Does Washington shortchange California on taxes? No, not really

By George SkeltonCapitol Journal Columnist

Oct. 9, 2017 12:05 AM PT

Reporting from In Sacramento — One of California’s oldest gripes is that Washington shortchanges the state on taxes. But it’s a questionable claim.

The beef is that California sends more money to Washington than it gets back and this isn’t fair.

But are we actually being cheated? No, not really.

“Like many other things, it depends on how you measure it,” says Ann Hollingshead, a fiscal policy expert at the nonpartisan Legislative Analyst’s Office.

The main reason we pay more in taxes than we receive in benefits is that California is more prosperous and younger than most states. So we pay higher taxes and get less back in Social Security and other retiree benefits.

Nevertheless, it’s accepted dogma in California that we’re getting robbed by Washington. It’s a convenient, crowd-pleasing complaint. Ten years ago, I myself fussed about it. Then I opened my eyes.

Sacramento blaming Washington for money problems — and there really aren’t any in this economic expansion — is like President Trump claiming that election “fraud” is why Hillary Clinton got more votes than he did last November. It’s an excuse based on fantasy.

This is being written because of several email responses to my Oct. 2 column asserting that Trump was right to propose elimination of state and local tax deductions on federal income tax returns for those who itemize. I wrote that there’s no credible justification for the federal government subsidizing California’s highest-in-the-nation state income tax — or, for that matter, any local levy such as the property tax.

“Doesn’t California send way more money to Washington than we receive?” emailed Steve. “That means we are subsidizing [other] states, namely most of the southern red states. Taking the state tax deduction from California would only exacerbate this situation.”

Harry wrote: “The real question should be, why don’t we get our fair share back?”

We do, I’d argue. But California politicians love to claim otherwise.

“States like California… are already paying more than others into the U.S. Treasury,” state Senate leader Kevin de León (D-Los Angeles) declared after Trump announced his tax proposal.

“Republicans in Washington have once again zeroed in on California to punish us and make our state the single biggest loser in their reckless tax scheme.”

Actually, Moody’s Analytics has looked at the initial outline of Trump’s proposed tax overhaul and concluded it would provide a “small positive impact” to California’s economy.

Former Gov. Arnold Schwarzenegger loved to complain about Washington shortchanging California. Shortly after being elected in 2003, the Terminator pledged to become “the Collectionator” of federal dollars. He failed — just as Govs. Gray Davis and Pete Wilson did before him.

Davis’ finance director, former state Sen. Steve Peace, accused Washington of treating Sacramento “like a colony,” contending “it’s nothing short of a confiscatory federal tax policy. It’s no mystery why Californians feel overtaxed. They are.”

That was baloney, even by political standards. If Californians feel overtaxed, it’s because of Sacramento politicians and state voters, not Washington.

California’s self-depiction as a “donor state” is based on tortured data and semantics. Analyst Hollingshead dug into it a few months ago.

One 2007 study by the conservative Tax Foundation found that California got back only 78 cents for every dollar paid in federal taxes. But that required some numbers juggling.

Try to bear with me:

That study, Hollingshead says, adjusted the tax dollars to assume a balanced federal budget. And we all know the feds spend much more than they receive in taxes. They borrow to cover the rest. That’s why the U.S. government has a $14-trillion deficit.

For study purposes, the Tax Foundation “weighted” the tax receipts upward to make income match actual outgo. Higher-than-actual tax payments were assumed from each state. With that magic, California got back only 78 cents in benefits for every tax dollar supposedly paid. So 78 is a make-believe number.

In 2015, the New York state comptroller did another study without all that imaginary balanced-budget nonsense. The conclusion was that California got back 99 cents on the dollar.

But that was still under the national outlay of $1.22 per tax dollar because, remember, the feds always outspend their tax receipts.

Mississippi made out the best, receiving $2.57 per tax dollar. The worst off was New Jersey at 77 cents.

In spending, it’s not so much what you might expect: great public works projects such as highways, bridges and dams. The biggest items are Social Security and Medicare payments for retired people — $83 billion and $69 billion respectively. But California has fewer retirees than the national average.

In California, 10.7% of the population is 65 or older, Hollingshead says. Nationally, the average is 12.4%.

Defense contracts and military bases also draw federal dollars, and those have tailed off in California since the Cold War ended.

Medi-Cal — healthcare for the poor — has been rising in cost, however. The feds provided $55 billion in fiscal 2014-15, the last year for which complete numbers were available. Hollingshead found $376 billion in total federal spending in California for that year.

So what’s to gripe about? We should be grateful. California has lots of multimillionaires capable of paying high taxes and loads of young, healthy workers.

And we really don’t want to be like Mississippi.

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