Saturday, November 17, 2012

Western Donor and Recipient States

By far the most popular entry in this blog has been one I wrote about federal donor and recipient states: that is, whether states pay more or less in federal taxes than they receive in federal expenditures.  In the last ten days or so, there has been a sharp increase in the number of times that page is downloaded.  I suspect that is related to a prediction I made to a friend shortly before the election that if President Obama won, there would be an increase in the use of the terms "secession" and "revolution" from people in so-called red states [1].  The increase has certainly happened.  My opinion is that the increased interest in donor/recipient status is from people in blue areas researching the often-quoted factoid that blue states (and within states, areas) subsidize red states/areas.

That previous piece wasn't concerned with the red-blue differences, but with the difference between the 11 states from the Rockies to the Pacific compared to the rest of the country.  By the usual Tax Foundation measures, the western states clearly subsidize the rest of the country.  Inside that group, depending on exactly what you compare, five states are donors: California, Colorado, Nevada, Oregon, and Washington.  Of the remaining six, all but Arizona have populations below three million -- some way below three million -- so those don't have a large effect on the total.  In this piece, I want to discuss the thesis that even in the six western recipient states, why they are recipients doesn't necessarily match the conventional wisdom of poor, lazy, etc.

The first unconventional factor is the very large federal government land holdings in the West.  In each of the 11, between 30% and 85% of the state's area is owned by the feds.  This ownership results in assorted distortions.  Wyoming is an example.  Almost 40% of the coal mined in the US is produced in Wyoming.  Much of that production is from federal lands.  In states where large amounts of coal are produced from private land -- West Virginia, Kentucky -- the state levies substantial severance taxes.  Wyoming can't tax the federal government.  Instead, the federal government shares a portion of the royalty revenue it gets from the coal mining with the state.  In the federal flow of funds accounting, these royalty payments show up as federal expenditures.  Absent those large payments, Wyoming would be a donor rather than a recipient.

Another factor is the size of some of the operations conducted on federal land in the West.  There are a number of national laboratories and large military bases located in the West.  This type of operation is often even larger when compared to the size of the state population where they are located.  New Mexico is an example.  Sandia National Laboratory is located in New Mexico, and the Lab's $2B annual budget is counted as an expenditure in New Mexico.  The White Sands military reservation (including the White Sands missile range) has a similar budget.  Those two facilities alone account for about $2,000 in federal expenditures for every person who lives in New Mexico.  Idaho is another small state with a large national laboratory.

Finally, there are some demographic things that affect the outcome.  States like Arizona are home to a large number of retirees.  While a farmer works in Illinois, his Social Security and Medicare are taxes collected in Illinois.  When he retires to Arizona, his SS and Medicare payments are federal expenditures in Arizona.  Increasingly, he may also bring Medicaid money into Arizona as well, if he moves into a nursing home and is poor enough [2].  There doesn't appear (to me) to be any sane way to account for people retiring to states other than those where they paid their taxes while they were working (and where their children continue to work and pay taxes).  Absent some way to account for that situation, Southwestern (and Southern) states receive disproportionate social insurance payments but it's not their fault.

My point is that determining the donor/recipient status of a state in a meaningful way is harder than just comparing tax receipts and flow-of-funds expenditures.  In the West, it's harder than most places.

[1] There are very few all-red or all-blue states.  The real divide is a rural/urban thing, which becomes clear if you look at the red-blue maps done at the county level.  For example, Georgia may be red but Atlanta and adjacent counties are blue, at least in the last two Presidential elections.

[2] Almost 50% of Medicaid expenditures are now for long-term care, particularly for the low-income elderly.

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