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Red States Lose Most if U.S. Goes Over Fiscal Cliff

"Much of the discussion about fixing the fiscal cliff has been at the abstract level," says Steve Liesman at CNBC. But mentions of cutting $2.5 trillion in spending or raising $1.6 trillion in tax revenue "obscure real pain that could be inflicted at the local level." And that's where things get interesting.

If you look at a 2012 electoral map, you'll see that President Obama won a blue strip down the West Coast, a small Colorado-New Mexico island in the Mountain West, the exotic outliers of Florida and Hawaii, and a big azure arc across the northeast corner of America, from Minnesota to Virginia. The rest of the country — most of the South and Midwest plus Alaska — is red. But generally, it's these red states that stand to lose the most if we go over the fiscal cliff — and a solid majority of voters would blame the GOP if we do — or if House Republicans get their way in the negotiations with Obama. On the other hand, the blue states contain a disproportionate number of losers if Obama and the Democrats win this fiscal cliff standoff. Here's a look at the perverse incentives of the fiscal battle raging in Washington:

Obama wins, blue states lose
"With their enthusiastic backing of President Obama and the Democratic Party on Election Day, the bluest parts of America may have embraced a program utterly at odds with their economic self-interest," says Joel Kotkin at Forbes. That's especially true of their congressional delegations' solid support for Obama's push to raise taxes on the rich — his central demand in the fiscal cliff talks. For blue states in particular, that makes for "a kind of bizarre economic suicide pact."

Here's why: Most obviously, the highest-earning Americans — defined by Obama as those making $250,000 a year — are concentrated in blue states, especially deep blue metropolitan areas (though "ironically the new taxes will have relatively little effect on the detested Romney über-class, who derive most of their income from capital gains, taxed at a much lower rate," Kotkin says). The Democrats also want to curb deductions on mortgage interest — which will hurt states with high property values the most: California, Hawaii, New York, Connecticut — and other itemized deductions, which would be felt the most in those and other blue states.

Great, so Republicans should let Obama have his tax hikes, says Jim Geraghty at National Review. Heck, Republicans could even package it as a "tax Blue America" plan: Raise taxes on high earners, keep capital gains taxes low, and hit itemized deductions on mortgage interest and state and local taxes. "Since the election, many conservatives have grumbled that they wish there was some way to raise taxes on only the 50.9 percent of Americans who voted for the president in November. This may be the option that comes closest to that."

Republicans win, red states lose
"Any plan to tax the rich has the feature of disproportionately taxing blue states in order to subsidize red ones," says Matthew Yglesias at Slate. "That's the general structure of the American fiscal union — high productivity states tend to vote for Democrats and subsidize the low productivity states where most people vote Republican." And the flip side of the "tax Blue America" plan is the "defund Red America" GOP spending plan. 

The Republicans' proposal for averting the fiscal cliff includes deep cuts to Medicare, Medicaid, and Social Security, but also $300 billion in cuts to farm subsidies and other mandatory spending, plus $300 billion in cuts to discretionary spending. Almost by definition, those cuts would affect red states more, since by and large red states get more federal money than they send to the treasury, while blue states pay more than they get back.

Farm subsidies, which will take a big hit if the GOP gets its way in negotiations or we drive over the fiscal cliff, provide another odd example. "Mitt Romney was the overwhelming choice of voters in counties that receive the biggest federal farm subsidy payments," says Alan Bjerga at Bloomberg News. In fact, 90 percent of those counties voted against Obama, and they all stand to lose millions. At the same time, the biggest federal outlay to all states, Medicaid, is exempt from the fiscal cliff, as is most of Medicare and some programs for the poor, says Ryan Holeywell at Governing

If the steep budget cuts of the fiscal cliff do take effect, that won't be great for red states, either. Among other things, "the spending cuts in the fiscal cliff are likely to spread the pain among Congress people in districts that depend on defense spending — many of which are Republican." Half the looming cuts are from defense spending, and military bases and research facilities are concentrated in the South.

What's going on here?
Part of it is the cultural divide between rural and urban America. "Farmers vote Republican but they like Democratic programs," former Rep. Charles Stenholm (D-Texas) tells Bloomberg News. "They consider themselves to be conservative, and if something is important to them, then they don't consider that liberal." But there's also something solidly American about this disconnect between politics and self-interest, and something structural. On the structural side, low-population red states are over-represented in the Senate, so red-state senators funnel a disproportionate amount of federal money to their states, says Slate's Yglesias. In that sense, "I think the overall pattern is best described as a coincidence and not a pattern of large-scale hypocrisy." 

The other point is that the fact that we don't think of the issues in this way is important to making the overall country work. Voters, whether they're liberal or conservative, don't think about Boston subsidizing Louisiana. They think about high-income people (a disproportionately large number of whom happen to live in the Boston area) subsidizing low-income people (a disproportionately large number of whom happen to live in Louisiana) and debate the issues on broad ideological grounds. Absent that commitment to broad ideological thinking we'd be in roughly the situation that the European Union is currently in, with Boston-area people happy to participate in a joint economic undertaking with Louisiana to some extent but horrified by the notion that their hard work should subsidize Bayou indolence.


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