Tags: cutting | off | subsidies | red | states

Think Before Cutting Off Subsidies to Red States

Image: Think Before Cutting Off Subsidies to Red States
(Dollar Photo Club)

Monday, 05 February 2018 08:12 PM

They earn much less than they spend, and they're not even embarrassed about it. Others (richer, better educated, and more all-around dynamic) have to send their hard-earned money to Washington, while getting precious little back in return. But these folks? They gorge themselves on government benefits … they take and take and take … and then actually they have the cheek to complain about the system that keeps them in welfare dollars and Medicaid checks.

I am speaking, of course, of the red states.

Well, not all red states, to be sure. (Should that be a hashtag? #NotAllRedStates?) But many red states get a lot more back from the federal government than they pay in to the system. Which has made folks living in rich blue states that are net donors a little testy.

Or maybe I should say that it used to make them a little testy. Because Republicans went and passed a tax bill that caps their ability to deduct their state and local taxes from their federal tax bill. Even with a cut in the marginal rate, many high earners in those states are looking at paying the federal government more--and many of the governments of those states are nervously wondering whether they'll be able to keep up the level of taxes, and services, they're used to. And blue-state liberals are now madder than a whole nest full of hornets.

I have lost count of the number of times in the past few weeks I've seen someone complain that the new tax law makes the disparity between donor blue states and recipient red states even worse. Turnabout is fair play, they said: If you want to jack up our taxes, then you should darn well wean yourself off of the federal teat.

Which got me thinking: Is it even true that red states are net recipients of blue state largess?

In fact, it’s not as clear as liberals think that the system consists of “Makers and Takers,” with the blue states making the money, and the red states taking it. That belief seems to come from a years-old graphic, based on data that dates back to the middle of the George W. Bush administration.  Since then, the electoral and economic maps have both changed a little bit. Thankfully, New York State has helpfully updated us, at least to 2013. Here’s what they came up with:

What do you notice? On a per-capita basis -- which is the right way to calculate this -- deep-blue New Jersey is the biggest donor state. But red-blooded Wyoming is the next biggest, and North Dakota makes the list too. There is certainly a preponderance of blue states at that end of the spectrum, but it’s not a clear “Donor states are blue” story. And if we match the 2013 data to the closest election (2012) we find that New Mexico, the biggest net recipient, went for Obama in 2012, as did Virginia, Maryland, Maine and Hawaii. What’s driving the net subsidies isn’t anything as simple as political identification.

What does explain it? In general, the net donor states tend to be populous and rich. But that’s a pretty broad generalization. North Dakota and Wyoming aren’t populous and aren’t particularly thought of as rich states -- but in 2013, they were in the middle of a fracking boom that threw off lots of tax revenue for the federal government. Maryland and Virginia, on the other hand, are both rich and populous -- but they’re also sitting next to the seat of the federal government, which means they have a lot of federal pensioners, a lot of government contractors, and a lot of federal office buildings pouring money into their economies.

So let’s break it into two questions: Why do states send a lot of money to the federal government? And why do they take a lot of money out?

The answer to the first question is pretty simple: The U.S. federal income tax is steeply progressive, meaning that it brings in most of its revenue from high earners. If your state has a lot of people with high incomes in it, you will send a lot of taxes to Washington.

Why money comes back to your state is a little more complicated.  Pew has helpfully broken down federal transfers into five categories:

  • Retirement benefits
  • Non-retirement benefits
  • Grants (mostly transportation, education, housing and Medicaid)
  • Government contracts for goods and services
  • Salaries and wages

Most of the transfers do not come from “red state welfare” like agricultural subsidies. They derive from Social Security, Medicare, Medicaid, unemployment insurance, food stamps, welfare, the maintenance of the national highway system, the purchase of goods and services for the federal government, and the operation of federal facilities and lands.

If blue state liberals consider this out of whack, what do they want to change?

  • Do they want to move toward a flatter, less progressive federal tax code?
  • Do they want to cut Social Security, Medicare and Medicaid?
  • Do they want to return unemployment insurance and similar entitlement programs entirely to the states?
  • Do they want to hand over the national parks to the states, or privatize them?
  • Would they like to downsize the federal workforce?
  • Should we redistribute military bases from red states to blue? (Those relocations might meaningfully alter the state electorate, making it easier for Republicans to get elected. They would also require the purchase, by eminent domain, of a lot of prime blue-state land that has things like beach houses on it.)

There are good arguments against all of these propositions. And arguably we don’t transfer enough in grants to poor states, which lack the fiscal capacity to provide basic services that come relatively easy in rich states.

But on the other hand, one can make an argument, from fairness and federalism, that these transfers are simply too large, too unbalanced; that it’s time to return social services to the states, and turn the federal government back into something like what it was before the New Deal: a referee between the states, a coordinator of inarguably national concerns like national defense, but not the guarantor of a vast and comprehensive social safety net.

Maybe the system is now so unfair to rich liberals that this is the way we should go. And given how impossible it is for them to get anything done in the federal government these days, blue state liberals might want to offer Republicans a compromise: we’ll get rid of federal taxes and programs, and it’s every state for itself. If you genuinely think it’s an outrage that red states collect so much federal money, you should probably be eager for the trade.

But think carefully before you make that proposal. Because if liberals offer to dismantle the New Deal and return to genuine federalism, they might just find that Republicans are eager to take that deal.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”

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MeganMcArdle
There are a few ways liberals could reduce the imbalance. But all of them play to conservatives' wishes.
cutting, off, subsidies, red, states
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2018-12-05
Monday, 05 February 2018 08:12 PM
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