Imagine two school districts in a metropolitan area in the same state: one with higher incomes and property values, and the other with lower incomes and property values. Say that the schools are funded by local property taxes. Thus, if the same property tax rate applies to both school districts, children in the district with higher incomes and property values will have a lot more spent on their education than children in the district with lower incomes and property taxes.
For some decades now, it has been widely accepted that it is appropriate to make some adjustments to this outcome. The general sense is that if two districts impose the same level of tax effort, as measured by the tax rate, then the per student funding in those districts should also be the same. In that spirit, many states now provide the same basic per-student funding for all schools, which involves some redistribution away from school districts with higher property values and higher incomes to others. Yes, school funding inequalities persist, as parents in higher-income districts find ways to offer additional support to schools, either by imposing higher property taxes on themselves or through other methods. But the inequality that would have existed if every school district was funded only by local tax revenues from that district is diminished.
A similar argument applies at the level of states and the federal government. Joshua T. McCabe makes the case in \”Rich State, Poor State: The Case For Reforming Federal Grants\” (Niskanen Center, December 2019).
The US Treasury does a ranking of states by \”Total Taxable Resources,\” which is basically a measure of the revenue streams that a state could tax. Here are states as ranked by Total Taxable Resources on a per capita basis. Not surprisingly, the states with the highest level of Total Taxable Resources are places like Connecticut, New York, Delaware, and Massachusetts, with California and Washington state also ranking high. At the bottom end are states like Mississippi, West Virginia, Alabama, and Arkansas.
McCabe then compares what tax revenues are actually collected by states with their Total Taxable Resources, which can be viewed as a measure of \”fiscal effort.\” An unexpected (to me) result emerges. Some of the states with the highest levels of Total Taxable Resources, like Connecticut and Delaware, rank near the bottom on fiscal effort. Some states with the lowest levels of Total Taxable Resources, like Mississippi and Alabama, rank near the top on fiscal effort. The overall pattern is mixed. For example, New York state is near the top both in Total Taxable Resources and in fiscal effort.
McCabe sums up overall argument this way:
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, Mississippi remains mired in poverty while Massachusetts prospers. The problem is that this story gets it backwards. Massachusetts can afford to spend more precisely because it is prosperous. Mississippi is limited precisely because it is poor. The two states look very similar in terms of top marginal income tax rates (5 percent in Mississippi; 5.05 percent in Massachusetts) and sales tax rates (7 percent in Mississippi; 6.25 percent in Massachusetts). In terms of fiscal effort, Mississippi actually dedicates a larger proportion of its total taxable resources to education in particular (3.19 percent in Mississippi; 2.82 percent in Massachusetts) and public spending in general (16.7 percent in Mississippi; 12.2 percent in Massachusetts). In reality, being poor means Mississippi generates less revenue with more effort than wealthy Massachusetts. … Criticisms of poor states as “low tax, low service” are fundamentally mistaken. In general, poor states exert similar fiscal effort as rich states, but generate a fraction of the revenue for education and social assistance due to the simple fact that they’re poor.
The US economy has been experiencing a rising level of regional disparities. Moreover, governments of other countries do considerably more than the US. to equalize revenues across state- or provincial-level government. McCabe writes:
Political scientist Jonathan Rodden has done the most comprehensive analysis of fiscal federalism around the world. In contrast to the rhetoric of pundits who claim there is a massive redistribution from rich (often blue) to poor (often red) states, Rodden finds that the U.S is the worst among rich democracies in terms of progressively allocating more federal grant funding to states with limited fiscal capacity.
What might such changes look like in a US context? McCabe points out that for some major federal programs, the federal government makes little nor no effort to help states with lower Total Taxable Resources. For example, here\’s federal Medicaid funding to states on a per-capita basis: notice that there is no particular pattern where states with less per capita Total Taxable Revenue get more federal Medicaid support.
In the Temporary Assistance to Needy Families (TANF) program, federal spending per child actually goes more to states that already have high per capita Total Taxable Revenue
The politics of this proposal are interesting to contemplate. For example, it\’s common to note that lower-income Republican-leaning states often have been hesitant to expand Medicaid, as they are allowed to do under the 2010 Patient Protection and Affordable Care Act. McCabe agrees that Republican intransigence toward the proposal is part of the issue, but also points out that lower-income states with lower levels of Total Taxable Revenue have been hesitant to commit to making matching-grant payments for Medicaid for several decades now.
Many of the higher-income states lean Democrat, and the rhetoric of that party often emphasizes the importance of government acting to create greater equity. Many of the lower-income states lean Republican, and the rhetoric of that party often emphasizes the importance of localities and states having a high degree of self-reliant autonomy. One suspects that a proposal which would have the effect of focusing federal spending away from states with higher taxable resources per capita (say, Connecticut, Massachusetts, Delaware, New York, and New Jersey) and toward states with lower taxable resources per capita (say, Mississippi, West Virginia, Alabama, Arkansas, Idaho) will cause enthusiasm to wane both for redistribution in the first set of states and for self-reliance in the second set of states.
Those who would like redistribution programs like Medicaid and TANF which have shared federal-state funding to become more popular might do well to consider the possibility that if they were designed to be friendlier to states with low levels of Total Taxable Revenue, they might spread more easily.