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TAX POLICY - TAX AND SPEND MYTHS V. REALITIES

Republicans allege that Democrats are Tax and Spend Liberals. Is that true? Not really! 
Indeed, it could be argued that the opposite is true- namely that Republicans are tax and spend conservatives.

To examine the above allegation, we decided to look at some recent data on Federal tax collections from States, how much Federal spending occurred in those same states, the political orientation of the states based on whom they elected to the U.S. Congress and the gross state product of those states. We got the data from the following sources/references: 
1. Tax Foundation, "Federal Spending by State Per Tax Dollar Sent to Washington FY 1990 and 2000".
2. House.gov, List of House members by State and by Party (Republican/GOP, Democrat, other) for the 106th Congress (1999-2001).
3. Senate.gov, List of Senators by State and by Party for 1999-2000.
4. Minneapolis Fed, Real Per Capita Gross State Product for 1999.
5. Dean Lacy (OSU and Stanford), "A Curious Paradox of the Red States and Blue States: Federal Spending and Electoral Votes in the 2000 Election", March 2002 

Now for the facts.

1. Federal Spending v. Federal Tax Collections, by State

Tax Foundation (Ref. 1 above) shows the ratio of federal spending in each state to the federal tax collections from that state, as follows. We focused on the year 2000 data since that is the most recent. Expenditure values > 1 mean that the state received more in federal spending, than it provided the Feds in taxes. 

Table 1
Federal Spending by State Per Tax Dollar Sent to Washington
FY 1990 and 2000

 

Expenditures
Per Dollar of Taxes

Ranking

 

FY’90

FY’00

FY’90

FY’00

Total

$ 1.00

$ 1.00

Alabama

$ 1.43

$ 1.54

6

8

Alaska

1.20

1.68

20

5

Arizona

1.25

1.18

16

22

Arkansas

1.31

1.38

12

14

California

.89

.86

38

40

Colorado

$ 1.16

$ .85

21

41

Connecticut

.78

.62

45

50

Delaware

.75

.84

48

42

Florida

.96

1.00

34

31

Georgia

.94

.99

36

32

Hawaii

$ 1.13

$ 1.56

23

7

Idaho

1.28

1.30

14

17

Illinois

.75

.74

47

46

Indiana

.88

.92

39

36

Iowa

1.08

1.04

26

29

Kansas

$ 1.06

$ 1.02

29

30

Kentucky

1.27

1.41

15

12

Louisiana

1.30

1.39

13

13

Maine

1.22

1.32

19

15

Maryland

1.23

1.32

18

16

Massachusetts

$ 1.08

$ .86

25

38

Michigan

.82

.81

44

44

Minnesota

.86

.76

41

45

Mississippi

1.66

1.78

2

3

Missouri

1.36

1.26

8

19

Montana

$ 1.44

$ 1.59

5

6

Nebraska

1.12

1.09

24

24

Nevada

.77

.69

46

48

New Hampshire

.74

.71

49

47

New Jersey

.68

.66

50

49

New Mexico

$ 2.05

$ 2.03

1

1

New York

.83

.86

43

39

North Carolina

.93

1.06

37

28

North Dakota

1.52

1.86

3

2

Ohio

.99

.97

30

33

Oklahoma

$ 1.24

$ 1.46

17

11

Oregon

.95

.93

35

35

Pennsylvania

.96

1.06

33

26

Rhode Island

1.06

1.18

28

21

South Carolina

1.32

1.27

11

18

South Dakota

$ 1.35

$ 1.46

9

10

Tennessee

1.14

1.20

22

20

Texas

.97

.96

31

34

Utah

1.34

1.06

10

27

Vermont

.87

1.08

40

25

Virginia

$ 1.44

$ 1.48

4

9

Washington

.96

.87

32

37

West Virginia

1.39

1.75

7

4

Wisconsin

.86

.83

42

43

Wyoming

1.07

1.09

27

23

Dist. of Columbia

$ 5.59

$ 6.49

Source: Tax Foundation, based on federal expenditure data from the Bureau of the Census.

2. Federal Spending v. Gross State Product
To make some sense of the above table, we surmised that the Federal spending-to-tax-collection ratio (henceforth referred to as STTC) for each state should be compared to a key measure of each state's economic output, the per capita gross state product (GSP) - to see whether at a macro level, the money is being spent in some reasonable manner. We only compared data for the 50 states and not for the District of Columbia, which, by the way, gets way more money in spending that it provides the Feds in taxes (see the above table for the numbers - it is perhaps not surprising considering that DC is the seat of the Government). 

The results of the STTC v. GSP comparison are shown in the chart below, where we compare the STTC for the year 2000 to the GSP per capita for 1999. Part of the reason for this, is that we thought it might be reasonable to imagine our representatives spend on our states keeping in mind how well the states did in the previous year. While this may not necessarily be a reasonable assumption in reality :-), it turns out from the chart below, that it surprisingly turns out to be a somewhat fair predictor of the STTC, with a few exceptions.

Some findings:
A. For the most part, Federal spending exceeds tax collections in states with lower per capita GSP, and it is lower than tax collections for states with higher per capita GSP. In other words, for the most part, more money is being taken from economically stronger states and spent on economically weaker states, than the other way around. There are two notable exceptions to this rule - one is Alaska (a Republican leaning state) which seems to be enjoying riches and more spending simultaneously (lucky duckies!). (The other, as stated earlier, is the District of Columbia which is not plotted below, but would be the other very very lucky duckie (off the chart on the top right)). 
B. As a rough guideline, it seems fair to assume that states with a per capita GSP > ~ $33,000 are almost certain to receive less Federal spending than the taxes they effectively pay the Feds.
C. Most important, while we don't have a problem with using funds from the rich to help the not-so-rich, it is nevertheless interesting that funds from economically stronger states are being provided more to economically weaker states (relatively speaking), as opposed to providing all funds from one state simply to needed projects and programs within that same state. This is important to note.


3. Federal Spending as a function of Political Orientation of the State
This is where the rubber meets the road, so to speak. 

To establish the political orientation of the state, we did the following. We took the list of House and Senate members from each state, by Party - from References 2 and 3 above, and assigned different political orientation codes (RR, RE, RD, EE, DE, DD) to each state based on the following:

By State   House
  GOP Reps > 50%, Dems < 50% GOP Reps < 50%, Dems > 50% GOP Reps = Dem Reps = 50%
Senate GOP Reps > 50%, Dems < 50% RR RD (or DR) RE (or ER)
GOP Reps < 50%, Dems > 50% RD (or DR) DD DE (or ED)
GOP Reps = Dem Reps = 50% RE (or ER) DE (or ED) EE

 Thus, in this coding system, 
- RR is a strongly Republican state (sent GOP majorities to both houses of Congress), 
- RE (or ER) is a Republican leaning state
- RD or EE represent states which evenly split their representatives to Congress between GOP and Democrats, or sent a GOP majority to one house and a Democratic majority to the other
- DD represents a strongly Democratic state, and 
- DE is a Democratic leaning state 

Now, we can examine the STTC as a function of both political orientation and GSP. In the chart below we have grouped states by political orientation and plotted the average per capita GSP for states of each political orientation.

The findings:
A. Democratic and Democratic leaning states (Dem states) had the highest average per capita GSP in 1999.
B. States which split between GOP and Democratic representation in Congress (Split states) had the lowest average per capita GSP in 1999. (This curious behavior is perhaps worth looking into further). 
C. Republican and GOP-leaning states (GOP states) fell in between the above two cases.
D. VERY IMPORTANT: Dem states got on average less Federal spending in 2000 than GOP states and almost all split states (except the 2 states in the EE category). This is in spite of the fact that they had the highest average per capita GSP of all states.

Please click on this chart to expand it!

We can look at the above results in another way. In the following chart, we show which states benefited more from funding and which states ended up being the source of the funding for those other states.

The results?
E. The number of GOP states that benefited richly from Federal funding in 2000 was much more than Dem states. The mantra tax and spend liberals (assigned by the GOP to Democrats) is patently false. Indeed, the data suggests the GOP party is hypocritical in more than one way. (Note that Florida is excluded from the chart below because it has an STTC ratio of 1). See our overall conclusions below this chart.


4. ELECTION 2000 and Bush v./vs. Gore votes

Dean Lacy's paper is worth reading. Here is the abstract and two key figures that tell the key story.

Abstract: Thirty of the U.S. states reap more in federal spending than their citizens contribute to the federal government in taxes. The other 20 states provide more in taxes than they receive in spending. In the 2000 U.S. presidential election, George W. Bush won most of the states that are net beneficiaries of federal spending programs, while Al Gore won most of the states that are net contributors to federal spending. A state’s ratio of federal spending to tax dollars, particularly non-defense spending, is a statistically and substantively significant predictor of Bush’s margin of victory across the states. A state’s per capita federal tax burden is also associated with the election result: states with higher tax burdens gave higher vote margins to Gore. Compared to Clinton’s state-by-state vote shares in 1996, Gore did worse in states that gained in federal spending per tax dollar from 1998 to 2000. 

The charts:

5. CONCLUSIONS

A. Based on the above data, the GOP has effectively used (intentionally or unintentionally) federal taxes from economically stronger (often Democratic) states and spent that money in its own backyard (economically weaker - often Republican - states). This is a tax-and-spend approach - indulged in by the GOP. In comparison, Democrats (and the states they come from) may be largely seen as fiscally "altruistic" based on the data above.

B. While it may be appropriate to spend money on economically weaker states, there is nothing in the above data that sheds light on whether the actual districts that are being spent on within a state constitute richer or poorer districts in that state. We'll have to come back to that topic later!

C. Based on per capita GSP as a measure, GOP states were economically weaker in 1999 than Dem states. This suggests that taking economic advice for the U.S. from those states and their representatives is not likely to be more beneficial than listening to the Democratic representatives from the Dem states. Indeed, we say here, listen to the successful Dem states and their representatives some more.

D. Given that many GOP states are benefiting disproportionately from the tax dollars of Dem states, it is natural to expect that GOP states don't largely determine this country's agenda. We think that is only fair. 

E. The greater economic success of Dem states (which translates into greater national economic success) should also be examined in light of greater U.S. economic success under Democratic Presidents vs. Republican Presidents.  

F. Not only is the "tax-and-spend liberals" label a myth, it may be appropriate to fairly label Republicans tax-and-spend conservatives! More importantly though, tax policy coming from Republicans must be viewed with great caution, especially in light of various other myths propagated by them, whether it is on personal taxes or corporate taxes.

G. The fact that "red states" (those that voted for Bush in 2000) are by and large subsidized by "blue states" (those that voted for Gore in 2000) only highlights the hypocrisy of conservatives who deride liberals as "tax-and-spenders".

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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