A Cure For Blue State Fiscal Blues

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Faced with massive debt, a struggling economy and political stalemate in Washington, we've entered the silly season for public policy. A host of citizens in states that voted against Barack Obama are petitioning to secede from the union. On the heels of that movement, the Washington Post's political columnist Dana Milbank suggests that the President should let them leave. Most of the states where people are intent on secession, Milbank argues, are ‘takers' from the budget, that is, they get back more in spending from the federal government than they provide in taxes and so are to a greater extent responsible for the nation's budget woes.

No one is leaving the union, of course. But if Milbank is really interested, there is a practical and entirely doable policy that Washington could embrace which would address the fiscal imbalance of the so-called Blue states, and it would make cleaning up the federal budget mess easier too by making the budget simpler and more transparent. It's a policy that has been suggested occasionally over the years, including by the late Sen. Daniel Patrick Moynihan. That his own Democratic Party has never embraced this solution (and wouldn't now) tells you a lot more about Washington than Milbank's analysis does.

Sen. Moynihan, you may know, is the guy who first started counting how much money the citizens of each state send to Washington in taxes, and what those states get back. His researchers totaled things like the value of defense contracts to local firms, salaries paid to federal officials located in each state, and grants and payments to recipients of federal programs in each state. Moynihan suspected that his own state, New York, was a net contributor, and every year for about two decades he produced a report which demonstrated who the takers and givers were.

Over time he noticed that the imbalance never changed, regardless of which party was in the White House or controlled Congress. So in one of his final studies, Moynihan suggested that maybe the country needed to pursue a different approach, which he termed a ‘new federalism.' It was time, he argued, to pare the national government's functions back to those things it could do better than individual states, such as national defense. Then Washington could cut federal taxes significantly with the money it saved and leave that money back in the states, where each state could then decide which model of government it would follow: a low-tax, basic services model, or a high tax, high services approach.

"It is time to trade," Moynihan wrote in 1998. "Less activism in Washington in return for more revenue at home, for whatever active measures recommend themselves to the state or municipality in question." As one Washington journalist wrote at the time, Moynihan "is the last of the New Deal liberal Democrats, so we must sit up and pay sharp attention when Moynihan says that New Deal-type government has become a bad deal" for some states.

Following the Moynihan prescription might quickly cure state fiscal woes in places that have supported the President. California might get enough of a windfall to fix Jerry Brown's budget without raising state taxes again. New Jersey might realize enough so that it could adequately finance its woefully underfunded pension system. New York might be able to expand its subsidized health insurance to cover its staggering number of uninsured citizens. The President's home state, Illinois, another net contributor, might be able to clear up its $5 billion in unpaid bills, a result of the country's worst state budget mess.

Meanwhile, all of those folks in Red states looking to secede from the union would get a taste of true small government.

You can see what would be at stake for the Blue states merely by looking at how a tumble over the fiscal cliff would impact them. The Tax Foundation calculated the average increase in taxes that a household in each state would pay if all of the Bush tax cuts as well as additional cuts enacted since then were simply to expire on Dec. 31. If you ranked the states in terms of total additional taxes per household, states that voted for the President would dominate your top 10, taking eight of the slots. Maryland is at the top. Its average household would send an additional $7,194 to Washington, followed by New Jersey at $6,933 per household and Connecticut at $6,653 and Massachusetts at $6,632.

While a budget compromise that avoids the fiscal cliff seems likely, Blue states will still be the biggest losers because the President is demanding significant tax increases. Since many of the states that supported the President already pay the most in taxes to Washington per household, they are likely to ante up more in any budget compromise. That's money leaving the state, much of which may not come back.

When you look at the figures, you can only speculate why Moynihan's party never took him up on the proposal. Perhaps the Washington representatives from Blue states wouldn't want to abandon the less fortunate elsewhere to their own local governments. That didn't seem to concern Moynihan, however, and he understood more about government policy and how it impacted the poor than just about anyone.

Or maybe it's simply that the federal office holders elected from California, Jersey, Illinois, New York, and other places all like seeing the money flow down to Washington and then back to the states, rather than simply staying at home. Maybe that has an awful lot to do with our budget mess in Washington, too.

Whatever the case, nobody's seceding from the union. But the Blue states could clearly get a better deal for themselves. All they have to do is vote for it.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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