Justin Fox: The blue state-red state tax divide isn't really that fair

The Trump administration’s many attempts over the past couple of weeks to halt federal spending have met mostly with approval from Republicans on Capitol Hill and outrage from Democrats.

That’s sort of what one would expect given that Trump is a Republican, but also kind of weird in that states and congressional districts that vote for Republicans are as a rule much bigger net beneficiaries of federal spending than those that vote for Democrats.

With the federal government running a deficit of 5.9% of gross domestic product in the 2022 fiscal year — the most recent available in the state balance of payments data compiled by the State University of New York’s Rockefeller Institute of Government — even blue states got more back from Washington than they sent there. But their deficit amounted to just 0.4% of GDP. The red-state shortfall was 3.1% of GDP, with interest payments accounting for most of the rest of the federal deficit.

Blue states did receive more federal largesse per capita than red ones in 2022, but that can be chalked up to the anomalous cases of Maryland and Virginia, where many federal agencies and contractors are based (the District of Columbia is not included in these statistics). Remove those two states from the calculations and per capita spending is slightly lower in blue states than in red ones. And all but one of the 11 states that paid more into the federal government in 2022 than they got back out voted for Kamala Harris in 2024 (Utah being the exception).

I am not the first to trot out these statistics. The usual theme of such exercises is to show what a bunch of hypocrites those Republicans are, although I guess one could also use them to make the case that Democrats are a bunch of patsies. But the disparities have less to do with spending decisions made by politicians in Washington than with revenue, and the reasons for that seem at first glance to be more economic than political. That is, the revenue disparities are due mainly to the high concentrations of high earners in blue-voting areas.

The federal government gets about half its revenue from individual income taxes, with 30% coming from Social Security and Medicare taxes. The income tax system is progressive, meaning those with high incomes are taxed at higher rates than those with low ones. At the very top of the income scale, above $5 million in adjusted gross income in 2022, effective rates do begin to fall a little because capital gains, which are taxed at lower rates than regular income, make up a larger share of that group’s income.

But the 87,517 taxpayers in that category in 2022, while accounting for just 0.08% of tax returns, still generated 12% of all income tax revenue. The 12.5 million making $200,000 or more, 11% of tax returns, generated 68%. And the places where these high earners congregate tend to elect Democrats to Congress.

These are the districts as they existed before the 2022 elections. But even with redistricting and Democrats no longer in the majority in the House, my sense is that the pattern still holds.

It’s a pattern that reveals inequality as well as wealth: The district with the lowest income tax revenue in the U.S. in 2022, New York’s 15th in the South Bronx, was just across the Hell Gate span of the Robert F. Kennedy Bridge (formerly the Triborough) from the district with the highest, and a 45-minute walk through Harlem from the third-highest.

The second-lowest-revenue district, California’s 21st in the San Joaquin Valley, was about 60 miles as the crow flies from both the second- and fourth-highest. But in New York and California, the rich districts outweigh the poor ones, and both states send more to Washington than they get back.

Why don’t more people in these high-income, high-tax-revenue districts vote for the party that’s always talking about cutting taxes? I suspect the Republican vote share is higher among the very biggest taxpayers in these districts than among their affluent-but-not-stinking-rich neighbors, but federal income tax politics have also been a little weird in recent years.

Democrats have come to treat incomes up to about $400,000 as off-limits from federal income tax increases, while the last big Republican tax cut — the Tax Cuts and Jobs Act of 2017 — actually raised taxes for some residents of affluent states, especially those earning $1 million or more.

The mechanism for this tax increase was the $10,000 cap imposed on state and local tax deductions, which had its biggest effect on taxpayers in states with high income or property taxes or both, such as New York, New Jersey, Connecticut and California. The SALT cap’s effects were canceled out for most taxpayers even in those states by raising the thresholds above which income is subject to the alternative minimum tax, but many of those with very high incomes were still hit by the AMT.

Raising the SALT cap is now a hot topic in Washington. After I wrote about it a couple weeks ago, I heard from several readers who thought doing so would be only fair because taxpayers in New York, New Jersey, Connecticut, California and the like contribute so much to keeping the federal government afloat. My initial reaction was that they (technically we — I live in New York) contribute so much mainly because our incomes are high, which doesn’t seem unfair.

But of course the cost of living is high in such places, too. Adjust for it, and New York state’s per capita income drops from third-highest in the nation to seventh, and California’s from sixth-highest to 17th (Nebraska and Kansas, not shown in the chart, push California and Maryland out of the top 15).

Adjust for cost of living by metropolitan area and the results are even more striking — real per capita incomes are higher in metropolitan Fayetteville-Springdale, Arkansas (home of Walmart Inc.), than in metro Boston or Seattle, higher in metro Sioux Falls, South Dakota, than metro New York or Washington (I’ve rendered the incomes as a percentage of the U.S. average because the amounts reported by the U.S. Bureau of Economic Analysis are in 2017 dollars, which I thought might be confusing).

So maybe the tax system is unfair to residents of affluent blue states and cities. One possible response would be to adjust income tax brackets for regional cost of living. But that would be complicated, and people in Fayetteville and Sioux Falls, whose representatives belong to the party currently in the majority in the House and Senate, would hate it.

Instead, what’s on the table is increasing the SALT cap, which would benefit only a small number of high-income people in high-tax states. But yes, it would also shift a little bit of the burden of financing the federal government away from the blue states.

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

Justin Fox is a Bloomberg Opinion columnist covering business, economics and other topics involving charts. A former editorial director of the Harvard Business Review, he is author of “The Myth of the Rational Market.”

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