The Myth of Donor States

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US GDP by state The Myth of Donor States

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Recently, New York governor Andrew Cuomo resumed whining about New York being a “donor state.” He means that his state pays more in federal taxes than it receives in benefits. California and other high-income states also qualify for this status. But there is a major federal benefit that is never included. That benefit alone eliminates the existence of “donor states.” Read on for details.

There is no doubt that states with higher income pay higher federal taxes. That is the very meaning of progressive taxation. Higher income individuals generally pay higher tax rates than those with low income. And those same high income individuals likely receive less in benefits than what they pay in taxes. The existence of the Earned Income Tax Credit almost guarantees this will be true. Why then should we be surprised that higher income states pay more than low income states? Similarly, we should not be surprised about the distribution of benefits.

However, there is one benefit that is worth more to the wealthy than poor people. That is enforcement of property rights. An extreme case is burglary. We rely on law enforcement and the courts to protect our property rights. Hopefully there is also some deterrent to people attempting to infringe on those rights.

The same is true of states. Every one of the fifty states is protected by the federal government’s national defense. National security is a public good. It is non-rival. That means one U.S. resident’s consumption of national defense services does not reduce the quantity of those services available to others. And national defense is also non-exclusive. No individual can be excluded from the security umbrella.

What is the value of national defense to the state of New York? It happens that the Department of Commerce Bureau of Economic Analysis reports state-level output (real GDP). In 2019 New York’s gross state product was $1.46 trillion, third in the country. California was first ($2.79 trillion) followed by Texas ($1.79 trillion). What is the value of national defense to the state of New York?

A basic principle of economics is opportunity cost, the value of what you give up when you make a decision. What is the opportunity cost of New York pulling out of U.S. national defense?

Unless New York intends to develop their own army, air force, and navy (very, very expensive), the opportunity cost of giving up federal national defense is their entire gross state product, $1.46 trillion. The state would quickly be taken over by a foreign country. Canada is a good candidate since they have a common border with the state. (Added bonus: Canada would then own both sides of Niagara Falls.) But with today’s modern warfare methods, China or Russia seem most likely. Remember, the federal government no longer defends New York.

So let’s not hear any more about “donor states.” When any state is willing to give up the protective services of federal national defense they can talk about being a donor state. Until then they can sit down and shut up.

For true data geeks, here’s 2019 gross state product from first to last.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.