Northeast's return on federal taxes continues to shrink

WASHINGTON -- New Englanders will pay tens of billions more in taxes to the IRS this year than the region will get back in federal spending, as the area's political clout and share of the federal pie continues to shrink, according to recent studies.

For every dollar Massachusetts residents send to Washington, according to figures compiled by the Tax Foundation in Washington, the Commonwealth will get 78 cents back in federal largesse. In 2003, that difference amounted to an $11.7 billion shortfall, a sum equivalent to about half of the entire state budget.

On the other end of the spectrum, Alaska, Mississippi, and New Mexico each get more than $1.80 from Washington for every dollar they pay in taxes.

Wealthy urban states in the Northeast have become the country's ''cash cow," according to a 2004 study by two New Jersey economists, which found that Northeastern states are transferring an ever-increasing amount of money to the South and West.

''From Lyndon Johnson and Sam Rayburn on, the Sun Belt knew how to milk the system, and they knew the Northeast was paying," said James W. Hughes, the dean of the Bloustein School of Planning and Public Policy at Rutgers University and a coauthor of the study.

Federal spending in the South has surged over the last 10 years, fueled largely by the shift in military spending out of the Northeast. Warmer regions also attract retirees, whose Social Security benefits factor in the calculations.

But the decline in federal spending in the region, economists say, also reflects loss of political influence in a Congress dominated by Southern Republicans and peculiarities in the federal tax code that doubly punish taxpayers in places like Massachusetts and New York that have relatively high state income taxes.

As recently as 1993, Massachusetts was breaking even on its federal tax payments.

In New England, the growing imbalance is most pronounced in Connecticut, which now gets back 65 cents on every dollar, and New Hampshire, which receives only 64 cents, according to the Tax Foundation.

In 2003, the six New England states paid a total of $115.3 billion, $23.9 billion more than the $91.4 billion the federal government spent in the region.

Herman Leonard, a professor at Harvard's Kennedy School of Government who authored several studies of the states' tax burden for Daniel Patrick Moynihan, the former Democratic senator from New York, said that the imbalance wasn't necessarily a cause for concern because wealthy Northeastern states would be expected to pay higher taxes under a progressive tax code.

''It's not that they receive less; it's just that they pay more," he said.

But Joseph Seneca, a Rutgers professor who coauthored the study with Hughes, said the Northeast was being shortchanged and that the imbalance ''calls for increased collaboration among the Northeastern states politically to get more of those federal dollars spent back in this region."

New Jersey fares worst overall, receiving only 57 cents from Washington for every dollar paid.

Frank Lautenberg, one of New Jersey's two Democratic senators, said the region wasn't getting back enough from the federal government.

''States in the Northeast have been getting the short end of the stick on this for too long," Lautenberg said. ''Even though the 'red' states claim to be against big government, they are the first ones with their hands out for help from the federal government."

Spokesmen for several members of the New England congressional delegation declined to comment.

The regional imbalance, Seneca said, was likely to grow worse over time, partly as a result of the alternative minimum tax, established in 1969 to prevent wealthy taxpayers from escaping tax liability.

The alternative minimum tax limits the amount of state taxes people can deduct from their federal returns. That rule now applies to millions of taxpayers, and its impact falls disproportionately on the Northeast, where incomes and state taxes are highest.

According to Treasury Department estimates, 3.2 percent of Massachusetts taxpayers filed under the alternative minimum tax last year, a number that will rise to 26 percent in 2010 unless the rule is changed.

Seneca said efforts by the Bush administration to ''simplify" the federal tax code could result in the abolition of all IRS exemptions for state taxes, which would be bad news for taxpayers in Maine, Rhode Island, and Connecticut, who already pay some of the highest state tax rates in the nation.

"That would essentially be a tax increase for Northeastern states," Seneca said.