The COVID-19 pandemic and resulting economic shutdown have wreaked havoc on state budgets. Certain state leaders, including New York Gov. Andrew Cuomo and Illinois Senate President Don Harmon, have urged Congress for an injection of federal funds to save state finances. Senate Majority Leader Mitch McConnell (R-Ky.) rightly responded that such a policy would constitute a federal bailout of spendthrift, big government states at the expense of fiscally conservative states. Progressives glibly replied that it is actually “blue states” that bail out “red states.” This sophomoric switcheroo gets more than its fair play in the media but rests on several false equivalencies and bad logic.
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 the wealthy.
The states with the highest personal income per capita are Connecticut, Massachusetts, New York and New Jersey. The states with the lowest personal income per capita are Mississippi, West Virginia, Alabama, New Mexico and Kentucky. These are the exact same states with the lowest and highest balance of payment ratios, respectively. It is hypocritical to decry the tax code for taxing high-income states more than low income states while intentionally designing tax policies with that effect.
The other side of balance-of-payment ratios is federal spending. Some of the most expensive federal programs are Medicaid, Supplemental Nutrition Assistance Program (SNAP), Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Each of these is “means tested,” meaning recipients must earn below a certain income threshold in order to receive federal assistance. Low-income states receive more federal money than high-income states by design because of means-tested federal poverty programs. As these programs expand and become more generous, the gap between state balance-of-payment ratios will only increase as federal taxes and spending increase to pay for means-tested poverty assistance.
Plus, federal means-tested eligibility does not control for differences in cost of living between states. Mississippi and Hawaii are the least and most expensive states to live in, respectively, while federal eligibility requirements are uniform. Many Mississippians receiving federal assistance would not be considered “poor” compared to their state’s cost of living, while many Hawaiians not receiving federal assistance may be considered “poor” because of how expensive Hawaii is compared to other states. Balance of payments ratios have nothing to do with state policy and everything to do with state income.
On the other hand, a state’s financial health has everything to do with state policy. In the ALEC publications Unaccountable and Unaffordable, Other Post-Employment Benefit Liabilities and State Bonded Obligations, it is very clear some states practiced restraint and shored up state finances in preparation while other states continuously raised taxes and spending while underfunding long-term obligations. Many policy organizations — ALEC included — have urged against a federal bailout of states because of the inherent moral hazard. Pundits will use the red herring of a “red state” bailout to distract from what a federal bailout of states truly looks like — a redistribution of tax dollars from taxpayers in responsible states to states that refused to make hard choices during the good times.
Statistical differences in federal income taxation and welfare policy is not a bailout. Pumping federal cash into spendthrift states to rescue them from underwater pensions and backlogged debt service is.
Skip Estes is the legislative manager at the ALEC Center for State Fiscal Reform. Follow him on Twitter @Skip_Estes.