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Home | Blog | Decentralize the Welfare State

Decentralize the Welfare State

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Tags PovertyTaxes and Spending

05/25/2017

It has long since become a doctrine of the modern American welfare state that the federal government must be the primary administrator of the nation's so-called safety net. Any attempt to devolve the welfare state to the states is routinely treated as backward and reactionary.

This doctrine remains in place though many US states are far larger and wealthier than many European countries that have welfare states of their own. Naturally, each of these states have economies large enough to manage state-based welfare programs. But, the federal government extracts so many billions of dollars from each state — primarily for the federal welfare state and the military — that states are left without the resources they would need to do their own.

How US States Compare to their European Counterparts

Now, for the sake of argument, let's just assume that every country needs a welfare state, and that it's a good thing.

But even if that's the case, why does Texas need the federal government to have a welfare program? Texas is the size of Australia in both population size and in the overall size of its economy. Australia has a large welfare state of its own (albeit slightly smaller than the US welfare state), so why can't Texas manage its own welfare state with its own resources?

This holds true even for small US states such as Colorado, which has a population similar to that of Norway, and a per capita GDP similar to that of Austria. So, again, this would suggest that Colorado has no need of the US federal government to create and administer its own welfare state.

The same can be said of all other US states.

If we look at a comparison of US states to European countries in terms of per capita GDP, we find that even the poor US states are comparable to member states of the European Union. Mississippi is similar to Portugal, and New Mexico is similar to Spain.

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Nevertheless, Americans are regularly told that the welfare states in these foreign countries are well-funded, well-run, generous, and superior to the American welfare state. If the Spaniards, with a per capita GDP similar to New Mexico can allegedly run their own welfare state so well, why can't the New Mexicans be allowed to do the same?

They aren't allowed to do this, of course, because the gatekeepers of leftwing and DC-based opinion would have us believe that New Mexicans, Texans, and Mississippians are too stupid and ideologically incorrect to run a welfare state properly. "Best to keep the power and control in Washington, DC," they might say "so we can make sure the rubes out in flyover country don't screw things up."

One argument the feds will use in this regard is that poor states need to be subsidized by the richer states. Nevertheless, the relative income levels and wealth levels of the states in the US have been converging over time. While it is certainly true that some states are wealthier than others, trends in capital investment are bringing the states closer together.1 

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These facts won't be enough to convince Washington to lessen its death grip on the welfare state, though. But, those of us who don't consider people outside of New York and Washington, DC to be members of a lesser species, it strikes one as prudent to leave government social programs to the people who actually live in the communities that are affected by them — and to keep the money closer to the taxpayers who actually pay the bills. Moreover, by breaking up the welfare state into 50 smaller units, the programs will be more responsive to the taxpayers who don't have time to go to Washington and attempt to compete with the huge national special interests that keep the national welfare state fat and happy. It's a lot easier and cheaper to meet with your state representative than your US senator.

After all, rather than send billions of tax dollars to Washington, then wait for some DC bureaucrats to spend that money in one's home state — after taking a generous cut for themselves, of course — why not just keep that money where it came from?

Besides, the amount of money that flows from taxpayers to the federal government is far, far larger than the amount of money that goes from taxpayers to the states themselves. This graph shows just how much more money goes straight to the feds rather than to state governments.2

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Note that in the case of Texas, Texans pay five times as much in taxes to the federal government than to the state government. In Illinois, residents pay four times as much to the feds as to the state. Even in tax-heavy California, Californians pay more than two-and-a-half times more in taxes to the federal government than to the California government.

A Thought Experiment: A State-based Welfare State

But what if all the states's federal tax revenues — we're completely ignoring state tax revenues — were allowed to stay in the states and were distributed to everyone on public assistance without going through DC first?

Yes, I know some readers will say "let the taxpayers keep it!" Right, I get it. And I agree. But for the sake of argument, let's just assume that money remains in the government's hands. Except we'll cut the feds out of the equation (somewhat).

But how much money are we talking about? And how much money would each state "need" to make payouts to low-income populations?

First, let's look at how much the feds collect from the states overall.3 As one might expect, the IRS's tax collections in each state vary wildly from place to place. The smallest amount is $4.4 billion in Vermont and the largest is $405 billion in California. In medium-sized Colorado, the total is $47 billion. 

Again, all of this ignores the money the states take in themselves through state taxes.

So, we know how much money the residents of each state ship off to the IRS.

We'll also leave the issue of the federal government's massively bloated military funding issue to other articles. (See here and here.) But in this case, we'll take 25 percent of each state's IRS collections as funds for military, foreign affairs, and interest on the debt. Out of the $3.3 trillion total collected from state residents, that leaves $825 billion for spending on military, veterans, the State Department, and foreign affairs.4 It's more than enough for a government that has a navy ten times the size of the world's next-largest navy, and the feds will just have to figure out how to use some of that money to keep paying the interest on the national debt

So, in our model, the feds are awash in money with their $825 billion, and that leaves 75 percent of state IRS collections to the states themselves, or $2.4 trillion total.

All that remains is for each state to dole out what they have to their low-income populations — or they can use it for anything else the voters will let the state legislature get away with. 

Next, we need to figure out how many low-income people are in each state.

To do this, we'll use the total numbers of people in poverty published by the Kaiser Family Foundation. That can be found here. But we can't stop there. In our model, we're giving public assistance only to people who fall below the federal poverty line. That excludes all the non-poor who receive fat Social Security checks every month. In our hypothetical world, the taxpayers won't be subsidizing the Baby Boomers' second homes and annual vacations anymore. 

But, without social security anymore, some elderly will fall below the federal poverty line. To include those, we'll add in these numbers put out by the leftwing Center on Budget and Policy Priorities. 

After we've added all that up, we have an estimate of how many people in poverty are in each state. The way the feds measure it, it's not a small number. 

Now, we divide up all those IRS tax collections (minus the 25 percent that goes to the military and interest) by the total number of people in poverty — and write a check to every person in poverty. Here's the size of the check in each state: 

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In some states with high federal tax revenues, low poverty rates, and low numbers of elderly, these numbers are huge. The federal progressive income tax means that states with even a small number of very rich people have much more money to play with. Few billionaires live in West Virginia, for instance. Using this model, Ohio can hand over a $48,000 check per year to each person in poverty. But even in lower-income states with fewer federal tax revenues and more poverty, states can hand over some pretty big checks. In our model, every single person in poverty gets free money. That's certainly not the way it's done now.

Moreover, keep in mind this is a per person number. This isn't a household number. There are 2.64 people in the average Mississippi household, where each person in poverty would get a check for $11,800. That means an average household of people in poverty would get checks totaling more than $31,000 or nearly 80 percent of the state's median income. Mississippi, by the way, is a state where the median monthly housing cost is a mere $687.5 

Even in the poor states, we're talking about fairly large amounts that can be distributed to low-income households. And, of course, people in states with low levels of welfare benefits can freely emigrate to states with more generous benefits. 

Some readers at this point will complain that we're ignoring that 14 percent of the budget that goes to all those "miscellaneous" purposes like arts funding, and research. There's nothing to stop the states from spending their share of the loot on these purposes. After all, not even Massachusetts is going to hand out $72,000 checks to every person in poverty. According to this model, the state could do that. But, it could also have plenty of money to spread around to make sure that starving avant-garde artists get their precious tax-funded arts grants. 

Conclusions

Now, I'm not saying that this is how states should do things were they allowed to keep most of the massive amounts of tax revenue their citizens generate for the federal government. I'm simply pointing out that even the poor states pay vast sums to Washington when that money could simply be distributed in the state from where the money came. Moreover, when we start to look at the sums of tax money produced in each state, we see there is simply no need for the federal government's vast welfare machine. The states and their taxpayers have all the resources necessary for each state to have its own locally-controlled welfare state. 

The question we're then left asking ourselves is this: why is the federal government "necessary" to spread around the welfare checks? 

Many of our readers already know the answer, of course. While most state governments must, by law, have balanced budgets, the federal government can always just resort to massive amounts of deficit spending. The federal government, unlike the states, can also simply print more money to help cover its massive budget shortfalls. As it does. 

This means that federal welfare programs can continually expand regardless of the state of the budget or the economy. 

And, of course, just as a matter of politics, the federal government, having seized the reins of the welfare state decades ago, will never give up this power because the political benefits of having control over the welfare state allow the federal government to collect enormous sums that it can dole out to its friends, especially in the military. Indeed, we see today how the Trump administration is planning to cut down on welfare spending in order to beef up military spending. 

Between the welfare state and the military, the US government enjoys the best of both worlds as both conservatives and leftists fall over each other demanding more government spending for their own pet projects. 

In truth, the welfare state could be decentralized back to the states and we'd still be looking at massive amounts of money that could be spread around low income populations.6 It would also keep a lot of money out of the hands of the Pentagon. Don't expect Congress and its cronies to look kindly on the idea, however. 

  • 1. See this article from the Washington Post:
  • 2. IRS collections are found here. State revenues are based on the Census Bureau's survey of state level revenues. This does not include local taxes. 
  • 3. See the IRS website for totals.
  • 4. The federal government has revenue sources outside the residents of the states. There are customs revenues and remittances from other countries, and revenues from leases on federal lands, etc. So, federal revenues are actually larger than what is discussed here. 
  • 5. According to the Census Bureau. 
  • 6. The military should be decentralized too, of course. As discussed here.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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