Tag: federal taxes

Earmark Donor States

I have an op-ed in Politico about “earmark donor states.” It’s a term I invented to highlight a rarely discussed side of earmarking: public choice economics.

As public choice theory would predict, the earmarking process operates under a system of concentrated benefits and diffuse costs.  Based on an analysis of 2009 data, 16 states receive a disproportionately large percentage of the earmark pie and can be labeled “earmark beneficiary” states. The other 34 states and the District of Columbia are “earmark donors,” as they receive fewer earmark dollars than they proportionally should.

To determine which states win and lose in the earmarking game, I looked at the share of taxes each state sends to Washington and compared it to the share of earmarks that each state receives. 

In the op-ed, I use Colorado, one of the biggest earmark donor states, as an example:

Colorado taxpayers contribute about 1.6 percent of total federal taxes, but they receive just over two-tenths of one percent of earmarked funds—proportionally speaking, less than a third of what it should be getting. This works out to more than $200 million dollars that Coloradans are spending to subsidize earmarks in other states – hardly chump change. So while Colorado’s representatives might pat themselves on the back for securing funding for an occasional municipal bus or bioenergy plant, their earmarking rivals in other states like West Virginia and Hawaii obtain funding for larger and more expensive projects and send the bill to the Centennial State.

Below is a table with additional data indicating which states are earmark donors and recipients.  The key column is the “earmark ratio.” The lower the figure, the smaller a state’s share of earmarks is relative to the amount of taxes its residents and businesses pay.  A state with an earmark ratio below 100% is a donor state.  As you can see, Utah is the first state on the table that receives slightly more than its proportional share of earmark funds. Mississippi, the last state on the list, remarkably receives 11 times more than its proportional share. 

 Also note that the most populous states in the country are earmark donors – almost 90 percent of Americans live in earmark donor states.

State TOTAL FEDERAL TAXES % of Total Taxes Proportional Share of Earmarks (millions of $) Earmarks Received (millions of $) % of Total Earmarks Earmark Ratio % of Delegation on Approps
New York 193,446,916 8.2% 1642.75 418.71 2.1% 25.5% 12.9%
Illinois 116,130,852 5.0% 986.18 252.19 1.3% 25.6% 14.3%
Nebraska 16,200,400 0.7% 137.57 41.53 0.2% 30.2% 20.0%
Colorado 38,484,608 1.6% 326.81 106.15 0.5% 32.5% 11.1%
Connecticut 44,684,141 1.9% 379.46 124.83 0.6% 32.9% 14.3%
New Jersey 103,548,696 4.4% 879.34 319.06 1.6% 36.3% 13.3%
Arizona 32,372,226 1.4% 274.91 102.00 0.5% 37.1% 10.0%
Ohio 103,638,344 4.4% 880.10 345.98 1.7% 39.3% 25.0%
Georgia 59,486,251 2.5% 505.16 203.94 1.0% 40.4% 13.3%
Minnesota 67,646,589 2.9% 574.46 233.10 1.2% 40.6% 10.0%
Texas 200,521,512 8.5% 1702.83 695.59 3.5% 40.8% 17.6%
California 264,868,391 11.3% 2249.27 971.05 4.9% 43.2% 14.5%
Indiana 42,108,854 1.8% 357.59 156.44 0.8% 43.7% 9.1%
Massachusetts 70,108,079 3.0% 595.36 265.75 1.3% 44.6% 8.3%
Wisconsin 38,642,363 1.6% 328.15 171.34 0.9% 52.2% 20.0%
63,348,252 2.7% 537.95 288.11 1.4% 53.6% 6.7%
Pennsylvania 106,613,979 4.5% 905.37 488.57 2.5% 54.0% 14.3%
Tennessee 44,047,939 1.9% 374.06 208.02 1.0% 55.6% 27.3%
Michigan 56,050,689 2.4% 475.98 279.99 1.4% 58.8% 5.9%
Florida 110,156,809 4.7% 935.45 556.55 2.8% 59.5% 14.8%
Delaware 13,683,353 0.6% 116.20 69.38 0.3% 59.7% 0.0%
Oklahoma 24,297,410 1.0% 206.33 123.91 0.6% 60.1% 14.3%
Oregon 21,736,643 0.9% 184.59 111.85 0.6% 60.6% 0.0%
Virginia 58,598,281 2.5% 497.62 312.80 1.6% 62.9% 15.4%
Wyoming 3,833,691 0.2% 32.56 21.33 0.1% 65.5% 0.0%
District of
19,487,689 0.8% 165.49 111.59 0.6% 67.4% 0.0%
Missouri 44,310,000 1.9% 376.28 256.45 1.3% 68.2% 18.2%
Washington 48,587,720 2.1% 412.61 287.22 1.4% 69.6% 18.2%
Maryland 44,484,984 1.9% 377.77 304.09 1.5% 80.5% 10.0%
Kansas 20,374,354 0.9% 173.02 141.68 0.7% 81.9% 33.3%
New Hampshire 8,739,838 0.4% 74.22 62.40 0.3% 84.1% 25.0%
Louisiana 34,882,848 1.5% 296.23 272.57 1.4% 92.0% 22.2%
Arkansas 25,727,268 1.1% 218.48 202.37 1.0% 92.6% 33.3%
Rhode Island 10,909,205 0.5% 92.64 87.58 0.4% 94.5% 50.0%
South Carolina 17,806,603 0.8% 151.21 145.36 0.7% 96.1% 0.0%
Utah 14,270,839 0.6% 121.19 131.18 0.7% 108.2% 20.0%
Idaho 6,859,632 0.3% 58.25 63.27 0.3% 108.6% 25.0%
Nevada 13,770,576 0.6% 116.94 129.88 0.7% 111.1% 0.0%
Kentucky 23,313,696 1.0% 197.98 248.74 1.2% 125.6% 37.5%
Maine 6,105,799 0.3% 51.85 73.04 0.4% 140.9% 25.0%
Iowa 17,614,407 0.8% 149.58 336.88 1.7% 225.2% 28.6%
Alabama 20,093,422 0.9% 170.63 424.18 2.1% 248.6% 33.3%
Vermont 3,366,627 0.1% 28.59 81.97 0.4% 286.7% 33.3%
Montana 4,136,011 0.2% 35.12 101.02 0.5% 287.6% 66.7%
South Dakota 4,888,826 0.2% 41.52 135.48 0.7% 326.3% 33.3%
New Mexico 8,188,815 0.3% 69.54 235.09 1.2% 338.1% 0.0%
North Dakota 4,115,943 0.2% 34.95 136.79 0.7% 391.3% 33.3%
Hawaii 6,747,592 0.3% 57.30 270.74 1.4% 472.5% 25.0%
Alaska 4,670,157 0.2% 39.66 227.81 1.1% 574.4% 33.3%
West Virginia 6,332,264 0.3% 53.77 336.92 1.7% 626.6% 20.0%
Mississippi 9,603,121 0.4% 81.55 900.57 4.5% 1104.3% 16.7%

IRS: http://www.irs.gov/taxstats/article/0„id=206488,00.html
Taxpayers for Common Sense
Author’s calculations

Suspecting that the disparity between states is a product of political clout, I calculated the percentage of each state’s congressional delegation serving on the House and Senate Appropriations Committees.  The graph below shows the correlation between this metric and the earmark ratio of each state. The closely tracking trend lines suggest there is a connection between a state’s representation on the Appropriations Committees and earmarks. The correlation between these figures is 0.264, which is especially strong when you consider that earmarking proponents often argue that the process is entirely merit-driven and apolitical.  To be sure, this is a very rough indicator – earmark recipient states like Alaska and West Virginia were long represented by earmark champions Ted Stevens and Robert Byrd, neither of whom is included in the figure.  Also, it should be noted that Hawaii and Mississippi are represented by Daniel Inouye and Thad Cochran who, respectively, are the chairman and ranking Republican on the Senate Appropriations Committee.  As such, they carry significantly more clout than the average appropriator. Additionally, Nevada’s status as an earmark beneficiary state despite its lack of appropriators might be explained by Senator Harry Reid’s influence as Senate Majority Leader.

I also evaluated the correlation between earmark ratios and median income. Based on the arguments of earmark proponents, one would expect a very strong negative correlation here as earmarking is intended to direct federal funds to needy, underserved parts of the country.  The strength of that correlation is -0.255, which is slightly weaker than the political-based correlation.  This suggests that in the earmarking process, political power is more important than financial need.

The connection between political power and earmarking prowess is hardly surprising. More startling is the disparity between the shortchanged earmark donor states and the earmark beneficiary states. Perhaps politicians from donor states are unaware of the extent to which their constituents subsidize out-of-state projects. More likely, most congressmen are successfully pulling off a political sleight of hand – trumpeting their occasional earmark project and hoping it distracts their constituents from the disproportionately large number of earmarks in other states.

After all, the vast majority of Americans would be far better off if Congress stopped earmarking and removed itself from spending decisions that should be made by local governments and private entities.  

I must acknowledge several of my colleagues who helped with this analysis – many thanks to Kurt Couchman and Andrew Mast.

Paul Krugman on Carter and Reagan: Wrong Again

Measured in constant 2005 dollars, real federal revenues rose from $968.4 billion in 1970 to $1,197.6 billion in 1980 and to $1508.7 billion in 1990.   In other words, the cumulative real revenue gain was 23.7% under the high and rising tax rates of the 1970s, and 26% under the dramatic reduction in tax rates of the 1980s.

Paul Krugman recently looked at these same figures through his logarithmic Kaleidoscope, and concluded that “the revenue track under Reagan … is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.”

Financial Times columnist Martin Wolf was so awed by Krugman’s creative artwork that he imagined “the theory that cuts would pay for themselves has proved altogether wrong.”

Notice that Krugman starts his trend with 1970, which was a year of recession and falling revenue.  If he had instead measured real revenue growth between the cyclical peaks of 1969 and 1979, the overall increase would have dropped to 19.5%.  Note too that Krugman ends his trend with 1981 rather than 1980, while suggesting 1981 was part of the glorious Carter years:

The Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable.

The comment is strange.  There was no recession in 1979, nasty or otherwise.  And non-energy inflation topped 11 percent that year – before oil prices peaked in early 1980.

The continually accelerating inflation during the Carter years, 1977 to 1980, pushed more and more families into higher and higher tax brackets.  It also resulted in brutal taxation of illusory, nominal capital gains and ephemeral inventory profits.   As a percentage of GDP, federal taxes soared from 17.1% of GDP in 1976 to 19% in 1980 and 19.6% in 1981.   Does that really look like a sustainable trend that President Reagan interrupted for no good reason?

Utah Legislators Call for Fiscal Federalism

Tea partiers take note: at the forefront of any effort to reduce the size of the federal government should be the devolvement of federal programs to the states. Achieving this may seem like mission impossible given the states’ addiction to federal money. However, there are signs that the idea of returning the relationship between the federal government and the states to that which the Founders prescribed is starting to gain some currency.

On Friday, the president of the Utah Senate and the speaker of the Utah House of Representatives penned an op-ed in the Washington Post calling for the federal government to begin the devolution process. The authors want the states to have the right to opt out of federal programs and allow the states to keep the taxes their residents send to Washington to fund them. The states would then be free to fund and manage the programs as they see fit.

The authors call their idea a “modest experiment,” and indeed, it is hardly radical. The 10th amendment to the Constitution is clear:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

From the op-ed:

Let’s select a few programs – say, education, transportation and Medicaid – that are managed mostly by Utah’s government, but with significant federal dollars and a plethora of onerous federal interventions and regulations.

Let Utah take over these programs entirely. But let us keep in our state the portion of federal taxes Utah residents pay for these programs. The amount would not be difficult to determine. Rather than send this money through the federal bureaucracy, we would retain it and would take full responsibility for education, transportation and Medicaid – minus all federal oversight and regulation.

Such a notion terrifies proponents of big government because state budgets are generally constrained by balanced budget requirements, debt inhibitions, and the inability to print money. States are also more limited in how much they can abuse taxpayers for the simple reason that citizens can move to a friendlier environment. Indeed, one of the beautiful aspects of returning to fiscal federalism is that it would strengthen this competition that $600+ billion in annual federal subsidies has somewhat neutered.

See this essay for more on fiscal federalism and this Cato Policy Analysis on the problems with federal subsidies to state and local governments.

Update: A C@L reader pointed me to this resolution introduced by Michigan state representative Paul Opsommer, which calls on the federal government to allow the states to opt out of federal highway programs funded by the federal gas tax. The states would be free to fund their own roads with their own gas tax revenues instead of sending money to Washington where its then redistributed back to the states according to Congress’s politicized wishes. As the resolution notes, the federal government uses the leverage it has over transportation spending to force the states to enact policies that they don’t want.