Blue state/red state, rich state/poor state: Who's bailing out whom?

The rich get richer; the poor get poorer — because the rich have rigged the system.

Such is woke progressivism's dim view of America's political economy. Liberals and conservatives of more moderate leanings could probably agree that this unflattering portrait has, like most caricatures, elements of truth.

Fact is, America's system may systematically favor the better-off in one way that would surprise many progressives. It may be that affluent states (mostly progressive politically) enjoy an allocation of federal dollars that is biased in their favor, or at least that traps poorer states in disadvantage.

It's a possibility brought to mind by the recent debate over pandemic-related federal aid to states, and over who's bailing out whom.

Republicans in Washington have objected to the idea of lavishing federal dollars on certain state governments, namely wealthy states like Connecticut, Illinois and California that spent themselves into budget crises long before the pandemic, especially through overgenerous pension plans for public employees.

It's not right, conservatives say, for spendthrift governments to use today's emergency to finagle oversized bailouts from federal taxpayers, many in far less prosperous regions.

The response has largely been a familiar argument that in fact the subsidy goes just the other way — that forward-thinking Democratic "blue states" constantly prop up tightfisted Republican "red states."

With their quality public services and strong schools, this argument goes, progressive states fuel dynamic economies that send more tax revenue to Washington than they receive back in the form of federal spending.

Gov. Andrew Cuomo of New York sounded this theme recently when he declared: "New York state has been bailing them [red states] out for decades … ." Cuomo explained that for every $1 New York's residents and businesses send to the federal government, Washington spends 91 cents in his state.

Though the list varies some each year, Minnesota also has often been among the 10 or 12 "donor states," receiving "less [in federal spending] than its taxpayers contribute in federal tax dollars," as former Gov. Mark Dayton put it in 2017, while protesting a GOP tax bill that capped the federal tax deduction for state and local taxes — another subsidy, conservatives complained, to high-tax, high-income states.

On its face, it's odd to find liberals like Dayton and Cuomo grumbling that America's federal system takes from rich states and gives to poor states. That those with more should help those with less is usually a progressive article of faith.

But the conviction that threadbare red states have only themselves to blame for their condition may explain this uncharacteristic aversion to redistributing wealth. In "Rich State, Poor State: The case for reforming federal grants," a fascinating paper for the Niskanen Center, Joshua T. McCabe, social science dean at Endicott College, writes:

"One of the enduring myths of American political discourse is that many states in struggling regions have mistakenly pursued a 'low-tax, low-service' growth strategy while thriving regions have wisely pursued a 'high-tax, high-service' strategy. Massachusetts, for example, spends twice as much per pupil on education as Mississippi. As a consequence [according to this view], Mississippi remains mired in poverty while Massachusetts prospers."

But McCabe insists this narrative has cause and effect "backwards." Massachusetts, where McCabe's university is located, "can afford to spend more precisely because it is prosperous," he writes. "Mississippi is limited precisely because it is poor."

The key to seeing this clearly, McCabe argues, is to measure states' public spending as a portion of their total taxable revenue (TTR) rather than the more commonly used statewide personal income or gross state product. The U.S. Treasury Department has long preferred TTR as a gauge of states' potential resources because it better captures business profits and flows of income across state lines.

Ranking states by TTR per capita produces the unsurprising result that the richest states include Connecticut, New York, Massachusetts, California, Washington, etc. — while the poorest include Mississippi, West Virginia, Alabama, Arkansas, etc.

(Minnesota ranked 16th in 2017, its roughly $70,000 TTR per capita well below Massachusetts' $90,000 but far above Mississippi's $42,000.)

The surprise comes when McCabe calculates the "fiscal effort" of each state. How much of its total taxable revenue does each state (along with its local governments) in fact tap for public services? How hard does each state try, if you will?

McCabe reports that allegedly "low-tax, low-service" states like Mississippi, South Carolina and Alabama are by this standard among the most heavily self-taxed in the country — while Connecticut, Massachusetts, Illinois and New Jersey rank near the bottom in relative self-imposed taxes.

Some prosperous progressive states rank high in effort as well as wealth — New York, California — and some reputed low-tax havens indeed rank low in effort — Florida, Texas. But on the whole, red-state/blue-state stereotypes do not survive this analysis. (Minnesota again ranks 16th.)

What becomes clear is the severe disadvantage of poorer states, including those requiring much from their taxpayers. Whatever their level of fiscal effort, rich states are able to raise far more money than poor ones, McCabe says.

"Being poor means Mississippi generates less revenue with more effort than wealthy Massachusetts," he writes. Yet Mississippi residents (along with Louisiana's) suffer by far the nation's highest poverty rate (McCabe's proxy for overall "need" in a state), about twice that in Massachusetts.

As for the system being rigged, McCabe doesn't use that language. But his whole purpose in documenting "this disconnect between fiscal capacity, effort, and need," is to plead for a transformation in the allocation of federal spending to better "reduce disparities between states."

Contrary to "the rhetoric of pundits who claim there is a massive redistribution from rich (often blue) to poor (often red) states," McCabe insists, "the U.S. is the worst among rich democracies in terms of progressively allocating more federal grant funding to states with limited fiscal capacity.

"Australia, Canada, and Germany all have highly progressive systems of federal intergovernmental grants to help poorer states and provinces provide basic services at competitive tax levels," McCabe notes, while America's structure is "only barely progressive" (even though there's more than enough of this kind of redistribution going on for liberal governors of some wealthy states).

In the short run, the need to stimulate a collapsing economy may require indiscriminate aid to states. But over time, McCabe's is one take on America's inequality problem that deserves more attention.

D.J. Tice is at Doug.Tice@startribune.com.