In a new episode of Policy Outsider, guest Laura Schultz, executive director of research at the Rockefeller Institute of Government, discusses the methods used in the Institute’s Balance of Payments report and how federal economic relief for COVID-19 is likely to impact state balance of payments and rankings.
States throughout the nation are grappling with massive budget deficits caused by the economic downturn associated with COVID-19. While states plan for major cutbacks to critical areas like education and infrastructure, relief in the form of an additional federal stimulus bill is being negotiated in Congress. Several of the states hardest hit by the pandemic, such as New York and New Jersey, are Democrat-controlled and the debate over relief funding has become politicized, with relief funding characterized by some as a “blue state bailout.” But, as policymakers in these states have pointed out, taxpayers in these states give more to the federal government in taxes than their states get back in federal spending—a negative balance of payments—while many “red” states get more in federal spending than they give to the federal government in taxes.
Understanding how funding flows among states and the federal government provides important context for evaluating these claims and understanding the potential effects of federal stimulus spending.
Guest:
Laura Schultz, Executive Director of Research, Rockefeller Institute of Government
Learn More:
Giving or Getting? New York’s Balance of Payments with the Federal Government
Transcript was generated using AI software and may contain errors.
Alexander Morse 00:07
When Senate Majority Leader Mitch McConnell, a Kentucky Republican, recently said he didn’t favor federal bailouts for states hardest hit by COVID-19, New York Governor Andrew Cuomo did not mince words.
Andrew Cuomo 00:19
If they want to talk about bailing out and money, they couldn’t be more wrong on the numbers. New York is the number one donor state in the United States. Second donor state New Jersey, then Massachusetts, then Connecticut, and California. The states that take more than anyone else, Virginia, Maryland, Kentucky, Alabama, Florida. And that’s every year.
Alexander Morse 00:49
That was Governor Cuomo in an interview with WAMC Public Radio’s Alan Chartock. The governor was referring to findings from the Rockefeller Institute’s balance of payments report, which analyzes how much money states give to the federal government versus how much they get back in federal spending. The report quickly made its way across news media outlets throughout the country, appearing in the New York Times, the Washington Post, NBC News, CNN, and more, as the debate over whether the federal government should provide economic relief to states continued. This is Policy Outsider. I’m your host, Alex Morse. Today, we have with us balance of payments report co-author and executive director of research at the Institute, Dr. Laura Schultz, to discuss how the balance of payments is determined and how federal COVID-19 relief spending might impact the redistribution of federal funds. Next.
Alexander Morse 02:06
I’m here with Dr. Laura Schultz, executive director of research at the Rockefeller Institute. Hi, Laura.
Laura Schultz 02:11
Hi, Alex.
Alexander Morse 02:12
We just heard New York Governor Andrew Cuomo cite the Rockefeller Institute’s balance of payments report, which measures how much states give to and how much states get from the federal government. The report got a lot of attention. So we thought it would be a good idea to have you on to talk us through what some of these numbers mean. Let’s start with how you measure the balance of payments.
Laura Schultz 02:32
Sure, the balance of payments is calculated by looking at two sides of a financial equation. We are going to start by looking at all the money that residents and businesses in a state pay to the federal government through income taxes, payroll taxes, and business taxes. These are the revenues generated within the state. We also look at the spending that the federal government sends into each state, the expenditures. This could be direct payments to individuals for Social Security. It could be wages to federal employees. It includes grants to state and local governments. Once we have those two figures, we can calculate the balance of payments. It’s the difference between the money received by the state and the money sent by the state to the federal government. A positive balance of payments means that the state gets more than it gives and a negative balance of payment means that the state gives more than it gets.
Alexander Morse 03:37
Governor Cuomo said that New York is the number one donor state, meaning New York ranks last?
Laura Schultz 03:42
Rockefeller has calculated the balance of payments for four years now, for the years 2015 to 2018. In all four years, New York has ranked dead last. But this isn’t a new trend. Senator Daniel Patrick Moynihan started this report in the 1970s and New York was pretty far down there then too.
Alexander Morse 04:02
What are some of the factors that drive these rankings? Why is New York last?
Laura Schultz 04:07
Well, you can look at it by seeing how New York compares in revenues and expenditures with the national average. If you look at federal spending in New York on a per person basis or per capita basis, New York gets about what the federal government gives out nationwide. So that’s not the part of it. The revenue side of the equation is where New York finds its negative balance of payments. The big driver is that New York generates a lot more in individual income tax than most other states. New York has a large population of high-income residents and our federal income tax is progressive, which means that the more money you make, the more you have to pay an income taxes. Our high-income earners in New York have a really high federal income tax burden. On a per capita basis, New Yorkers pay almost $2,600 more a year in income taxes than the national average. That’s what’s driving New York’s negative balance of payments. It’s the same thing that’s causing New Jersey, Massachusetts, and Connecticut to also have high negative balances of payments.
Alexander Morse 05:19
Okay, so the high-income population drives federal revenue. So states with progressive tax structures, like New York, meaning they’ll be paying more to the federal government. What about federal spending though, what drives that?
Laura Schultz 05:33
Well, we have four categories of spending. Direct payments, that’s payments to individuals, the biggest portion of that is Social Security. A state with a high portion of the population receiving Social Security will have a disproportionately large level of spending there. State and local grants are, again, determined a lot by population and income levels. That’s for Medicaid. That’s for social services programs. That could also be education, transportation grants. Contracts go to where money needs to be spent with companies. Contracts can be driven by location and proximity to federal facilities. Finally, federal wages. So a state with a large federal workforce or a military workforce is going to have a higher level of funding.
Alexander Morse 06:32
Okay, so which states then received the most federal spending?
Laura Schultz 06:36
Well, we have two categories of getters or winners in the balance of payments. The number one state is Virginia, they have by far the largest positive balance of payments. Virginia and Maryland are what we call high-income high-federal spending states. Virginia and Maryland are located next to Washington, DC, so there are a lot of government contractors in that region that are receiving federal spending. You have a lot of residents who are federal employees who are receiving federal wages. It’s just the fact that it’s located next to the national capitol that’s driving its’ high positive balance of payments. Virginia also has several military bases. The other group of states with a large positive balance of payments are low-income high-federal spending states. Their positive balance of payments are driven by the fact that they have relatively a low federal income tax burden. So they’re not paying much in revenue to the federal government. They do receive higher than average federal spending and that can be Social Security and other social programs. The cluster of those states would be Kentucky, Alabama, Mississippi, and West Virginia.
Alexander Morse 08:00
Now, what about state rankings over time? Sounds like most of these factors remain relatively stable. Populations don’t dramatically change overnight. Federal office buildings and military bases probably won’t be going anywhere. The obvious exception here is the incomes have been affected by the pandemic, which will affect both federal revenue and spending. Are there any examples of dramatic jumps because of federal responses to emergencies?
Laura Schultz 08:24
In general, the states do remain relatively stable. If you do a year-over-year ranking, you see New York is in 50th place and in the bottom four and per capita. Overall, the balance of payments has improved for all states because increased federal spending has meant that everyone’s getting more. New York’s balance of payments, when we first issued the report for 2015, was -$45 billion and is now minus -$22 billion. One thing that can really change this would be a natural disaster. We see this in our 2018 numbers. Hurricane Harvey hit Southeast Texas and the Houston area in August of 2017. That was at the end of fiscal year 2017. What happened then, in fiscal year 2018, was several relief bills, funding to FEMA contracts, and a lot of funding and tax revenue rebates and things like that being flooded into Texas to support the businesses and residents of Houston as they rebuild from the natural disaster. In 2018, Texas saw a significant jump in its balance of payments ranking. It had the biggest jump in balance of payments, received $8 billion more in balance of payments in 2018 than in 2017. It’s rank jumped 28th to 20th.
Alexander Morse 09:55
Since New York was the epicenter for COVID cases here in the United States, what might we expect to see in terms of federal spending? How could that affect the balance of payments ranking?
Laura Schultz 10:07
Well, first of all, as an economist, it’s really hard to look back and find an example that matches the pandemic. There’s not really a lot that we can look back at and go, “Oh, that’s going to happen again.” I look at the pandemic almost as a public health disaster that occurred disproportionately across the United States at this point, but also, at the same time, an economic downturn that was similar to 2008 that impacted across the US. It all depends. It will be interesting to see how this plays out in the balance of payments. We’re currently watching how federal funding and support to address COVID is being distributed throughout the United States. The first round of funding really went out more on a per capita basis, each state got a portion based on how big their population was. So if that’s the case, then that’s going to improve everybody’s balance of payments.
Alexander Morse 11:16
But it will get your rankings the same.
Laura Schultz 11:18
It will keep the rankings the same, it won’t have a dramatic impact. The numbers will change, but the states will stay where they were. Additional funding, the next round of funding for the public health response has been more directed at states that had to incur more expenses to address the pandemic itself. It’s being focused in places like the northeast, New York and New Jersey, who are being more negatively impacted by COVID. If that’s how future funding rolls out, then you could see the northeast being potentially impacted in their balance of payments numbers in 2020.
Alexander Morse 11:57
Finally, what does this all mean for the blue state/red state divide?
Laura Schultz 12:02
The blue state/red state, rural versus urban divide has a long history. It comes up every few years, it continues to turn up. That’s why the balance of payments measurement has been relevant for 40 years, because everyone likes to think that they’re being shortchanged. People living in rural communities don’t think that they should have to fund New York City or San Francisco or LA. So it is helpful to have this real data that actually shows you where the money’s coming from and where the money’s being spent. Because we can actually answer the question who’s paying for what?
Alexander Morse 13:01
Thanks again to Dr. Laura Schultz, executive director of research at the Rockefeller Institute for taking the time to break down what the balance payment report is, what drives federal revenues and federal spending, and how federal relief funding for COVID could affect the future balance payments reports. You can find our balance of payments report and it’s accompanying interactive data visualization on our website at rockinst.org. The data visualization is especially cool, it lets you click through all 50 states and see their balance of payments ranking. Plus you can break the data down even further and view each state’s expenditures and receipts, as well as each state’s return on the dollar. I highly encourage you to check it out and much more on our website. Thanks everyone for listening. Stay safe and stay well. I’m Alex Morse. Until next time.
Alexander Morse 14:01
Policy Outsider is presented by the Rockefeller Institute of Government, the public policy research arm of the State University of New York. The Institute conducts cutting edge nonpartisan public policy research and analysis to inform lasting solutions to the challenges facing New York State and the nation. Learn more at rockinst.org or by following RockefellerInst on social media. Have a question or comment or idea? Email us at [email protected].
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