If Rich States Need Federal Help, Remember They Paid for It

(Bloomberg Opinion) -- Yes, Connecticut is in trouble. No, it’s not going to follow the path of the Greek debt crisis.

My Bloomberg Opinion colleague Brian Chappatta recently wrote about widening credit spreads on its municipal debt, and the prospect that one day the state could default. Other states like New Jersey and Illinois have similar woes.

Mitch Daniels, president of Purdue University and former governor of Indiana, compared the state budget crisis with the European debt crisis, with Connecticut and Illinois playing the role of Greece and Italy. But this analogy gets the relationship backward. Daniels also argued that the structure of the U.S. Senate will prevent “profligate” states like Connecticut from being bailed out by others, but given the structure of U.S. taxation, it’s entirely appropriate for some of the overburdened states to get federal help.

First look at why Connecticut and Illinois are not the Greece and Italy of the U.S. In the euro zone, those two poorer nations have far greater debt burdens than their richest neighbor — Germany — and far lower GDP per capita. Daniels’s logic can sort of apply in Europe, where many have argued that Germany is more productive than the more-indebted members of the periphery, and should not be responsible for their financial shortcomings. (What would help resolve the imbalance, but isn’t possible given the governance structure of the European Union, would be currency adjustments.)

But Connecticut and Illinois are not poor states. Connecticut is third in GDP per capita, and Illinois is 11th, the highest in the Midwest. Last fall, the Office of the New York State Comptroller released a report looking at federal taxation by state, and it  showed Connecticut paid more per capita to the federal government than any other state, and Illinois was 10th. Both states paid more to the federal government than they got back in federal spending. Daniels’s Indiana, by comparison, paid less than the national average and received more in federal spending than it paid in taxes.

This is the outcome we should expect in a progressive tax system, where richer states pay more in taxes than they get paid, with poorer states getting the opposite outcome. But it reframes the fiscal problems now plaguing these wealthier states. Yes, the pension systems of many of those “profligate” states were irresponsibly pumped up by legislators and unions. But it’s a little perverse for politicians in Indiana to be scolding Connecticut for financial troubles, when Connecticut has long subsidized the finances of Indiana.

The progressive tax system of the U.S. has generally served the country well. For decades, coastal and Northern states have been wealthier and more economically developed than Southern and interior states, and transfer payments from the former to the latter have helped grow and sustain the economies of underdeveloped states.

In the future, the more pressing need may be to help with the legacy financial obligations of some of the aging, historically wealthier states. It only seems fair that the states they long subsidized should return the favor.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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