Whose Fault Is Fiscal Hypocrisy?

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Filed Under Economy on Oct 17 

Amendment 3 in Tennessee would permanently enshrine their no-income-tax policy and is being pushed by various groups after an opinion by their AG suggested the state could at some point reimpose an income tax to meet budgetary needs. Aside from some worries about voting “no” when seeing the word “tax” on the ballot, the measure seems to have a good chance of passing. And Tennessee has one of the lowest overall state tax burdens despite having a relatively high sales tax rate of 7%. The average per capita state and local tax paid was $2.777 according to the Tax Foundation and that’s the 2nd lowest in the country. They do have a tax on dividend and interest income however, not good for retirees who depend on that income to meet monthly expenses.

More generally, the problem of spending by state governments, and by the federal government as well in each individual state, presents interesting evidence. A study of the net federal contribution of each state as a percentage of individual gross state products produces something of a contradiction. States that raise less money in federal taxes than that spent by the federal government in their state, tend to want to reduce the size of government at the same time that they benefit from overall transfers from Washington. Tennessee for example, contributes 18.7% of it’s GSP to federal revenue and receives 24.4% of it’s GSP in federal spending, for a 5.7% shortfall, coming between Hawaii at a shortfall of 4.3% and Lousiana at a shortfall of 5.8%. Now Hawaii is no red state so the contradiction of net contributors voting Democrat is not always the case. But assuming there is this contradiction in some cases – Mississippi and Kentucky have shortfalls of 13.3% and 17.9% – then is it hypocritical for them to wish to reduce the size of government? Salon ran an article gleefully pointing out 10 offending states, Mississippi and Kentucky are on the list. But all states are captive to federal welfare policies and must spend money that they perhaps would rather not, on policies like Obamacare for example. The real test is how willing voters in Tennessee, for example, would be to cut back all government spending until taxes balance out what they receive from Washington. I suspect that many in Tennessee would be willing, but I also suspect that Washington will never allow them that freedom. Is there fiscal hypocrisy on the part of low-tax states? Sure, but they operate within the constraints that the federal government imposes on them.

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