No, 'blue states' do not bail out 'red states' Those arguing that “blue states” are the ones bailing out “red states” point to the federal “balance of payment” ratios, or federal tax dollars collected compared to federal money received, on a state-by-state basis. The states with lowest balance of payment ratios (collecting more federal taxes than they receive in federal funds) are Connecticut, New Jersey, Massachusetts and New York. The states with the highest balance of payments (receiving more federal funds than they collect in federal taxes) are Kentucky, New Mexico, Mississippi and West Virginia. Therefore, “blue states” are bailing out “red states” — or so they say.
But federal balance of payment ratios are not as indicative as pundits think they are. New Mexico is often deemed a “blue state” and West Virginia had Democratic control of the governor’s mansion and both state legislative chambers as recently as 2014. The relationship between state policy and balance-of-payment ratios becomes even weaker considering that North Dakota, New Hampshire and Nebraska — so-called “red states” — all have balance of payment ratios of less than 1.00. This means they receive less in federal funds than they collect in federal taxes, just like Connecticut, New Jersey, Massachusetts and New York.
In fact, 40 states have a balance of payment ratio higher than 1.00. Far from a dependency caused by state political leaning, it is typical for states to receive more in federal funds than they collect in federal taxes — an anomaly made possible only by rampant federal deficit spending.
Assuming data supported the claim that “blue states” bail out “red states,” using balance-of-payment ratios as a measure to support that claim is a non-sequitur, because balance-of-payment ratios depend entirely on federal tax and spending policy. The amount of federal revenue collected from state taxpayers depends mostly on state income, and the federal income tax levies higher rates on filers with higher incomes. Progressives designed the federal income tax to burden high-income earners on purpose and support policies to make the federal income tax increasingly weighted toward
Comparing Red/Blue state federal bailout money is a false comparison, economists, analysts argue The argument that some Democratic “blue states” should receive more federal bailout money than Republican “red states” because their residents pay more in federal taxes isn’t really a comparison of apples to apples, economists and analysts note.
No state has the same budgetary or geographic-oriented needs and is not given equal amounts of federal subsidies even on a per capita basis, and several states have been operating failing fiscal policies for years before the coronavirus and even the Great Recession hit regardless of where their revenues came from.
New York Is No ‘Donor State’: Cuomo’s claim that the Empire State ‘gives’ more than it ‘gets’ is based on distorted measures. As the July 31 expiration date looms over the Cares Act’s unemployment bonus, all eyes will turn to the next—and, according to Senate Majority Leader Mitch McConnell, the last—coronavirus relief bill. Chief among Democrats’ priorities is a “blue-state bailout.
They argue that high-tax states, which tend to vote Democratic, pay more in federal tax receipts than they get back, thereby subsidizing low-tax states, which tend to vote Republican. New York Gov. Andrew Cuomo keeps flogging a list of “donor states,” topped by New York, which “gave” $29 billion a year more than it “got” from 2015 through 2018.
Mr. Cuomo’s argument—that blue states like New York have lined federal coffers for years, so it’s only fair the feds return the favor—might be compelling if it were true. But the facts are sourced from a Rockefeller Institute report that miscounts what states receive. In truth, high-tax blue states are net “receivers” of federal funds, New York foremost among them.
The Rockefeller Institute’s “Giving or Getting?” report was published in 2017 and used soon after in a widely publicized Associated Press “fact check.” Since then, the report and its subsequent installments have served as the backbone of countless treatises like Paul Krugman’s sunny “The Moochers of Middle America.”
It isn’t so simple. A food stamp isn’t the same as a serviceman’s paycheck. The former can reasonably be characterized as a federal subsidy—“a gift” in Mr. Cuomo’s parlance—while the latter cannot. The Rockefeller report treats both as gifts, distorting who gets what.
Texas is home to nearly 219,000 military personnel, New York 60,000. It’s no surprise federal defense-related expenditures in Texas dwarfed those in New York in 2018, $65 billion to $14 billion. From this the Rockefeller report implies Texas got $51 billion more than New York—for the privilege of defending the whole country.
This doesn’t square. The lion’s share of what states get from defense spending is the protection afforded by national expenditures, not the in-state spending. For New York, this protection is worth a lot more than $14 billion. Using total federal defense-related expenditures as a proxy for this value and allocating it among the states by population, New York got $38 billion. With this one correction, in 2018 New York got $2 billion more than it gave.
The Rockefeller report also flatters the Empire State by leaving out the federal subsidization of municipal debt issuance. Washington lets states and localities issue debt that is tax-exempt at the federal level, thereby subsidizing each dollar of issuance. In 2018, New York issued $34 billion of long-term tax-exempt municipal debt; applying the Congressional Budget Office’s 2018 forward-looking estimate of 26 cents in federal subsidization per dollar of issuance implies roughly $9 billion in subsidies, increasing New York’s “take” in 2018 from $2 billion to $11 billion.
High-tax, high-debt blue states dominate this market. The four biggest—California, New York, Illinois and New Jersey—issued almost $91 billion in tax-exempt munis in 2018, about a third of all issuance, collecting nearly $24 billion in federal subsidies. These states reap the benefits while exporting the costs to entrepreneurs, who have to pay more for scarcer capital. Rather than conducting diligence on a small business looking for capital, wealthy households have been absorbing municipal issuance. They own most of it.
Municipal debt is irresistible to the wealthy because they can arbitrage the spread between their own tax rates and the average rate faced by the market-clearing bond buyer. A 2014 study suggested the top 0.1% of households use municipal debt to reduce their federal tax bills by an average of more than $42,000 a year. Blue-state politicians such as Mr. Cuomo benefit because they can avoid unpopular property taxes on the middle class while purportedly taxing the rich, who take their cut on the back end.
Finally, the Rockefeller report flatters high-tax states like New York, many of whose retirees migrate to low-tax states such as Florida, where they receive benefits. This allows New York to claim its residents pay an estimated $2 billion more in Social Security taxes than they receive in benefits. Logically, high-growth states with expanding working-age populations would register positive spreads on this metric. New York is neither while Florida is both. But the Sunshine State is saddled with a $21 billion negative spread, thanks to retiree flows. Neutralizing New York’s illusory $2 billion spread raises the state’s take from $11 billion to $13 billion.
In total, the four biggest blue states got from Washington $64 billion more than they gave in 2018. And even this figure might be too charitable, because it doesn’t account for the implicit socialization of their unfunded pensions and postemployment benefits, which totaled $790 billion at the end of 2017.
