April 14, 2006

April 14, 2006 | Commentary on Taxes

How Washington Will Spend Your Taxes in 2006

As the April 15 tax deadline edges closer, taxpayers frantically completing their 1040s may be wondering just what their hard-earned federal tax dollars pay for, anyway.

Washington will spend $23,760 per household in 2006 -- the highest inflation-adjusted total since World War II, and $6,500 more than in 2001. The federal government will collect $20,044 per household in taxes. The remaining $3,716 represents this year's budget deficit per household, which, along with all prior government debt, will be dumped in the laps of our children.

Here's a breakdown of how Washington will spend that $23,760 per household:

Social Security/Medicare: $7,875. The 15.3 percent payroll tax, split evenly between the employer and employee, covers most of these costs. This system can remain sustainable only if there are enough workers to support all retirees, which is why it risks collapsing under the weight of 77 million retiring baby boomers. If nothing is done, taxes eventually will need to be raised by the current equivalent of $11,000 per household to pay all promised benefits. The unpredictable costs of the new Medicare drug entitlement could add thousands more to each household's tax bill.

Defense: $4,701. The defense budget covers everything from military salaries to operations in Iraq and Afghanistan to the research, development and acquisition of new technologies. Lawmakers drastically reduced defense spending following the collapse of communism in the early 1990s. The 9/11 attacks reversed this trend, and the $1,900 per household increase since 2001 has returned defense spending to its historical levels.

Low-income programs: $3,579. Nearly half of this spending subsidizes state Medicaid programs that provide health services to poor families. Other low-income spending includes: Temporary Assistance for Needy Families (TANF), food stamps, housing subsidies, child-care subsidies, Supplemental Security Income (SSI) and low-income tax credits. Despite recent rhetoric about "cuts for poor," anti-poverty spending now tops 3 percent of GDP for the first time ever.

Interest on the federal debt: $1,930. The federal government is $8.2 trillion in debt. It owes $4.9 trillion to public bond owners, and the rest to other federal agencies (mostly to repay the Social Security trust fund, which lawmakers raid annually). Despite rising debt, record-low interest rates have limited costs. As interest rates rise back to normal levels, these costs will spike.

Federal employee retirement benefits: $870. This spending funds the retirement and disability benefits of federal employees, including the military.

Education: $732. Education spending is primarily a state and local function; 9 percent of the total comes from Washington. Federal education spending has surged 137 percent since the 2001 enactment of the No Child Left Behind Act. Most federal dollars are spent on low-income school districts, special education and college student financial aid.

Health research/regulation: $671. This spending is up 78 percent since 2001, and much of this growth is concentrated in the National Institute of Health. This category includes the Food and Drug Administration and dozens of grant programs for health providers.

Veterans' benefits: $618. The federal government provides income and health benefits to war veterans. Spending is up 56 percent since 2001.

Community and regional development: $456. The $300 per household leap in this category since 2004 comes from the Federal Emergency Management Agency (FEMA), which is financing much of the Hurricane Katrina relief.

Highways/mass transit: $402. Most highway and mass-transit spending is financed by the 18.4 cent per-gallon federal gas tax. Washington subtracts an administrative cost and sends this money back to the states with numerous strings attached. Some economists suggest it would be more efficient to let states collect this tax and decide how to spend the money themselves.

Justice administration: $363. Justice spending includes federal attorneys and prisons, as well as law-enforcement grant programs. New homeland security costs have added $80 per household to justice spending.

Unemployment benefits: $338. Unemployment costs fluctuate based on the number of unemployed Americans. This year, unemployment costs are decreasing as job growth continues.

International affairs: $305. This includes foreign economic and military assistance, operation of American embassies abroad, and contributions to organizations such as the United Nations. International spending has doubled since 9/11.

Natural resources/environment: $287. This includes national parks, federal lands, water projects and environmental clean-up.

Agriculture: $235. Despite rhetoric about supporting small family farms, the vast majority of farm subsidies are distributed to large farms with average household incomes over $135,000.

The programs listed above cover $23,362 per household. The remaining $398 is allocated to all other federal programs, including social services, space exploration, air transportation and energy.

Taxpayers must decide for themselves if they're getting their money's worth.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Taxes

Distributed nationally on the Knight-Ridder Tribune wire and The Washington Times