

Federal taxes, especially income taxes, are progressive, meaning that the more wealth one has the higher the percentage one pays in taxes. Therefore, prosperous states — like Texas or California — pay more on an aggregate level while New Mexico and Mississippi pay far less.

According to the Tax Policy Center, 44 percent of Americans pay no income tax at all because they do not meet the income standard. Meanwhile, the top 50 percent of all taxpayers paid 97 percent of all individual income taxes and the top one percent of earners paid 26.8 percent of total income taxes.

Three of the top four most populated and highest GDP states — California, Texas, and New York, in that order — fall within the latter half of the second tertile.

Florida, third in population and fourth in GDP, ranks 37 in dependency.

Texas’ unemployment rose in September after dropping consistently since its peak in April. Its oil and gas industry, the main driver of Texas’ recent economic prosperity, is still hurting despite some signs of recovery showing.

The state is fiscally healthier than many others, but the substantial reliance on energy production which has been inhibited by a deficiency in travel means uncertainty still looms.

Added to that, with the federal government not only continuing its astronomical spending, but ramping it up exponentially during the pandemic, the financial cushion of economic prosperity is deflated. 

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Brad Johnson

Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.

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