In the balance of payments between states and the federal government, some states “win” and some states “lose.” We speak with the authors of our new report, Giving or Getting? New York’s Balance of Payments with the Federal Government, about the factors that shape these funding flows.
Guests:
Laura Schultz, Senior Economist and Director of Fiscal Analysis, Rockefeller Institute of Government
Michelle Cummings, Policy Analyst, 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.
Kyle Adams 00:01
Here’s a familiar scene. You’re out to dinner with some friends. You’re all getting some apps, you say no thanks. Kevin gets three apps. Maria gets lobster. You just get a salad. There’s wine and more wine. Kevin gets another glass of wine. Then desserts. Again, you say no thank you, I’m good with my salad. Then the check comes. Someone suggests to split it. You just had that one salad. You don’t want to be rude. But honestly, you go home feeling like you just got robbed. That’s how some states are feeling when it comes to what they give to the federal government versus what they get back in federal spending. We’ll break that down today on Episode 5 of Policy Outsider.
Kyle Adams 01:03
This is Policy Outsider from the Rockefeller Institute of Government, the podcast that takes you outside the halls of power to understand how decisions of law and policy affect our everyday lives. I’m Kyle Adams, communications director at the Rockefeller Institute. I’m here today with Laura Schultz, senior economist and director of fiscal analysis at the Rockefeller Institute. Laura, how are you?
Laura Schultz 01:26
Great, how are you?
Kyle Adams 01:28
Good. Thank you. And Michelle Cummings, policy analyst at the Rockefeller Institute. Michelle, thanks for coming.
Michelle Cummings 01:33
Thank you for having me.
Kyle Adams 01:35
Laura and Michelle are the authors of our new report Giving or Getting: New York’s Balance of Payments with the Federal Government, which analyzes how much states contribute to the federal government versus how much the federal government spends in that state through various programs. Laura and Michelle, first of all, why don’t you just take us through the basics here? How do you make these calculations?
Laura Schultz 01:56
There are two sides to this equation. We use the term receipts, and that is how much New York and any other states provide to the federal government. New Yorkers pay personal income taxes, they pay corporate taxes, they pay excise taxes, and employment taxes. As New Yorkers, all of that money going to the federal government gets collected. We’re calculating all of the taxes that New Yorkers and New York businesses provide to the federal government and what every other state provides to the federal government. The other side of that equation is expenditures. The federal government sends Social Security benefits, provides Medicare and Medicaid for residents. It employs people within states and so sends paychecks, provides benefits, and it also provides grants for research and contracts to help to purchase things from businesses in the state. What we want to do is we want to sum that up across all of the states, and then figure out does the state pay more and get less or the other way around? What we’ve calculated is the balance of payments, and that’s the difference between receipts and expenditures. If you have a positive balance of payments, that means that you get more in federal spending than you send to the federal government.
Kyle Adams 03:22
So some states obviously come out on top, some way below, let’s run through the top five and bottom five. Bottom being states that pay in more than they get back.
Michelle Cummings 03:36
Most of the revenue that the federal government generates comes from two primary sources, the individual personal income tax and the tax free play on Social Security. There’s two different types, almost 90 percent of the federal government revenue comes from taxes on earnings. The way the math works is that if you are in a high earning state with a higher personal income per capita, more likely than not, your federal income tax burden is going to be greater than many other states. States that are losers contribute a lot more in terms of per capita basis than what some of the other states do. New York, Massachusetts, Connecticut, the Northeast states are the primary givers in terms of the balance of payments.
Kyle Adams 04:27
Who makes out the best in this analysis?
Laura Schultz 04:30
Well, the big winners are Virginia, Kentucky, New Mexico, West Virginia, and Alaska. When you take a deep dive into who really benefits, we find that there are, in fact, two categories of winners. You have states like Virginia, Alaska, and Maryland who do really well and they’re doing really well because they’re the federal workforce. Virginia and Maryland are right next to DC, that’s where a lot of federal employees live. Alaska also has a really big federal workforce and has a lot of contracts and grants from the federal government. These are states that actually pay a lot in taxes, but they get a lot from the federal government as well. Then we have states like West Virginia, Kentucky, Alabama, these are states that don’t pay much in federal income taxes. They have relatively low incomes. They’re the ones that pay the least in federal taxes. Yes, they’re getting more in expenditures. But the reason they have such a positive balance of payments is because they have a low tax burden.
Kyle Adams 05:39
I want to dwell here for just a minute, because when the headlines about this report come out, there’s a lot about giving and taking, which can give the impression that there’s somebody in the federal government deciding who gets more and who gets less. But it sounds like these factors, nobody really decided these things. It’s geography.
Laura Schultz 05:58
Its demographics and geography. This isn’t necessarily a party in power going well, we need to punish these states that didn’t vote with us or reward the states that did vote for us. It’s really more of a factor of what’s the poverty level in your state? What’s the number of retirees that live in your state? What’s the income level? What’s the general economic condition of your state?
Michelle Cummings 06:24
As the overall tax burden shifts a little bit and we’re more or less reliant on corporate and excise taxes, we’re even more reliant on those income taxes. If you’re already getting potentially hurt by having a high-income base, more and more of your money’s going to get pulled in by the federal government. It’s just the nature of a progressive income tax.
Kyle Adams 06:48
Let’s focus for a minute on New York. What did you find here?
Michelle Cummings 06:53
New York continues to pay more than their fair share in terms of a per capita basis than…
Laura Schultz 07:00
They rank 47th. New York is 50th in total balance of payments. In 2017, New York sent $35.6 billion more to the federal government than they received. So that’s for every $1 they sent in tax revenue to the federal government, they only got 86 cents back.
Kyle Adams 07:26
This inevitably becomes a political talking point, especially in the states that are getting less than they’re contributing. But when somebody says something like, let’s get that money back, what is it really in their power to do? As we talked about, a lot of these factors are not things that any one person really controls.
Laura Schultz 07:46
I think a state like New York, if they’re talking about putting a new military base somewhere, or a new national laboratory, a state that’s losing would have an argument, you could make this even if we had more government workers or if federal contracts were awarded to that state. There’s not much we can do about the distribution of Social Security recipients.
Michelle Cummings 08:17
I think one of the things that we’re excited about for this year’s report, it is our second year of taking a look at this. One of the things that we have found is that you really shouldn’t look at the balance of payments in a microcosm. You have to look at it over several years, because as Laura said, spending patterns are going to change somewhat. What you really want to be aware of is how much it changes or grows or shrinks over a three, four, or five year period. And this report, actually, was started several years ago by Senator Moynihan. He found very similar results back in the 80s, that New York contributes more to the federal fiscal than we get back.
Laura Schultz 08:57
I believe the report started because the talk on Capitol Hill was that New York kept getting and getting and getting. He wanted to provide the data to prove that, in fact, New York was subsidizing the rest of the country.
Kyle Adams 09:14
Just looking at the past two years that we’ve done, were there any significant changes or it’s hard to say a trend from two years but changes?
Laura Schultz 09:21
New Jersey is going to be really excited because it’s no longer the worst state in the nation on balance of payments. That honor has gone to Connecticut.
Kyle Adams 09:30
What would it account for that?
Michelle Cummings 09:31
Income tax distribution, more high-income earners seem to be in Connecticut right now.
Laura Schultz 09:36
New York moved from 48th to 47th. So that’s gain and that’s income tax. That’s also contract money coming into play.
Kyle Adams 09:48
Were there any really broad trends in terms of the states as a whole moving one way or another on the balance?
Laura Schultz 09:55
On average, the national balance of payments improved by $202 per person.
Kyle Adams 10:02
What does that mean, exactly?
Laura Schultz 10:03
It means that the federal government has been giving out even more per dollar than they’ve received.
Kyle Adams 10:09
Again, is there any major driving factors behind that or just a real mix of things?
Michelle Cummings 10:14
Just a real mix of things. Timing of spending, really.
Kyle Adams 10:18
This report comes out in the middle of what is now the longest ever federal shutdown. What does it tell us about how that shutdown may affect different states?
Laura Schultz 10:31
Well, New York is going to be less impacted by the federal shutdown than Virginia, Kentucky, or New Mexico, all of those winning states. When you have a large federal workforce, those are going to be the states that are not necessarily long-term impacted in a balance of payments, but those are going to be the ones that are going to have the biggest economic impact of the shutdown as a whole.
Michelle Cummings 10:57
To the extent you have a large workforce, those states could be seeing a drop in their withholding tax. So it’s not going to impact federal revenue right away, but it will impact state tax. You have Maryland, Virginia, probably their withholdings are going down. As Laura said, the sales tax, no one’s going to restaurants, no one’s going to bars, no one’s spending money, that’s going to be an immediate impact as well.
Kyle Adams 11:21
In the report, you write that the federal tax cuts and Jobs Act of 2017 will have a significant impact on high-income New Yorkers, beginning in 2018, with changes that are expected to flow through effects on state tax burdens in New York. How do you think that law is going to change the balance of payments?
Michelle Cummings 11:37
Well, one of the things we saw at the end of 2017 was a lot of people potentially taking or not taking capital gains. We saw a lot of prepayment of the local property taxes. Taxpayers change their behavior to maximize the benefit of their particular tax structure. Going into 2018 and as the budget acknowledges, there is a revenue difference because now we’re trying to stabilize taxpayer behavior. That’s going to continue because people are going to be doing their federal tax returns and how it is they manipulate their own individual tax structure, it’s going to be really a two-year cycle until we actually see some stabilization in taxpayer filing patterns.
Laura Schultz 12:25
The tax cuts and Jobs Act is a complicated change. We’re not necessarily sure what the long-term impacts are going to be. The focus has been on the loss of the SALT deduction, which everyone assumes that means New Yorkers are going to have to pay a lot more. But at the same time that went into place, it raised the standard deduction, which may lower the tax burden. It all comes down to the fact that nobody really knows.
Michelle Cummings 12:55
Nobody really knows. Each individual’s taxpayer behaviors, the circumstances are going to be different. You have the alternative minimum tax and what that’s going to do. There were five big pieces, SALT was one of five cornerstones of the Federal Tax Act. All of us are going to be different, we really don’t know.
Michelle Cummings 13:13
The extent that your standard deduction is now almost doubled, maybe you live in upstate, maybe the itemized loss of the SALT deduction is not as significant as it would be in downstate. That plus the AMT, the elimination or the reduction of the AMT.
Kyle Adams 13:13
Those pieces are moving in different directions, not in the same direction. There’s definitely going to be an effect.
Kyle Adams 13:36
Sorry, could you define AMT?
Michelle Cummings 13:37
The alternative minimum tax, which was another big piece, and that was one that historically has really hurt New York, because we have a lot of people in that upper tax bracket that got pulled in to the alternative minimum tax prior to the tax reform. It really is a lot of taxpayer behavior is going to be changing.
Laura Schultz 13:40
We knew a lot of people paid early in 2017, because they knew what that tax structure was. We also suspect that there are going to be a lot of extensions and delays for 2018 as people try to figure it out. The people who are going to be doing that are the ones that pay the most in taxes.
Kyle Adams 14:15
Why do you think this analysis is important? Why should the average person care and what can policymakers learn from it?
Laura Schultz 14:24
I think policymakers always like to pit people one against the other and talk about givers and getters and talk about how people in New York have too much power or have too much money. I think an analysis like this provides the data. Puts things in context and provides the information people need to inform the debate of the distribution of tax burden and the distribution of federal spending. The other thing that I think is going to be particularly important about the 2017 report is it is going to be a baseline by which we can see the true impacts of the tax cut and Jobs Act of 2017. If we do this on an annual basis, we’re going to be able to show year over year and in five years from now, we can say yes, this was the definitive impact of this policy.
Kyle Adams 15:26
Thank you very much for joining me today to help break this down and explain what can be a kind of wonky and nerdy issue. You can see that full report at rockinst.org, as well as an interactive data dashboard where you can see exactly what your state gets and what it gives. As always, check out the web site for the latest in public policy research and analysis. I’m Kyle Adams. Thanks for listening.
Laura Schultz 15:57
So Michelle, when you go out to dinner, do you split the check or do you divvy it up?
Michelle Cummings 16:02
I split the check.
Laura Schultz 16:04
Oh, everyone always hands it to me. Trust in the economist.
“Policy Outsider” from the Rockefeller Institute of Government takes you outside the halls of power to understand how decisions of law and policy shape our everyday lives.
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