Blue States: Ready for a Less Progressive Tax Code?

December 15, 2004

When you see bitter headlines like “Red State Welfare Queens,” and “If At First You Don’t Secede,” you know that angry urban, blue-state commentators have a new whipping boy -- federal taxing and spending.

This anger may be the best hope for fundamental tax reform, which is being pushed by red-state Republicans but would mostly benefit people in the brightest blue urban centers.

The “red welfare state” accusation is based on the Tax Foundation’s annual comparison of federal taxes to spending in each state, which answers the question, “Does my state get as much back in federal spending as it sends to Washington in taxes?”

The 50 answers to that question track red and blue almost perfectly: New Mexico (newly red) leads a gang of red states in the beneficiary column, getting almost $2 in spending for each $1 in taxes. New Jersey finishes dead last, edging out other blue states by receiving only 57 cents in spending per dollar of taxes. This comparison has long been a staple of the business pages. Now it has become a regular feature in the columns of liberal writers, but they rarely point out what could change it, aside from secession.

Why does this state-by-state disparity exist?

Let’s sweep away the silliest misinterpretation first – that during their brief majority, Republicans have prevented blue-state congressmen from bringing home their share of federal spending.

The scraps of pork that clutter the federal budget each year, infuriating as they are, are not large on the massive scale of total federal spending. A Nevada congressman will undoubtedly brag about that $25,000 mariachi program that Congress just funded in one of his local schools, but it will not change Nevada’s ratio of spending to taxes. Even a military base, usually considered the biggest, juiciest pork chop that a state can hope for, doesn’t change the spending-to-tax ratio more than a penny in a medium-sized state.

Spending does lean red, but the reason is demographic, not political. Most federal money is spent on retirees, especially Social Security and Medicare. And of course the elderly have been moving south and west for years. Every large blue state saw its elderly population depleted during the late 1990s. As might be expected, red Florida and Arizona took in many of the elderly, but they weren’t alone. Almost every Mountain and Southern state expanded its elderly population.

Despite the red dominance of retirement destinations, the spending tilt toward red states isn’t extreme. The ten states where Uncle Sam spent the least money per capita in 2003 include three solid reds -- Utah, Georgia and Indiana; two solid blues – New Jersey and Illinois; and five battleground states -- one barely red, Nevada and four barely blue, New Hampshire, Michigan, Minnesota and Wisconsin.

Which brings us to the real culprit: high blue-state income taxes. States with the highest incomes per capita -- and they’re all solid blue -- pay much higher federal taxes per capita. An income of $132,000 in San Francisco buys the same standard of living as $71,000 in Phoenix, but when it’s time to fill out the 1040, the San Francisco family pays 17.3 percent of its income in federal income taxes. That’s $22,812, almost triple the national median. Meanwhile, the Phoenix family pays $7,576, about $400 less than the median. A similar comparison could be drawn of Boston and Atlanta, not to mention New York and almost anywhere.

The income difference is illusory because it does not result in a higher standard of living, but the tax burden on that illusory income is real. By forcing taxpayers who live in high-cost, high-salary areas up into higher tax brackets, the progressive income tax code not only redistributes income from the prosperous to the poor, but from middle-income blue to middle-income red. Part of this redistribution is caused by the Alternative Minimum Tax (AMT), once conceived by Democrats to catch rich tax avoiders, now rapidly eating away at the upper-middle class in blue states. Is this the progressivity that Democrats have been championing for years?

Now President Bush is talking “fundamental reform” and elimination of the AMT. Advocates of the flat tax and national sales tax are emboldened. How would these radically different tax systems affect the red-blue balance?

The red states would be singing the blues. A flat tax wouldn’t quite bring a dollar-for-dollar ratio to New York, New Jersey or Connecticut, but all of the blue “donor states” would be getting a much better deal from Uncle Sam.

Will Democrats obey their instinct to fight President Bush, or will they see a flatter, less progressive tax structure as a way to make the red states pay their fair share? Perhaps red-state enthusiasm will wane when the writing is on the wall, but right now it appears they’ll follow President Bush wherever he leads them.

William Ahern is editor of Tax Features published by the Tax Foundation, a nonprofit tax research group that has educated the public about tax policy since 1937.

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