State Sees Nominal Return on Funds Sent to Washington
By HOWARD FINE
Despite a Republican governor and many contributors who dole out millions of dollars in national campaign contributions, California receives far less from Washington in return for the taxes it puts in.
For every dollar the state sent to Washington in 2002, the most recent year comprehensive figures are available, it got back only 77 cents in total federal expenditures. That gap totals $58 billion and puts the state 45th out of the 50 in getting its return on tax dollars, well behind Texas and Florida.
While California became a donor state 15 years ago, the trend has accelerated sharply since President Bush took office in 2001, according to figures compiled by the California Institute for Federal Policy Research. The acceleration was largely due to a spike in income taxes paid just as the dot-com boom went bust.
The imbalance has become so great that when he took office last fall, Gov. Arnold Schwarzenegger pledged to work his charm to get more money from Washington. So far, he has had some success in prying funding out of the Bush administration including $400 million in penalty waivers and tens of millions of dollars each for child welfare, crime victim compensation, energy research and job training programs though that hardly makes a dent in the overall shortfall.
The common perception is that California is not getting its fair share because of partisan politics and the inability of the California delegation the largest in Congress to lobby cooperatively for programs earmarked for the state.
But while it’s true Republican states such as Wyoming, or those with powerful delegations, such as Texas may snag more highway dollars or get more homeland security money per capita than California, that’s only part of the story.
A bigger factor is rooted in demographics.
“California is a wealthy state and a state with a younger population that gives more than its share to Washington and gets less back in return,” said Alan Auerbach, professor of economics at the University of California, Berkeley.
With the world’s sixth-largest economy, California has a per-capita personal income of $32,600 in 2002, compared with $28,900 nationwide. As a result, Californians pay more than average in taxes to Washington.
“California gets hammered by the progressive nature of the federal tax system, especially on the income tax,” said Scott Moody, senior economist with the Tax Foundation, a non-partisan research organization.
Californians sent 116 percent of the national average in taxes per capita to Washington in 2002, according to the Tax Foundation. Much of that excess came from taxes paid on stock options cashed out in 2001, largely from Silicon Valley executives. This was the major reason, Moody said, the return on tax dollars sent to Washington plummeted in 2001 and 2002.
Because so much tax money is sent to Washington, California must extract more than its proportional share in federal spending to get a 100 percent return on those taxes, Moody said. And that hasn’t happened.
In 2002, California only reaped 88 percent of the national average in federal spending per capita, according to the Tax Foundation.
Again, much of the reason involves demographics. California has the nation’s sixth youngest population 27 percent under the age of 18, vs. 25 percent nationwide; 10 percent over 65, vs. 12 percent nationwide so it doesn’t draw as much in federal spending on social programs for the elderly. These entitlement programs, including Medicare and Social Security, take up more than half the entire federal budget.
“With 60 percent of federal expenditures tied up with mandatory spending programs, that leaves only 40 percent of the budget to work with in bringing home the bacon,” Moody said.
On this discretionary side, California was hit hard in the early 1990s by defense cuts and military base closings. The losses were temporarily offset in 1994 and 1995 by the $15 billion the federal government pumped into the Los Angeles region following the 1994 Northridge Earthquake. But the decline resumed again during the second Clinton administration, despite the former president showering the state with repeated visits and considerable federal aid.
As the high tech boom took hold in California during the 1990s, this drop in federal spending barely registered on the overall economy.
“The economy adjusts in the longer run to these fluctuations in federal spending levels,” said Chris Thornberg, senior economist with the UCLA Anderson Forecast. “It’s only if in the short run the fluctuations are sharp that there’s an impact, like what happened with the defense cuts in the early 1990s.”
One trend that does trouble Thornberg and other economists is that California’s state and local governments are picking up an ever-increasing share of the cost of educating and caring for its younger population, especially for recent immigrants.
“The things we do spend a lot of money on like schools are borne at the state and local levels and are not reflected in this balance of payment data,” Auerbach said.
Another factor to track, these economists say, is how California stacks up against other states. Thanks primarily to its large population, the state ranks near the bottom of the list of federal funds received. Most of the smaller states near the top, such as Alaska, New Mexico and North Dakota, benefit more proportionally because the formula for distributing federal money often give minimum amounts to each state.
“When so much of the budget is determined by decades-old formulae, there’s only so much that a president or a congressional delegation can do,” said Tim Ransdell, executive director of the California Institute for Federal Policy Research.
While California’s congressional delegation has been criticized for not doing enough to bring in more federal dollars, Ransdell said the group is more cohesive than it was 10 or 15 years ago. Certainly, times have changed since 1992, when the federal government chose to site a national earthquake laboratory in New York instead of California.
Since then, the delegation has banded together on a number of issues.
“Our delegation members work tirelessly to bring home the state’s fair share,” said Alisa Do, executive director of the California Republican Congressional Delegation, which is chaired by Rep. David Dreier, R-Glendora. “I’ve personally walked the halls countless times and gotten 55 signatures on various letters accompanying legislation.”
Do said the delegation is working on two issues this year: trying to get more dollars for federal transportation and homeland security.
What’s more, a record five Californians now hold congressional committee chairmanships, and the top Democrat in the House, Nancy Pelosi of San Francisco, would likely become Speaker if the Democrats win back control of the House in November.
Nevertheless, neither increased cooperation nor the California committee chairs have been able to stop or even slow the imbalance of payments hitting California at least through 2002.
Take transportation. Between 1998 and 2002, California received, on average, 91 cents back on every dollar it forked over into the federal highway account, according to the Rudin Center for Transportation Policy and Management at New York University.
Rudin Center Project Manager Mark Seaman said a combination of factors likely contributed to California being a donor state: a newer road and bridge system than in Eastern states such as New York and Pennsylvania; fewer highway dollars per capita than less populous states such as Montana or Wyoming; and “a not very successful track record in getting funds earmarked for California projects.”
But in an ironic twist given the nature of partisan politics, the imbalance of payments could diminish when figures come out in the next few months for the 2003 fiscal year. The reason: the tax cuts Bush pushed through Congress in 2001 and 2002.
What’s more, with the 2001 terrorist attacks and the war in Iraq, defense spending has ticked up, with California receiving a significant share.
But even with these changes, few expect California to shed its donor status anytime soon. Not even the $80 million that Californians have contributed to federal campaigns so far in this election cycle is expected to make a difference. (Coincidentally, virtually all of that money will be spent on advertising in the 17 or 18 swing states, not in California.)
“Given its wealth and young population, I would be shocked if California weren’t a donor state,” Auerbach said. “That’s simply part of the compact that California has with the rest of the country.”