The Red/Blue Paradox
Why do liberal states give while conservative states take?
We hear it all the time: Red states are for limited government; blue states are for heavy spending. While this may be true when it comes to broad political preferences, it's false as measured by patterns of federal spending.
When you compare the 50 laboratories of democracy after sorting them based on how their citizens voted in November 2008, only 10 Democratic-voting states are net recipients of federal subsidies, as opposed to 22 Republican states. Only one red state (Texas) is a net payer of federal taxes, as opposed to 16 blue states. One blue state (Rhode Island) pays as much as it gets.
Political scientists have been wrestling with this apparent paradox for years. One explanation sometimes offered is that the red states, on average, have smaller populations. In "Political Determinants of Federal Expenditure at the State Level," published by the journal Public Choice in 2005, two University of Alabama at Tuscaloosa economists, Gary Hoover and Paul Pecorino, note that residents of low-population states have more per capita representation in Congress, since every state, regardless of population, has two senators. That edge, Hoover and Pecorino argue, translates into more federal handouts. The results are conspicuous in the case of homeland security grants, where small, rural, relatively low-risk states get much more money per capita than urban states that face bigger terrorist threats.
But red-state lawmakers' ability to bring home the bacon isn't the main reason for the paradox. Red states, on average, are also lower-income states. Because of the progressive federal income tax, states with higher incomes pay vastly higher federal taxes. These payments are unlikely to be matched by federal spending directed back into those states.
This transfer of tax dollars from the states to the federal government is net of tax deductions, including deductions for state taxes ($50 billion in fiscal year 2012) and mortgage interest ($100 billion). As the former U.S. Treasury economist Martin Sullivan showed in the March issue of Tax Notes, the mortgage interest deduction overwhelmingly benefits high-income states. If it weren't for that deduction, blue states would be even bigger net payers than they are today.
The mortgage benefit is somewhat mitigated by the alternative minimum tax (AMT), which disallows certain tax breaks, including the personal exemption and the deductions for state and local taxes. About half of the people paying the AMT in recent years live in one of four states: California, Massachusetts, New Jersey, and New York. Between them, those four states account for almost a quarter of the nation's population.
Why would voters in red states elect lawmakers who promise them small government when they benefit disproportionately from federal handouts? Why would voters in blue states elect lawmakers who support policies that redistribute their income to red states?
One possible explanation is that the voters are misinformed. According to this theory, the people who benefit the most from federal spending simply don't understand how much money they receive; they assume their tax dollars are subsidizing others when in fact they are the ones being subsidized. People in rural states might be convinced that liberal urban Northeastern jurisdictions get large subsidies for entitlements, welfare, and industry bailouts, while failing to understand how much their own states benefit from agricultural and welfare spending. They may mistakenly equate life in a low-density environment with self-sufficiency. Subsidies and welfare from the federal government help maintain this illusion, enticing them to vote for advocates of smaller government. By contrast, voters in highly urban areas may assume they are the ones who get the most subsidies. In turn, they vote for big-government politicians, thinking that welfare spending will ease social frictions in big cities. Ultimately, everyone is wrong.
Another explanation holds that voters are simply irrational. In the words of the George Mason economist Bryan Caplan, "Voters often see themselves as they want to be, not as they really are. People in red states tend to think that 'government is the problem,' so they tell themselves that big government is mostly a problem in blue states. People in blue states tend to think that 'government is the solution,' so they tell themselves that their government takes care of people."
These hypotheses may explain some voters' behavior, but they amount to generalized guesses about other people's thought processes. Two other theories take a closer look at the data.
In "Rich State, Poor State, Red State, Blue State," a 2007 paper for the Quarterly Journal of Political Science, four researchers—Andrew Gelman of Columbia, Boris Shor of the University of Chicago, Joseph Bafumi of Dartmouth, and David Park of George Washington University—explain that while richer voters are more likely to be Republican than poorer voters, this tendency is weaker in blue states. Take two equally wealthy people. One lives in a blue state and the other lives in a red state. The data show that the voter living in the richer blue state is more likely to be a Democrat than the one in the poorer red state, although both are more likely to be Republican than a poor resident of either state. Simply put: Income plays a greater role in determining voter preference in red states than in blue ones. So while voters in red states are more motivated by their financial interests (or perceived financial interests), issues outside of income are more powerful motivators for blue voters. This pattern could help explain why some states vote Democratic despite their wealth and some states vote Republican despite their poverty.
The second theory, which is consistent with the first, holds that Republican voters want to reduce federal spending only if it means cutting other people's handouts. That would explain why elected Republicans in red states, such as Sen. Charles Grassley (R-Iowa), don't let their limited-government rhetoric get in the way of voting for farm subsidies.
In the end, the red/blue paradox may be a product of our tendency to look for ideological consistency in politics when there isn't any. The Republican and Democratic parties, like all political coalitions, are umbrella groups that include very different interests. Pro-lifers share a party with hawks, gun controllers with immigration reformers. The role of ideology may be to make contradictory impulses seem coherent and connected.
Contributing Editor Veronique de Rugy (vderugy@gmu.edu), a senior research fellow at the Mercatus Center at George Mason University, writes a monthly economics column for reason.