Monday, October 8, 2012

Do Blue States Subsidies of Red States Indicate Their Fiscal Superiority?

The realization that nearly 40% of President Obama's electoral support came from the five fiscally disastrous and chronically blue states of California, Illinois, Michigan, New York and New Jersey apparently hit some raw nerves. Some critics countered with the fair point that red states recover more federal tax dollars then they pay and are consequently subsidized by blue states that pay more than they receive. That assertion is arithmetically correct but the interpretation that somehow red states should be thankful for the generosity of blue states and are financially or fiscally inferior is fanciful.

First, a significant portion of federal tax revenues flow back to residents of all states as Social Security and Medicare payments, which for the most part have been earned by recipients who paid into those programs during their entire working lives, so they should never be confused as gifts of charity and are certainly not the result of the beneficence of blue states. States also receive significant federal tax revenues for national defense and military spending, which protect everyone, especially coastal blue states, at least more so than interior red states.

Second, blue states generally pay more federal taxes than they receive because their residents and businesses are more affluent. Ironically, if President Obama wins the fiscal cliff negotiations and raises taxes on the wealthy, that tax disparity will widen, but the effect should be short-lived as long term trends show that affluent folks continue to leave high tax/high cost blue states for red states; over time the disparity should narrow.

Third, blue states, not red states, need a financial overhaul. The five states identified herein recover federal tax revenues ranging from only 61 cents (New Jersey) to 92 cents (Michigan) per dollar their residents pay in federal taxes, with the remaining three states receiving approximately 75-80 cents per tax dollar they pay. Those states are trying desperately to stay financially solvent by raising state and local taxes, which for New York, New Jersey and California are already among the nation's highest.

Those states carry enormous debt epitomized in the extreme by California's whopping $618 billion; they carry debilitating budget deficits, epitomized by the nation's worst at $44 billion in Illinois; and carry smothering unfunded state government worker pension and healthcare liabilities that amount to as much as 43%, 37% and 31% of the respective state GDP's of Illinois, New Jersey and California.

If allowing those states to keep more of their federal tax dollars would enhance their financially viable, such a policy should be considered, but let's not kid ourselves, there will be no quick fixes to their problems.

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