Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 7: Other Federations
While the United States has no explicit system for equalising States, the allocation of
funding for specific services has a significant and varying impact across the States.
Some States receive considerably more Federal funding than they pay in Federal taxes,
while the tax burden for other States far exceeds the funding they receive (Leonard and
Walder 1999). The States receive approximately US$1.5 trillion in domestic Federal
expenditure per year, and this flow of funds rearranges the geographic location of
economic activity with varying impacts across the States.
A joint publication by Harvard University and the Office of Senator Daniel Patrick
Moynihan provides data on the balance of payments – the difference between Federal
spending received and taxes paid in each State. States recording a surplus receive
more in Federal spending than they contribute in taxes, and deficit or donor States pay
more in Federal taxes than they receive in spending.
Thirty-one States had balance of payments surpluses in 1999–2000, with ten receiving
US$2 000 or more per capita. New Mexico was the largest recipient with US$4 000 per
resident, over US$800 per person more than the next highest, Montana. Connecticut
was the largest donor State with a deficit of nearly US$2 800 per capita, more than
US$500 greater than New Jersey. Seven other States had deficits of more than
US$1 000 per capita, principally in the northeast, mid-Atlantic and Great Lakes regions.
In net terms, eleven States received over US$5 billion each and all of those were
southern States. The largest recipient by far was Virginia with over US$21 billion,
followed by Maryland and Alabama, which both received over US$9 billion. The largest
donor State was California, contributing over US$23 billion, due to its large population
(33 million or 12 per cent of the national population). The next largest donor State was
Illinois with a deficit over US$20 billion, while New Jersey, New York and Michigan all
contributed over US$10 billion each.
The Western Australian Government has conducted similar analysis of ‘fiscal subsidies'
within the Australian Federation. Under this approach, a State provides a fiscal subsidy
to the Federation if total Commonwealth revenues derived from that State exceed total
Commonwealth outlays to that State (Western Australian Treasury 1999). This analysis
has excluded the Australian Capital Territory to avoid the unique circumstances of the
Territory inflating the outcome, namely the Australian Capital Territory’s receipt of
Federal funding that is perceived as serving the nation; accompanied by Australian
Capital Territory residents’ high personal income taxes and low level of benefit
payments received.
The analysis finds that Western Australia provides the highest per capita fiscal subsidy,
followed by Victoria and New South Wales. The Northern Territory is by far the largest
Australian recipient, receiving US$6 321 compared to the US$3 944 received by the
largest United States recipient, New Mexico. 6 Gross state product per capita in the
Northern Territory is 16 per cent higher than the national Australian average (Bureau of
Economic Analysis 2002), whereas New Mexico’s gross state product per capita is
15 per cent below the United States average. Considering that Australian average
incomes are much lower than in the United States, the standard deviation between the
contributions made by the Australian States is much greater than States in the United
States.
6
Currency based on $US1=$1.3 at Purchasing Power Parity exchange rates, OECD.
FINAL REPORT [105]