Senate Majority Leader Mitch McConnell’s suggestion that Washington should allow financially stressed states to declare bankruptcy during the coronavirus crisis has provoked the ire of several Democratic governors, especially New York’s Andrew Cuomo, who has been pressing McConnell instead for aid to states and cities. Though McConnell’s proposal seemed aimed at strapped Illinois, whose legislators have asked for federal help in bailing out their pension funds, Cuomo appeared to take the suggestion personally and fired back at the Kentucky senator. Cuomo claims that New York is a net donor to the federal government—sending more money to Washington in federal taxes than the state gets back in federal spending—and that all New York wants from Washington now is its fair share back. By contrast, Cuomo pointed out, Kentucky is one of the principal “taker” states, benefiting from taxes paid by citizens of New York and other places.
This argument is not new; Senator Daniel Patrick Moynihan made it in the 1970s, when he began studying the flow of funds between Washington and the states to show how New York was being shortchanged. The studies have long been grist for politicians in New York and other high-tax states, and for the media, which uncritically reported the results every time Moynihan issued a new study. But a close look at the kinds of spending that these studies examine reveals that much of the funding deficit comes from big, non-discretionary spending programs that send cash to individuals and businesses around the country—not to state government itself—and that much of New York’s shortfall is its own fault, not Washington’s.
For decades, the biggest portion of Washington expenditures has been retirement income sent to individuals from the federal government, principally in the form of Social Security or retirement benefits for federal workers. The studies track this money as it is sent to the states where people reside in retirement. New York has consistently ranked near the bottom in the amount of these funds that it receives because it’s not a desirable place to retire and has one of the highest rates of out-migration to other states. A Pew study based on the Moynihan model found that per-capita spending in the Empire State for this category was 8 percent below the national average, and that New York ranked 42nd in terms of outlays when adjusted for its population. That’s hardly Washington’s fault. New York is a “donor” state insofar as its citizens take their retirement income and move elsewhere. Don’t blame Washington for that.
Federal contracts, dominated by Defense Department spending, represent a large pool of money counted as being “given” to some states. New York was once a defense-contracting powerhouse, raking in money to build ships along its waterfront and house military personnel in key bases around the state. But New York lost much of its contracting business because of its high costs. As a result, the Empire State ranks low on winning federal contracts, at a per-capita rate only one-third of the national average. Even worse, local officials have resisted efforts to bring in more defense money to the state. In the early 1980s, for instance, when the Reagan administration expanded military spending to challenge the Soviet Union, then-Secretary of Defense Caspar Weinberger proposed a naval base on Staten Island that would add $100 million a year in federal payroll to the city and help revive the shipbuilding industry. Weinberger went ahead with the project, though New York’s city council objected to the base as a symbol of militarism. Though opened in 1990, the base closed four years later, on a federal commission’s recommendation that New York refused to challenge.
New York officials also complain about a heavy federal tax burden. The Internal Revenue Service collects more money from New York than any state except for California. That’s a function not only of the state’s population size but also of its wealth; New York ranks third among states in the number of millionaire households. The progressive federal income tax, which taxes wealthy individuals at higher rates, cuts deep. But New York officials can hardly complain about this when its liberal congressional delegation supports that tax structure. In 2013, when the Obama administration boosted the top federal tax rate from 35 percent to 39.6 percent and increasing the tax on capital gains from 15 percent to 20 percent, New York’s Democratic delegation voted unanimously in favor of the increases, which hit residents of their state considerably harder than most others. New York’s liberal politicians support such increases because they’d rather see the money channeled through government in the form of taxes—and then demand that it come back to New York as government spending.
Occasionally, a New York politician sees things differently. After 9/11, New York mayor Rudy Giuliani was asked what he wanted from Washington. He listed some ideas for aid but then said—unexpectedly—that one of the best things Washington could do for the city was cut taxes and leave more of its residents’ income in New York, where they could spend it as they liked. The Bush administration took Giuliani’s advice, cutting income taxes in May 2003. Most of New York’s Democratic delegation voted against the legislation.
The battle for federal aid to states and cities will only intensify. One side, likely led by Republicans, will try to target the aid narrowly at areas directly affected by the coronavirus. Many Democrats, by contrast, will argue, as Illinois governor J. B. Pritzker has, for block grants that states can use to bolster their budgets as they see fit. Cuomo’s notion that New York deserves more because it’s a “donor” to the federal government has no place in that debate.
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