Government Spending and Economic Development

Government Spending and Economic Development

June 15, 2006 Posted by J. Scott Moody - No Comments

Opponents of the Maine Taxpayer Bill of Rights assert that it will limit government’s ability to promote economic development in the state. Ed Cervone of the Maine Center for Economic Policy recently stated that “In Maine, this [economic development] could be done through further investments in the community colleges . . . Another option is improvements to energy infrastructure.” And the list goes on.
Even better, the other side argues, is if we can pay for these government services with taxes on “people from away.” Some want to increase property taxes on out-of-state second home owners while others want to increase the sales tax since they hit tourists–or even better, enact a local option sales tax.
Overlooked in this discussion is the fact that Maine is already the beneficiary of large amounts of government spending funded entirely by “people from away.”


The source of these funds is the Federal Government. Every year the non-partisan Tax Foundation publishes a report titled “Federal Tax Burdens and Expenditures by State” authored by Curtis S. Dubay. The study finds that Maine, in federal fiscal year 2004, received $1.40 in federal spending for every $1.00 sent to Washington, D.C in taxes. This is not a one-year aberration either; in fact, Maine has been a “recipient” state for every year since FY 1981–the first year of available data–except for FY 1989.
Further analysis reveals that these Federal transfers are massive. Since FY 1981, Maine has received $40.2 billion dollars (in 2005 dollars) from the Federal Government. To put this into perspective, Maine’s state government collected $53 billion (in 2005 dollars) in taxes since FY 1981–a difference of only $12.8 billion. In addition, this actually exceeded all local government tax collections over this time period of $33.2 billion (in 2005 dollars).
How does this spending breakdown? The source of the federal expenditure data is from the Consolidated Federal Funds Report published by the Census Bureau. In FY 2004, Maine received $10.9 billion in federal expenditures. Most of this money comes from “Retirement and Disability” worth $3.6 billion which includes items such as social security payments. The next largest category is “Grants” worth $2.8 billion which includes items such as federal matching funds for Medicaid or transportation. This is followed by “Other Direct Payments” worth $1.9 billion which includes items such as federal welfare programs. Finally, Maine receives $1.7 billion in procurements (think Bath Iron Works) and another $957 million in salaries and wages (think Brunswick Naval Air Station).
To complete the picture, the Tax Foundation estimates that Mainer’s paid $7.1 billion in federal taxes in FY 2004–yielding a net inflow into Maine of $3.8 billion. Keep in mind, that this $3.8 billion represents the tax money of “people from away.” More specifically, according to the Tax Foundation report, it comes from high income states such as California or New York. So the next time you visit your relatives in these states, be sure to thank them for their tax dollars.
But don’t rub it in their face too badly, despite this enormous influx in federal government dollars, Maine still ranks as one of the poorest states in the union. So this begs the question, if government spending is the key to economic development, why isn’t Maine one the wealthiest states in the union instead of one of the poorest? Think about it.
Comments/Questions? Email J. Scott Moody