Donor State Problem Not Easy to Solve

John Wildermuth
Journalist and Political Commentator

When Gov. Arnold Schwarzenegger makes his angry “donor state” argument, as he has regularly since 2003, it sounds both outrageous and easy to fix:

1. California only gets 78-cents back for every dollar state taxpayers send to Washington.

2. The feds should return the rest of our money. Right now.

As the Fox of this blog pointed out Tuesday, the governor is expected to argue in his State of the State address this morning that it’s past time for Washington to play fair with California. The budget he will unveil Friday is expected to use a chunk of new federal dollars to help balance the state’s books.

Put aside for a minute the California-first, “I got mine, Jack” attitude behind Schwarzenegger’s demand and forget all that “E Pluribus Unum,” “one nation, indivisible” stuff you learned in high school civics.

And disregard for the moment the chance that after six-plus years the federal government is going to suddenly say “My bad” and send California extra money pulled from the current allocations to, say, Texas, New York or Mississippi.

The real problem with all the donor state complaints is that there’s really not a lot that anyone, either in Washington or California, can do about that money gap.

Let’s talk about the payment side first. Despite its ongoing financial problems, California is still a wealthy state, with the ninth-highest household income in the nation.

With a progressive tax system, higher incomes means more tax money headed to Washington. It’s no surprise that of the 10 leading donor states in a 2006 report by the Washington-based Tax Foundation, all are in the top 17 of income states (California is number nine).

High earnings mean high wages, which translate into bigger federal payroll tax payments. And Californians also drive a lot, which means more federal gas taxes leaving the state.

On the payment side, much of the federal money California gets comes from direct payments to individuals, which means Social Security, Medi-Care, SSI disability and federal retirement pay.

And since California’s population is relatively young (fourth lowest median age in the 2000 census, behind Utah, Alaska and Idaho), that means there’s going to be a lot less of that money flowing into the state then goes to Florida, Pennsylvania and West Virginia, which lead the nation in senior citizens.

The closure of California military bases and a decline in big dollar defense contracts since the early ‘90s, when the state was getting back about 92-cents on the dollar, also have trimmed federal payments to the state.

States like New Mexico and Mississippi get back more than $2 for every buck sent to D.C. If a state wants to join them on that government “pay to” list, it helps to have a low per capita income, a small population and plenty of federal installations, complete with workers getting paid by Uncle Sam.

Schwarzenegger’s not the only governor making the donor state complaint and playing the federal fairness card. New Jersey, Nevada and Connecticut all got less than 70-cents back from D.C. in 2005, the most recent year with figures available. And with the economic times tough everywhere, you can bet that every state getting back a nickel less than it pays out is going to be echoing Schwarzenegger’s argument. Loudly.

On the other hand, there aren’t any states offering to give back any extra federal largesse, which means the governor may find his anticipated government funds to be more budget smoke than fiscal reality.

John Wildermuth is a longtime writer on California politics.

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