Progressives Against Progressive Taxation

Those on the left should celebrate redistribution of money from rich blue states to poorer red ones.

By Aaron Brown and Michael Mendelson. Mr. Brown is author of “The Poker Face of Wall Street” and “Red-Blooded Risk.” Mr. Mendelson is a principal at AQR Capital Management. Excerpts:

"If we consider the two components of the state-by-state balances—federal tax receipts and expenditures—first we find that the expenditures tend to be related to the number of older people in each state because of Social Security and Medicare. That includes many people who paid taxes while they were younger and earning money in blue states before they moved to red states to retire. There’s additional variation due to the number of highly paid federal workers in the District of Columbia, Maryland and Virginia.

Other, more lightly populated states often have large federal facilities, including those for the military. Working in New York and retiring to Florida doesn’t demonstrate a federal policy to subsidize Florida, but rather that older New Yorkers like milder winters. Even so, the federal government spends more per capita in the 17 solid blue states (those with Democrats controlling both legislative houses and serving as governor, attorney general and secretary of state), $16,493, than in the 23 solid red states, $15,514. The 10 swing states make out at $19,040.

So it isn’t the spending side that drives the overall blue-red divide. It’s the other variable in the equation: personal and corporate income taxes. Here is where the blue states take pride of place. The highest-income places tend to be coastal blue states like Massachusetts, Connecticut, New Jersey, California, New York and Washington. They pay the highest federal taxes, $16,562 per resident in the 17 solid blue states, compared with $11,846 in the 23 solid red states.

Higher incomes usually mean higher tax rates, and extremes of income usually generate disproportionately high tax bills. Since there are more high-income taxpayers in Manhattan, Bel Air and Silicon Valley, individuals there subsidize the federal expenditures for those who pay less, whether they live in a red state 1,000 miles away or nearby in an even bluer but much less affluent neighborhood.

What many assume to be hinterland hypocrisy reveals the most consequential lie of the June 27 Biden-Trump debate. The billionaire class doesn’t pay income tax at the 8.2% rate Mr. Biden cited—it pays far more. The top 1% of earners pay 46% of total federal income tax while earning only 26% of total income. Those big-city Democrats (and the well-off Republicans living among them) are paying a big chunk of federal spending on healthcare, the military and school lunches. As long as we have a progressive tax code and lots of social spending, tax money is going to keep flowing from Park Avenue and Sand Hill Road to conservative Appalachia and rural Mississippi, as well as to left-leaning Detroit and Hartford. That is, from the Warren Buffetts of the world to their secretaries, not vice versa.

If those on the left really believe in progressive taxation, they should celebrate the redistribution of money from rich blue states to poorer red ones. They shouldn’t use it as a cudgel against middle-income red-state citizens who still believe in limited government but aren’t wealthy enough to turn away their Social Security checks."

Then there was a letter to the editor about this article. See Are Blue States Really Bailing Out Red States? People, not state governments, pay federal taxes.

"In addition to the intrastate transfer from rich to poor that the Moynihan “balance of payments” approach to state-to-state federal tax flows misses, it is also worth noting that many major federal grant-in-aid programs fail to adjust for state population declines. The funding levels for cash welfare (TANF) and clean water (CWSRF) programs, for instance, are based on state aid levels set by statute and don’t adjust for population declines—such as those in large blue states, including California, New York and Illinois.

Education assistance is governed by “hold harmless” provisions that maintain federal aid even if public-school systems see declining enrollments. In an October, 2023 American Enterprise Institute report, I calculated that, for the 12 largest federal grant-in-aid programs, California enjoyed $130 million in “avoided reductions” it would have incurred were population loss considered. New York and Illinois also avoided reductions.

Put another way—and to update Moynihan—by failing to take population loss into account, federal aid is actually favoring blue states over red.

Howard Husock

American Enterprise Institute"