State no longer pays more taxes than it gets back

Ten years ago, thenGov. Arnold Schwarzenegger was complaining that California received only 78 cents back for every tax dollar it sent to Washington, arguing that the state’s budget woes would disappear if the federal government would only play fair with funding.

It’s too late for Schwarzenegger, but a new study found that California has moved off the list of donor states and now takes in almost exactly as much in federal payments as its businesses and residents pay in taxes.

While that’s great news for California, it’s not nearly so upbeat a statistic for the country as a whole, said Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at UC Berkeley.

“The federal deficit has been going up every year, with the government spending more than it is taking in,” he said. “As they say at the carnival, ‘Everyone is a winner.’ ”

The new study by the Rockefeller Institute of Government in New York found that in the 201718 fiscal year, there were only eight socalled donor states, which paid the government more than they received. That was down from a dozen states in 2015, including California, and 17 states in a 2007 study by the independent Tax Foundation.

“The federal balance of payments is growing, sparking more money for the states,” said Laura Schultz, senior economist for the Rockefeller

Institute and coauthor of the new report. “As that money gets spent, there are fewer states with negative balances.”

The money that comes to Californians from the federal government includes retirement checks, like Social Security and veterans benefits, as well as Medicare and food assistance. California also receives billions in federal grants for MediCal and other health programs, and money for transportation, education and housing.

Federal contracts with California companies are also included in the final figure, as are wages and benefits for federal workers and the military, according to a 2017 report by the state Legislative Analyst’s Office.

Some of those numbers have been rising steadily, said Auerbach of UC Berkeley.

Former President Barack Obama’s “Medicaid expansion and the Affordable Care Act allowed California to expand health care, and virtually all that money has come from the federal government,” he said. Also, “there are a lot of new defense contracts and other increases in spending.”

The latest figures also show that while President Trump has threatened to slash federal funds from California for its sanctuary policies on undocumented immigrants and its tougherthanWashington’s environmental rules, the state’s federal contract numbers keep getting bigger.

“California’s greatest increase (in 2018) was in the number of contracts, which account for much of the growth in federal payments,” said Schultz of the Rockefeller Institute. “They rose from $54 billion in 2015 to $72 billion in 2018.”

Those rising figures have little to do with any action California has taken.

When he took office in 2003, Schwarzenegger proclaimed himself “the Collectinator,” pledging to get more money from the federal government. He quickly discovered that plenty of those federal dollars are baked into formulas the state can’t adjust.

Two of the states that get the most federal money, for example, are Virginia and Maryland, thanks largely to the huge number of federal workers and government facilities in the suburbs surrounding Washington, D.C.

And California’s population is one of the youngest in the nation, with about 14% of its residents 65 or older. By contrast, more than a fifth of Florida’s residents are of retirement age, guaranteeing a river rather than a stream of Social Security money.

While California officials still might complain that other states get a higher percentage of federal money, no one is willing to change places with states like Kentucky, Alabama, West Virginia and Mississippi. Each of those lowincome states gets better than $2 in federal payments for every dollar of taxes.

“Poor states pay less taxes and have a lot of sick people,” Auerbach said. “It’s pretty clear why Mississippi is a recipient state.”

But California might not have much time to revel in its comfortable spot on the federal pay line. Both Schultz and Auerbach warned that next year’s survey could be bad news for the state.

Rockefeller’s new chart “only captures about one month of the 2017 tax changes,” Schultz said. “We won’t see the full effects ... until next year.”

Although the tax package pushed through by a Republican Congress and signed by Trump trimmed people’s IRS bills across the nation, California and other highwealth states like New York and New Jersey face special problems.

When the federal government capped the deductibility of state and local taxes and mortgage interest, “California suffered a lot,” Auerbach said. Relative to lowtax states like Texas, “California will be paying higher taxes.”

When the tax changes are factored in, Auerbach said, the donor state numbers “are absolutely not going to stay the same.”