Peter Passell
Editor, The Milken Institute Review; Senior Fellow
California and Capital Markets and Europe and Finance and Global Economy and Labor and Public Policy and U.S. Economy
Peter Passell is editor of The Milken Institute Review, the Institute's economic quarterly. A senior fellow, Passell joined the Institute after eight years as economics columnist for the news department of The New York Times. He previously served on the Times' editorial board and was an assistant professor at Columbia...
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Fiscal federalism
By: Peter Passell
April 19, 2011

Every year or so, somebody crunches the numbers to figure out which states win and which states lose from fiscal federalism. (For all you ancient history buffs, this sort of exercise was pioneered by the late Sen. Patrick Moynihan of New York, who was eager to show that his state paid more than its share of income to the federal government.) The latest look, put together by the editors of The Daily Beast, the online newspaper that recently merged with Newsweek, can be found here.

As best one can tell, the analysis is pretty solid - it's based (like all such analyses) on IRS summary data, along with the Census' annual Consolidated Federal Funds Report. But this sort of reckoning, in which federal money spent in each state is weighed against federal taxes paid, is a conceptual muddle. For example, on the expenditure side, it includes both disability checks and Defense Department weapons system procurement, while on the income side it includes both Social Security taxes and taxes on multinational corporations.

To put it another way, the money going to the states benefits widely disparate groups and has widely disparate impacts on state economies. Federal procurement dollars spent in California might, for example, end up in the hands of local workers, or the money might go to aerospace stockholders who live in New York or Dubai.

That said, there are still some striking, easily interpreted realities visible in the numbers. First, since a large portion of the federal budget pays for pensions and services for the poor and elderly, while most federal taxes are paid by middle-class earners, the big "winners" are low-income states. What's more, since Washington serves as a buffer against cyclical changes in income (even more than usual during the last recession, thanks to stimulus spending), the hardest-hit states made the biggest gains in 2009, the latest year for which the figures are available.

It should be no surprise, then, that Mississippi "led" the nation, taking in almost $3 in federal income for every dollar paid. West Virginia is just a hair behind. At the other end of the list, Connecticut, New Jersey, Minnesota and Delaware got the least for the most.

Note the apparent irony. Seven of the top ten states - those that received the most federal money while supplying the least income to the federal government - voted for John McCain in 2008, and are presumably even more inclined to vote for conservatives today. Meanwhile, the four relatively affluent states - those that supplied the most income to the government while getting the smallest share back - at the bottom all supported Obama.

It's become the conventional wisdom that Americans aren't inclined to vote according to their direct economic interests, identifying with the earners they hope to be rather than the earners they are. That presumably explains why so many of them oppose estate taxes, even when these affect only multimillionaires.

Still, you have to wonder whether Americans will continue to ignore their own economic class status if and when conservatives get their way with federal entitlement programs. Case in point: Rep. Paul Ryan's (R - WI) arguably brave plan to 1) convert Medicare into a voucher-like program that will require everyone now under the age of 55 to maintain private insurance to cover their own health care costs once they reach 65, and 2) transform Medicaid (which covers the elderly in nursing homes as well as the poor) into less generous block grants.

Do Americans worry more about budget deficits and tax rates than about paying their medical bills? Maybe we'll soon find out.