Bringing Home the Bacon
With the election fast approaching, attention and speculation is beginning to shift to the aftermath. Whatever the outcome on November 6th, the sine die Congress and the potentially lame duck White House will be unable to avoid at least debating how to begin tackling the deficit and the mountain of debt accumulated in the past ten years.
Where you reside may color your views on the best approach to closing the deficit. The red/blue divide (those leaning Republican versus those leaning Democratic) is often cited as an ideological line of demarcation, separating those voters more receptive to cutting government spending versus those open to increasing taxes. Some states — like Texas — are portrayed as bastions of more free market, less government thought; while others — California or New York — are depicted are as proponents of more government, more regulation, not less. Power and philosophical shifts in Washington will be determined by how these lines change between now and Election Day.
In light of these stereotypes, we thought it worthwhile to assess which states stand to benefit, or lose, based on a shift in power to the right or to the left. Surprisingly, our analysis suggests a Republican sweep, granting them control of both the White House and Capitol Hill, may favor the so-called blue states (those casting their votes for President Obama in the 2008) more than their red state counterparts.
Yes, this conjecture is counterintuitive to impression conveyed by the press. As a rule, blue states tend to receive proportionately less in federal expenditures than they pay in taxes — defined for the purpose of this analysis as the sum of personal income and Social Security and Medicare payroll taxes. On a per capita basis (the surplus of spending over taxes divided by the state’s total population) this disparity is even more pronounced.
Of course there are the inevitable exceptions. Maryland (MD), New Mexico (NM) and Hawaii (HI) stand out as historically Democratic strong holds that receive a hefty dose of federal spending. Maryland, obviously, benefits from its location. On the District’s doorstep, the state is home to the offices of numerous government agencies inside and outside of the Beltway. Hawaii is home to a number of large military installations including the Pacific fleet anchorage at Pear Harbor, Schofield Barracks and Hickam field. In 2009, the Department of Defense contributed $5.5 Billion in purchasing power to the Hawaiian economy just in the form of salaries and wages to military personnel and civilian employees located on the islands.
Another cut is size. As a rule, smaller states — in terms of population — fare better than larger states in securing a larger share of Washington’s spending relative to taxes paid. We suspect there are several explanations contributing to this phenomenon. Grants for certain projects, such as a bridge’s renovation, are invariant; so the smaller the state’s population, the greater the positive impact. Second many of the less density populated states comprise the nation’s breadbasket, growing the bulk of the nation’s agricultural commodities. Third, a number of these same states also play host to large military installations. Fourth, several are less affluent than the nation as a whole. For a certain programs, there is a redistributive element in the benefit computation, which aids poorer states. Finally, there is the political element. Small states in the Senate have equal representation. Some politicians — like the late Senator Robert Byrd from West Virginia (WV) — have been able to parlay this to constituents’ advantage.
A dramatic reduction in federal spending and a retrenchment of the welfare state may have some unlikely beneficiaries if this development results in lower effective tax rates. States like California, New York and New Jersey may discover less taxes going to Washington than cuts in spending. In politics, there will always be pork, but it may soon grow leaner.
Notes on Sources and Methods:
Taxes paid represent the aggregate of personal income taxes, Old Age, Survivorship and Disability (OASDI) payroll taxes and Hospital Insurance (HI, or Medicare) payroll taxes paid by state residents and workers in 2009. Corporate, excise and estate taxes were excluded from the total. In the case of federal corporate taxes, there is no effective way to apportion where the income was earned by state. Estate and excise taxes are negligible relative to the total. Income tax data was obtained from the Internal Revenue Service (IRS). OASDI and HI payroll tax data was obtained from the Social Security Administration (SSA).
Expenditure data was drawn from the Census Bureau’s Consolidated Federal Funds Report for Fiscal Year 2009. The report tabulates all expenditures made by Washington, by state. These include but are not limited to Social Security, Medicare, Medicaid and other block grants, salaries and wages for federal employees and military personnel and for equipment procurement.
In 2009 spending exceeding combined revenues; hence, the reason why the ratio of spending received to taxes paid exceeded one for each of the fifty states. Including corporate, estate and excise tax receipts would have lowered the ratios but would not have materially impacted the relative rankings among the states.
(Source: Census Bureau; SSA, IRS; AIFS estimates.)
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American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.
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