Editors' pick: Originally published Jan. 17.
Here's the thing about federal money: it all has to come from somewhere. While Washington's role as the spender of last resort is a critical piece of America's federalist system, for it to send money out to states in the form of aid, grants and other spending, Congress actually has to have that money in the bank. There are three ways of getting it.
The first is simply to print more. As a sovereign nation in control of its own currency, America can at any time make enough dollars to meet current needs. (This is what differentiates it from a European Union country and one of the many reasons why, structurally, America can never become Greece.)
This isn't a bad thing. As the economy expands, the money supply needs to grow with it, or else the ratio of dollars to goods and services will shrink, potentially leading to deflation and the host of macroeconomic ills that come with it. It is an irony of language that the "stronger" the dollar, the weaker the economy can get.
Of course at the same time printing money has to be done extremely carefully or else the government risks triggering inflation. Ultimately the printing press is not a magic machine to create money, but rather a way to calibrate the supply of currency relative to an economy's total value. A government that wants money can create it, holding the power to magic up $100 to pay a $100 bill, but doing so has consequences.
The government can also borrow. Again this is not necessarily a bad thing. When interest rates are low, borrowing can often be far better for the economy at large than raising taxes, and Treasury bonds along with the Federal Reserve's interest rate provide an essential part of the global banking system. U.S. debt gives the world a rock-solid place to keep its money, and that's a crucial stabilizing agent in ways far too numerous to explain here.
Of course that bill does eventually come due, and right now, the government pays over $200 billion in interest alone on its borrowing (out of a budget of about $3.3 trillion).
Finally, money that goes to a state can come from others which pay more than they get back. Not every state can collect a lot from the federal government. In fact, for many states federal dollars make up a surprisingly small percent of the budget. As a result, here are the ten most self-sufficient states in the nation.
Percent of State Budget from Federal Funds: 26.8%
Just because you're self-sufficient, doesn't mean your finances aren't a mess. Just ask the great state of Illinois, which struggles to pass even a rudimentary operating budget and whose chief city, Chicago, keeps flirting with the idea of bankruptcy.
Yet the state collects a svelte 26.8% of its revenue from federal money.
Much of this reflects a state with relatively high personal incomes. At $60,413, the median household income in Illinois is the 19th highest in the nation, according to the Kaiser Family Foundation, reducing the need for federal aid money to individuals and programs like school districts. Although multi-billion dollar aid packages are in the works, given the increasingly dire straits of the state's finances, for the time being Illinois remains highly independent.
Percent of State Budget from Federal Funds: 26.7%
From time to time, a state hits on an economic "get out of jail free" card. That's almost never a good thing for everyone else, being rather like the guy who skips the line to get "a quick refill," but it's very helpful for the legislature in question.
Like South Dakota, years ago Delaware discovered the beauty of deregulation. In this case, it comes in the form of legal forum shopping. When a company gets sued, it will try very hard to defend its case either in or under the laws of their state of incorporation. Since a company can technically incorporate with little relationship to the actual, physical place of business, many began looking for the most defendant-friendly jurisdiction to set up shop. Companies found it in Delaware.
Thanks to this quirk of the law the state collects vast fees from companies which exist in the state as little more than P.O. boxes for service of process, a system that sets Delaware up nicely to need relatively little from Uncle Sam.
Percent of State Budget from Federal Funds: 26%
California's budget has had its ups and downs, but there's no real argument over whether this is a rich state. Boasting communities like Orange County, Hollywood and San Francisco, the Golden State is flush with cash.
It's just that, as the sixth largest economy in the world, California also has a lot of expenses too.
Unlike Delaware, California's revenue comes largely from this massive tax base. The state collects almost two-thirds of all revenues from taxes, an enormous amount which pushes the role of the federal government to a tiny quarter of overall revenues.
#6. Kansas (tie)
Percent of State Budget from Federal Funds: 25.5%
Kansas is a bit of a mystery.
In one respect, this is a politically sensible outcome. State Governor Sam Brownback has been very aggressive about rejecting money from the federal government, turning down programs ranging from Obamacare to the National Endowment for the Arts. As a result, it's reasonable that the state would collect relatively little money overall from Washington.
At the same time, however, the state budget is in crisis. It is arguably in the worst shape of any in America after enormous tax cuts left the government unable to fund basic services such as schools and courthouses. According to the Topeka Capital Journal, the state faces a $228 million budget shortfall, and Brownback refuses to reconsider the tax breaks on business owners. The upshot is a surprisingly low federal contribution to Kansas' revenues, considering how much those revenues have fallen.
#6. Minnesota (tie)
Percent of State Budget from Federal Funds: 25.5%
Minnesota and Kansas are tied for sixth place.
Unlike Kansas, Minnesota's low share of federal money makes sense. This state's economy is, in the words of Wells Fargo, a "consistently solid performer." It has the sixth highest household in the nation at $68,730 and a fantastic unemployment rate of 4.0%. With several major corporate headquarters contributing to the tax base such as Target and United Health, Minnesota collects 61% of its budget from tax receipts alone.
Amid all that, federal funds are a fairly small slice of the pie.
#4. Hawaii (tie)
Percent of State Budget from Federal Funds: 24.8%
Tourism has been good to the Hawaiian islands. Although the state economy boasts other sectors, most notably agriculture, light manufacturing and military spending, the majority of the state works for and around visitors.
The upshot is not only a robust tax sector but also a substantial revenue base related to state fees and miscellaneous income; in fact it's fees and miscellaneous income which makes Hawaii so independent from federal spending. The state collects a little over half of its revenue from taxes, a fairly low number by the standards of this list, but makes the rest up from general "other" spending.
The islands' system works, and, even with a heavy military presence, federal money makes up less than half of their revenue stream.
#4. Nevada (tie)
Percent of State Budget from Federal Funds: 24.8%
In another tie, landlocked Nevada keeps pace with far off Hawaii.
Although both states boast impressive tourism sectors, in Nevada's case, this is all about tax revenue. The state brings in a lot of it.
Much of this has to do with the state's growing commercial sector, as well as its reliance on sales and consumption taxes in lieu of an income tax. This latter has helped the state maintain its tax base through tourism despite an unemployment rate of 6.3% and a middling per-household income.
Percent of State Budget from Federal Funds: 24.6%
Given that Connecticut is one the richest states in the nation, there'd be something wrong if it didn't show up on this list. A state which makes a fortune from Hartford's insurance industry, as well as the personal income taxes paid by residents of the Gold Coast, it has a tax base more than wealthy enough to support a full two-thirds of the state budget.
It's not a state without its struggles though.
Despite boasting some of the richest suburbs in America, Connecticut also has two of its poorest cities in Hartford and New Haven. The state capital's poverty gap (the difference between the poverty rate of a city and its suburbs) is the second highest in the country, revealing serious problems still to fix -- problems which will continue to depend on federal dollars for a solution.
Percent of State Budget from Federal Funds: 22.8%
Considerably less than a quarter of every dollar that Virginia brings in comes from the federal government. That's quite an accomplishment in this day and age.
Much of this has to do with Virginia's diversified economy. Not dependent on a single sector or resource, the state has managed to build several well rounded sectors in services, manufacturing, agriculture and more.
Of course it doesn't hurt to live right next door to Washington, D.C. With the influx of wealth that comes from workers who live in the capital and a robust fee structure that brings in a whopping 20% of the state budget from service charges, Virginia is a strong second place on this list.
#1. North Dakota
Percent of State Budget from Federal Funds: 16.8%
Virginia has nothing, however, on North Dakota.
The Roughrider State has been in the middle of an oil boom for several years now, and it has the tax receipts to prove it. At nearly 70%, this state collects a greater share of its income in taxes than any other in the country, reducing federal funds to a relatively tiny percent of total revenues.
It's not wealth without risks, however. Petro-economies are notoriously fickle, destined to boom and bust with oil prices and the lifetime of the wells. If a field starts to dry up or the price of a barrel bottoms out, the local economy can go south just as fast. For the time being, however, North Dakota is by a very wide margin the most financially independent state in the union.