OK, I’ll admit it — I’m from Kentucky, and I’m a wee bit ticked off at y’all right now.
After Mitch McConnell (R-KY) launched his “let states go bankrupt” talking point, the proverbial fur has been flying here at the Great Orange Satan. (N.B. While states can potentially default on debt, they cannot claim bankruptcy in any legal sense; check the Constitution, because McConnell is blowing pure smoke on this one. His real goal is force states and municipalities to raise taxes to survive, so that the national GOP can avoid doing so at the Federal level.) We’ve seen front pagers push the “blue states bail out red states” language, and commentators have jumped on specific states (including mine) with both feet.
Well, I think we need to take a step back and look at some (reasonably) hard numbers, ask ourselves which numbers are relevant, and see how we compare on those numbers. The main reference we’ll use is the Rockefeller Institute’s “balance of payments” analysis cited numerous times by Governor Andrew Cuomo of New York. Given the relative positions of McConnell and Cuomo, I’ll be drawing comparisons between New York and Kentucky.
1) In what general areas does the Federal Government return monies to the states?
The Rockefeller Institute breaks state-level receipts of Federal monies into four categories, but we’ll start with these two:
- Direct payments to individuals. This accounted for 61.3% of Federal spending in FY 2018, and Social Security and Medicare accounted for 75% of these direct payments.
- Grants include block grants to the states (Medicaid, transportation, Title I, SNAP, TANF, etc.), grants to local governments (law enforcement grants, public works grants, etc.) and grants to individuals (e.g. Pell and TEACH Grants for education).
It seems, then, that the biggest chunks of money under discussion are, with the possible exceptions of transportation and law enforcement grants, areas where no progressive should be arguing for cuts.
Moving on, the Rockefeller report includes two additional categories of Federal spending:
- Contracts are exactly that — usually procurement of some sort. This is going to include pretty much everything the Federal government buys, everything it has built/renovated, and the like.
- Wages includes all wages paid to Federal employees. This includes everyone from active duty military personnel and TSA employees to USDA county extension offices and US Fish and Wildlife agents.
2) How do Kentucky and New York compare in direct payments and grants?
The Rockefeller report specifically notes that, while differences in direct payments among states are obviously tied to known demographics (e.g. elderly population, disabled population, overall health, etc.), variations in the latter three categories (grants, contracts and wages) have a “significant impact” on each state’s per capita numbers. How significant, you ask? Well, let’s compare New York and Kentucky in the first two categories:
- In FY 2018 payments to individuals (e.g. Social Security, Medicare, Federal retirement/pension pay, etc.), Kentucky received roughly $800 more per capita than does New York.
- Where FY2018 Federal grants to the states (usually block grants like Medicaid, Title I, SNAP, TANF, Head Start, etc., but also individual grants like Pell/TEACH grants and the like) are concerned, New York received roughly $500 more per capita than does Kentucky.
- Overall, in terms of stuff directly reaching individuals across each state, the overall difference between New York and Kentucky in FY 2018 was...$249 per person.
At this point, there’s a simple question to ask — is a per capita difference of $249 in direct payments particularly significant when comparing a state of 4 million people to one of 20 million? Let’s compare data from the Census Bureau, with national figures/averages included and listed from ‘best’ to ‘worst’:
- Median household income, 2014-18: NY $65,253, US average $60,293, KY $48,392
- Per capita income: NY $37,470, US average $32,621, KY $26,948
- Persons in poverty, percent: US average 11.8%, NY 13.6%, KY 16.9%
- Persons with a disability, under age 65: NY 7.6%, US average 8.6%, KY 13.1%
NY performs better than the US average in 3 of the four categories, while Kentucky is well behind both New York and the US average in all 4 categories. It seems reasonable, then, that a higher percentage of Kentucky’s population is likely to receive need-based Federal monies, which (in turn) seems the most likely explanation for the $249 per capita difference between NY and KY in FY 2018. Again, what progressives would cut that funding?
3) Well, what about the other two categories?
Let’s talk about contracts and wages. These areas are what truly separate Kentucky and New York in terms of Federal monies received; here are the differences from FY 2018:
- Federal contracts: KY $5,649 per capita, NY $775
- Federal wages: KY $971 per capita, NY $357
These differences seem massive...until they’re placed in context.
The difference in wages is largely due to the outsize influence of Federal installations in Kentucky, primarily Forts Knox and Campbell, as well as the Blue Grass Army Depot (nerve gas storage/destruction), US Army Corps of Engineers Louisville District, and the Bureau of Prisons’ Federal Medical Center in Lexington. In fact, the Department of Defense is the largest employer in Kentucky (other than state government), with 40,000+ active duty service members and roughly 10,000 DoD civilian workers. (The largest non-governmental employer in Kentucky is UPS, with 21,000 employees.) In a state of only 4 million, those monies have a disproportionate effect on any per capita measurements. It’s also worth noting that it wasn’t a “subsidy from blue states” when the site for Fort Campbell was selected in 1941, or when Fort Knox was established in 1918.
That same disproportionate effect comes with Federal contracts, too. I trust that no one is going to argue that it’s a “subsidy from blue states” if a Kentucky firm wins a Federal contract for new construction at Fort Campbell, renovation of a Post Office in Lexington, or an International Space Station module. (That last example is NOT sarcasm; Kentucky’s leading non-agricultural export is aerospace technology, and Lexington-based Space Tango has gear on the ISS.) In 2018, Kentucky firms won ~33,000 Federal defense contracts worth $7 billion — while one could certainly argue against our outsized defense budget, does anyone want to argue that these contracts, jobs, and wages were a “bad thing” for Kentucky, or that they ‘should have gone’ to New York?
4) So where’s the REAL discrepancy in the ‘balance of payments’ analysis?
That’s easy — New York pays far more in taxes, per capita, than does Kentucky. In 2018, New York’s per capita Federal taxes were $12,655; Kentucky’s per capita taxation was $7,158. We can break those down further in two important categories, which account for 90% of each state’s total Federal tax burden:
- Per capita individual income taxes: NY $7,650, KY $2,979
- Per capita payroll taxes: NY $3,769, KY $3,428
Federal payroll taxes (Social Security, Medicare) per capita are roughly even between the two states (which is to be expected), so that leaves individual income taxes as the big difference — New Yorkers pay, per capita, roughly $4500 more in income taxes than do Kentuckians. Why is that? Well, let’s go back to those Census Bureau figures:
- Median household income, 2014-18: NY $65,253, US average $60,293, KY $48,392
- Per capita income: NY $37,470, US average $32,621, KY $26,948
- Persons in poverty, percent: US average 11.8%, NY 13.6%, KY 16.9%
- Persons with a disability, under age 65: NY 7.6%, US average 8.6%, KY 13.1%
So, New York has a much larger workforce (roughly 5x that of Kentucky), a significantly higher median household income (almost $20K higher), a significantly healthier workforce (per the under-65 disability rates), and a smaller proportion of its population in poverty (i.e more people making better *taxable* wages). I would argue that all of those are simple demographic differences which account for the disparity in individual income taxes between the two states. Now, I’ll give you one more bit of information, courtesy of the Wall Street Journal:
- Number of millionaire households, 2017: NY 456,479, KY 79,205
Now, we progressives are supposed to support a progressive income tax system, right? So, we’d expect a difference of 6x in millionaire households to result in higher income tax payments per capita, eh?
5) What about the other states?
According to the Rockefeller Institute’s FY 2018 analysis, 40 states received more than $1 in Federal monies for every $1 paid in Federal taxes. 15 states received $1.50 or more for every $1 paid:
- More than $2-to-$1: 6 states
- KY $2.41, NM $2.27, VA $2.12, WV $2.08, AL $2.02, MS $2.01
- Between $1.50-to-$1 and $1.99-to-$1: 9 states
- AL $1.95, MD $1.75, HI $1.65, ME $1.64, SC $1.61, AR $1.61, LA $1.59, OK $1.58, MO $1.50
25 other states received better than $1-to-$1 but less than $1.50-to-$1, ranging from Washington’s $1.01 to Arizona’s $1.48.
California and Illinois were $1-to-$1 between taxes paid and money received; they didn’t “subsidize” anyone else in 2018.
Eight states received less than $1 in Federal money for every $1 in taxes paid:
- MN $0.99, NE $0.98, UT $0.98, CO $0.97, NY $0.91, MA $0.90, NJ $0.90, CT $0.84
I see a mix of red/blue/purple states in both extremes...but I don’t hear anyone yelling about Virginia or New Mexico getting “subsidized” at better than $2-to-$1, nor do I see anyone praising Nebraska or Utah for their roles in “subsidizing” other states.
CONCLUSIONS
1) What many folks are emphatically criticizing is a natural result of the combination of a progressive income tax, varied economic/demographic factors in each state’s population, and the uneven distribution of economic opportunity across the 50 states.
2) There will always be extreme cases, including both blue and red states; for instance, it’s almost certain that Virginia and Maryland will remain on the high end of these comparisons, due to the sheer number of Federal installations/employees/contractors in those states.
3) Comparisons will also shift from year to year, often for reasons few would criticize; one wonders what the comparison between KY and NY will look like this year, given the massive relief funds appropriated as a result of the COVID-19 pandemic.
If anyone has constructive suggestions on how to “fix this” without trampling on progressive ideals, I’m all ears. Until then, I’m not particularly interested in mere rhetoric.
Tuesday, Apr 28, 2020 · 4:30:24 PM +00:00
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wesmorgan1
Numerous commentators have suggested that the story is McConnell’s hypocrisy and/or ‘criticizing the system’. You’ll get no argument from me where McConnell is concerned; he’s evil in a half shell.
However, It isn’t ‘criticizing the system’ unless you also direct your ire at the blue states taking far more than they contribute, like Virginia and Maryland; VA received $2.12 per $1 paid in FY 2018 taxes, while Maryland received $1.75. Blasting Kentucky and Kentuckians without calling out VA/MD and their residents is...wait for it...hypocrisy.