April 15, 2007
Fiscal Equalization for the U.S.?
Posted by Leandra Lederman

I got back this evening from the terrific Critical Tax Theory Conference held at UCLA. Yesterday was a full day of presentations on a wide array of interesting topics. This post focuses on the intriguing paper that Kirk Stark, one of the organizers of the conference, presented, entitled "Rich States, Poor States: American Federalism and the Politics of Fiscal Equalization." The project analyzes the use of fiscal equalization grants to reduce disparities in resources between rich states (or provinces) and poor states. These grants are "no strings attached" grants from a country's central government to states with lower-than-average taxing capacity (regardless of the amount of tax each state actually collects). Kirk listed numerous countries that use such grants, including Canada, where they are a constitutional requirement.

A focus of Kirk’s project is the political issues that fiscal equalization would raise in the U.S. If fiscal equalization were adopted here, most of the recipient states would be in the south. For example, based on fiscal capacity data from a 2006 Tax Policy Center study, Kirk determined that the top seven recipient states by size of per capita payment would be Mississippi, West Virginia, Arkansas, Alabama, Oklahoma, Louisiana, and South Carolina. In addition, most of the states that would receive equalization grants are "red states," and red states would get the bulk of the grant monies. The question of whether Canadian-style fiscal equalization should be adopted in the U.S. thus raises interesting political questions. As Kirk asked, are we currently in an era in which fiscal equalization would be possible? Desirable?

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Comments (3)

1. Posted by Billy Budd on April 15, 2007 @ 20:46 | Permalink

Uh, we already have such a system, de facto.

2. Posted by Elizabeth Brown on April 16, 2007 @ 5:53 | Permalink

The Tax Foundation has published a study for several years showing that the US redistributes money from high income states, which pay more in federal taxes, to low income states, which pay corresponding less in federal taxes.

The Executive Summary of the most recent report is as follows:

"The Tax Foundation’s annual federal tax burden and expenditure study clarifies the geographical patterns of income redistribution that federal tax and spending policies cause each year. The results of the study have been controversial for years because they show that the nation is not only redistributing income from the prosperous to the poor, but from the middle-income residents of high-cost states to the middle-income residents of low-cost states.

Thanks to a steeply progressive federal income tax, states with higher incomes pay vastly higher federal taxes, payments that are unlikely ever to be matched by federal spending directed to those states. Ironically, most of these high-paying states are the so-called blue states that have generally elected politicians who support a more steeply progressive tax system even though their own constituents bear a greater share of the burden as the code gets more progressive.

All categories of federal taxes, including income taxes on individuals and businesses, social insurance taxes, excise taxes, estate and gift taxes, customs duties and all other taxes, are tabulated and the total tax burden of each state is determined. This figure is compared to the flow of federal funds back to each state, bringing the two sides of federal fiscal operations together.

In fiscal year 2004, New Mexico, Alaska, West Virginia, Mississippi and North Dakota received substantially more from the federal government than they paid in taxes, while New Jersey, Connecticut, New Hampshire, Minnesota and Illinois paid much more in taxes than they received in spending. Tax burdens for fiscal year (FY) 2004, which starts October 1, 2003 and ends September 30, 2004, are used in this study because the most recent state-level federal expenditure data released by the Census Bureau, to which the tax burdens are compared, is for FY 2004."

The full study can be found here: http://www.taxfoundation.org/publications/show/62.html

3. Posted by Kirk Stark on April 16, 2007 @ 14:18 | Permalink

Many thanks to Leandra for the posting on my "Rich States, Poor States" project. Thanks also to the two commentators above. I discuss the Tax Foundation study at length in the paper. It came up at the UCLA conference as well. As Ms. Brown notes, that study deals with the overall geographic distribution of federal taxes and federal spending. While interesting, this is very different from the purpose/function of fiscal equalization grants, which is to provide state and local governments the ability to provide a roughly comparable level of goods/services at a roughly comparable tax effort.

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