Federal money: Who gets? Who pays?

Thank you, New York. Quit complaining, Kentucky.

The big piggy bank in the sky.

     "This is a bailout package for blue states for their bad policies, for their lockdown policies. . .. California and New York, but, you know, now they have these massive state budget deficits. . .. AOC and now Joe Biden are going to the big piggy bank in the sky that prints nonstop money."

      U.S. Rep. Michael Waltz, R. Florida

President Biden's COVID relief plan proposes spending $1.9 trillion. It is a lot of money, and that is the point. It is intended to combine aggressive fiscal policy (spending) with aggressive monetary policy (very easy credit) to put money into the economy, especially targeted to people who are hurt hardest by the COVID shutdowns. If people who need money get money, they will spend money, and it will circulate, stimulating more activity: The well-known multiplier effect.

It is getting criticism from Republicans. Some of the criticism is no doubt sincere and earnest concern over deficits from the party that had traditionally been worried about thrift and fiscal prudence. It is old muscle memory. That was forgotten while Trump was president, but as widely expected it has re-emerged as policy again now that Biden stands to benefit from the political glow that comes from spending "free" money. Of course, the money is not free; it is borrowed from the unseen future--the one in which debts somehow disappear in a miracle, rather as Trump had imagined COVID might.  Republican officeholders are expressing state jealousy and competition in the form of concern for "moral hazard." They are arguing that the COVID bill is a bailout for bad fiscal discipline in other states, and we cannot afford it. That argument has political traction. 

The targeted states are New York and California, with New Jersey, Connecticut, and Massachusetts close behind. Those are the states accused of cultural hegemony, so suspicion that they are gaming the political system to steal money from prudent taxpayers in "flyover" heartland states is an argument that comes easily and "feels right."  Look at those big bad spenders. Darned if we want our hard earned tax money paying for their political giveaways. The quotation above from Michael Waltz is boilerplate political messaging. He was speaking to Fox News.

Donor states. The fiscal reality in the U.S. is that the most states receive far more money from the federal government than they pay in taxes--after all, we are doing deficit spending, borrowing from the future. Net-net nationwide, nearly everyone is on the fiscal take. The exceptions are the "donor" states, the ones that pay more in taxes than their residents get back, leading with New York, Massachusetts, New Jersey, and California. The source for this is the Rockefeller Institute, using 2019 data: https://rockinst.org/wp-content/uploads/2021/01/2021-Balance-of-Payments-Report-web.pdf

The red and yellow states are donor states. The blue ones are "takers." The darker blue, the bigger the take.

PDF, Page 12

Here is a state-by-state list of getting and paying:

PDF, Page 13

Some of this makes intuitive sense. The donor states are relatively prosperous, and we have a progressive income tax system, nationally, made more focused on individual income taxes by Trump's 2017 tax act. It cut corporate taxation and capped the deduction for state and local taxes at $10,000. This was a tax hike for states with expensive housing and a high income tax: New York, New Jersey, Connecticut, Massachusetts, and California. It was a relative benefit for states including Texas and Florida with sales taxes but not income taxes. The people and businesses in and around New York and in California--especially the financial and technology industries--create more value, so they get more income.

The big net recipients of money are intuitive as well. Virginia, and to a lesser extent Maryland, has a large population of federal employees. They get paid more than they get taxed. No surprise there. States with relatively large military operations are intuitive winners, too: Alaska, Hawaii, New Mexico. Kentucky is an outlier. It gets an enormous amount of money in federal grants, an amount nearly equal to Virginia.  Kentucky is a high poverty state, but one which the Democratic governor led the state to take full advantage of the Medicaid expansion under the ACA, which brings federal money into the state. Kentucky taxpayers paid in $7,493 and get $21,646 in return, for a net balance of $2.89 for every dollar in taxes. New York, Massachusetts, and Connecticut get about $0.90 for every dollar of taxes.  (Page 13)

The United States has always had sectional rivalries: The coasts versus inland, the settled states versus the frontier, free versus slave states, the industrial states versus the agricultural states, silver-producing states versus states with powerful banks preferring a hard money gold standard, and so on. Currently there is loose talk about succession of one state or section or another, none of it serious, reflecting the heightened political partisanship of the era. Blue state activists talk about escaping the USA to better reflect climate concerns. Red state succession talk perceives New York City and Hollywood as dangerous cultural forces, spreading cosmopolitan values on religion and sex, and risking gun rights. The Biden COVID plan adds an area of attack; they want our hard earned money.

It is good politics, but it isn't good data. They are biting the hand that feeds them.

Tomorrow: Counties that voted for Hillary Clinton and Joe Biden represent 64% and 71% respectively of the aggregate share of the U.S. GDP.  Is this great news for Democrats? They are the ones who carry the country on their back. No. It is a danger signal for them.