Federalism and Redistribution

Somewhat in honor of our national holiday (though perhaps more appropriate for Constitution Day), a recent article about federalism in National Affairs struck my interest.

I’ve been reading about federalism a fair amount lately, mostly from a political theory perspective. In my less thoughtful youth, I tended to disparage federalism as an outdated idea, a mere compromise for the times, and an obstacle to My Preferred Policy Program. But recently, mostly through the writings of political theorist Jacob T. Levy, I’ve come to a new appreciation for federalism as an impediment to centralized state power and a source of cross-cutting ‘tribal’ identity.

On the more grounded side, this article, ‘Federalism in Red and Blue’, also makes some points I hadn’t considered before. One fact often touted by the American left is that Blue states pay more into the federal system than they get back in benefits, and Red states pay less. In essence, Blue states subsidize many functions of Red states. Usually this fact is deployed as an example of the hypocrisy of the right, or in some way to make the reader feel that it’s unfair for Californians to be paying the way of Mississippians. That fact is never deployed to make one consider that there should be *more* transfers of wealth from rich states to poor states; yet, that’s exactly what this article does.

The argument here rests on fixed costs. Basic state services, like education, policing, and welfare, have some fixed costs regardless of the size of the state. Additionally, states all have different ‘fiscal capacities’, i.e. differing abilities to raise revenues. The example in the article is a comparison of Kansas and Massachusetts, both of which recently embarked on sizable shifts of their tax burden from income taxes to sales taxes. Kansas has been in the news for the disastrous impact of said restructuring, whereas Massachusetts has attracted no attention. Why? Well, Massachusetts has per capita income about 30% higher than in Kansas and over twice the population, plus is surrounded by similarly populous states; the state can raise revenue far easier than can Kansas.

So if states’ fiscal capacities have direct effects on their ability to provide basic services, the result is that poor states face the choice of implementing higher relative taxes or reducing services. Given the haphazard boundaries of states, this seems profoundly unfair.

For example, my home state of South Dakota has some of the lowest paid teachers in the entire country. It’s neighbor to the west, Wyoming, has considerably higher paid teachers; it was common for teachers in my corner to the state to decamp to Wyoming after a few years experience. Neither state has an income tax. What accounts for the difference? Wyoming has the good luck of possessing fossil fuel reserves that bring in considerable revenue. In fact, there is a crescent of oil, coal, and natural gas deposits in the American West that passes through North Dakota, Montana, and Wyoming, but almost entirely bypasses the Mount Rushmore state.

Given this fact, the author argues that states with lesser fiscal capacities should receive equalilzation grants from the federal government to even things out. You might think this would be madness, to simply hand states buckets of cash without any strings attached, but other federalist countries, like Canada and Australia, have implemented such programs without any ensuing shenanigans. Furthermore, such grants would actually allow the experimentation that is aspired to in the conception of states as ‘laboratories of democracy’. As it currently is, most federal money to states comes with so many strings attached that the state is basically a delegated administrator for federal spending.

Maybe the big irony here is that when it comes to states, the left and right have reversed views of redistribution. I can see why this is the case, and is related to the tension between the rationalist and pluralist strands of liberalism as proposed by Mr. Levy.

The piece did a good job of making me reconsider my implicit ‘Blue State’ view of federalism. Still, my pie in the sky dream would be a total overhaul of our state structure; I think too many states are too small to have good governance, rural bias in the Congress and Electoral College is becoming a major issue, and we’d all be better off with fewer, larger states that actually corresponded to economic and cultural divisions.