Blue-State Scrooges

As I look out of my office window at the glass and steel office buildings lined up Sixth Avenue like corporate soldiers drawn up at attention before Radio City Music Hall, my thoughts turn to – tax reform.  Specifically to the to the loud complaints coming from high tax Democrat-leaning “blue” states like my own New York, objecting to the GOP tax reform’s $10,000 cap on deductions for state and local taxes (SALT) .

While this has proven to be one of the most protested features of the GOP tax reform, to me the debate seems to have overlooked a critical component.  That is the impact of those corporate headquarters marching up Sixth Avenue and filling office parks across many blue states, paying taxes in those states on their nationwide incomes.

The complaint is that many of these high tax Democrat states already subsidize lower tax Republican-leaning “red” states through federal taxes and spending.  And indeed, as a general rule, blue states pay more in taxes into the federal government than they receive in federal spending.  For example, in 2013 New York state received about $195 billion in federal expenditures while contributing about $231 billion in business and personal taxes (we use 2013 numbers because it is the most recent year for which broad estimates are available since the IRS stopped releasing spending estimates in 2010).  The most extreme case is Minnesota, for which the taxes paid to spending received ratio is almost two-to-one.  These primarily blue states are already paying out more than they receive, so it is unfair that they be forced to pay even more by not being able to deduct the full amount of their high state and local taxes.  The proposed $10,000 cap on SALT deductions will only add to the money flowing from blue states through the federal government to red states.

A number of responses have been made to this argument.  For example, SALT deductibility is really an unfair tax subsidy from low tax states underwriting profligate high tax Democrat state spending.  Even the New York Times admits that the SALT cap will primarily impact high income residents of these blue states, which undermines the “help-the-rich, soak-the-poor” narrative being used to attack the tax reform.

However, focusing on government expenditures results in an incomplete analysis.  A significant component of federal receipts are business taxes.  In the figures which are the basis of this argument, corporate taxes are ascribed to the state where a company has its headquarters.  Thus, Disney’s corporate taxes are all attributed to California, and Citigroup’s to New York.  However, the revenue upon which their profits and taxes are based normally comes from across the entire nation.  Disney does not sell tickets to Star Wars only in California, and Citigroup branches and operations are not limited to New York.  For them and all other companies with nation-wide sales, revenues, and the profits and taxes which are based on them, come from throughout the country.  The profits and taxes may be ascribed to states like New York where the companies have their headquarters, but the money comes from West Virginia and Mississippi as well.

Ideally, one could try to break down the sourcing of large national companies’ revenues to analyze the significance of this phenomenon.  However, with the vote on the tax bill coming this week, we must resort to a quicker, if cruder, metric.  That is the location of the headquarters of the Fortune 1000 largest American companies.  A review of these shows that America’s largest companies are concentrated in blue states.  Using 2013 Census Bureau estimates, New York had about 6% of the nation’s population, but almost 9% of the Fortune 1000 headquarters.  The numbers are even more striking for its neighbors.  With 2.8% of the national population, New Jersey had 4.5% of the Fortune 1000 headquarters, and for Connecticut the headquarters per capita ratio was 236%.  Nor is this a northeastern blue state phenomenon.  For Minnesota, this ratio was 166% and Illinois it was 163%.  To give some perspective at the red state end, six red states have no Fortune 1000 corporate headquarters and accompanying nationally sourced profits and taxes.  Even in Florida, the headquarters per capita ratio is under 50% (with 6.2% of the national population, Florida had only 30 Fortune 1000 corporate headquarters).

The impact of having a corporate headquarters extends beyond corporate taxes.  A corporate headquarters supported by nation-wide revenues increases the personal taxes attributable to a state as high-paid corporate officers (and other professionals in a headquarters ecosystem like bankers, lawyers, accountants, advertising executives and others) contribute to the headquarters state’s share of federal personal income taxes.

Leaving aside this positive impact on a state’s share of individual federal taxes, a comparison of states’ federal tax receipts with federal spending by state shows that corporate taxes cover a substantial portion of these blue states’ federal spending “shortfall.”  For example, in 2013 the $25 billion in federal corporate taxes collected from New York companies equaled 69% of the $36 billion by which New York’s federal tax payments exceeded federal spending in the state.  The corresponding percentages for other blue states were also substantial, usually approaching or exceeding 50%. 

One can argue that not all of the corporate taxes paid in a state are based on nationwide revenues.  Some come from genuinely local businesses.  However, this factor must be offset by personal income taxes paid by high earners supported by all those large corporate headquarters.  Such increased personal taxes also probably offset the rest of the “shortfall.”

What this analysis can show us is that if blue states are subsidizing red states with federal expenditures, red states are supporting those blue states with the revenues which are the source of those higher federal tax payments.  Indeed, if I were a radical leftist rather than a firm supporter of free enterprise, I might point out that it appears that blue states are holding red states in a quasi-colonial relationship.  Predominantly blue state based corporations exploit red state colonies for revenues, while buying their passive acquiescence through federal spending centrally controlled from Democrat blue Washington, D.C.  I might further point out that the SALT deductibility primarily benefits the “large corporations” and “millionaires and billionaires” who are the great villains of the evermore leftist Democrat critics of the tax reform.  But perhaps, like the fictional Scrooge who exploited others and then thought the money was all his, our blue states will come to realize that we are all purple, all in this together, and wish their poor red state Cratchit cousins a happy tax reformed Christmas.

James W. Lucas is an attorney in New York City. He is the author of Are We The People? How We the People Can Take Charge of Our Constitution and Timely Renewed: Amendments to Restore the American Constitution and of posts on www.timelyrenewed.com.

As I look out of my office window at the glass and steel office buildings lined up Sixth Avenue like corporate soldiers drawn up at attention before Radio City Music Hall, my thoughts turn to – tax reform.  Specifically to the to the loud complaints coming from high tax Democrat-leaning “blue” states like my own New York, objecting to the GOP tax reform’s $10,000 cap on deductions for state and local taxes (SALT) .

While this has proven to be one of the most protested features of the GOP tax reform, to me the debate seems to have overlooked a critical component.  That is the impact of those corporate headquarters marching up Sixth Avenue and filling office parks across many blue states, paying taxes in those states on their nationwide incomes.

The complaint is that many of these high tax Democrat states already subsidize lower tax Republican-leaning “red” states through federal taxes and spending.  And indeed, as a general rule, blue states pay more in taxes into the federal government than they receive in federal spending.  For example, in 2013 New York state received about $195 billion in federal expenditures while contributing about $231 billion in business and personal taxes (we use 2013 numbers because it is the most recent year for which broad estimates are available since the IRS stopped releasing spending estimates in 2010).  The most extreme case is Minnesota, for which the taxes paid to spending received ratio is almost two-to-one.  These primarily blue states are already paying out more than they receive, so it is unfair that they be forced to pay even more by not being able to deduct the full amount of their high state and local taxes.  The proposed $10,000 cap on SALT deductions will only add to the money flowing from blue states through the federal government to red states.

A number of responses have been made to this argument.  For example, SALT deductibility is really an unfair tax subsidy from low tax states underwriting profligate high tax Democrat state spending.  Even the New York Times admits that the SALT cap will primarily impact high income residents of these blue states, which undermines the “help-the-rich, soak-the-poor” narrative being used to attack the tax reform.

However, focusing on government expenditures results in an incomplete analysis.  A significant component of federal receipts are business taxes.  In the figures which are the basis of this argument, corporate taxes are ascribed to the state where a company has its headquarters.  Thus, Disney’s corporate taxes are all attributed to California, and Citigroup’s to New York.  However, the revenue upon which their profits and taxes are based normally comes from across the entire nation.  Disney does not sell tickets to Star Wars only in California, and Citigroup branches and operations are not limited to New York.  For them and all other companies with nation-wide sales, revenues, and the profits and taxes which are based on them, come from throughout the country.  The profits and taxes may be ascribed to states like New York where the companies have their headquarters, but the money comes from West Virginia and Mississippi as well.

Ideally, one could try to break down the sourcing of large national companies’ revenues to analyze the significance of this phenomenon.  However, with the vote on the tax bill coming this week, we must resort to a quicker, if cruder, metric.  That is the location of the headquarters of the Fortune 1000 largest American companies.  A review of these shows that America’s largest companies are concentrated in blue states.  Using 2013 Census Bureau estimates, New York had about 6% of the nation’s population, but almost 9% of the Fortune 1000 headquarters.  The numbers are even more striking for its neighbors.  With 2.8% of the national population, New Jersey had 4.5% of the Fortune 1000 headquarters, and for Connecticut the headquarters per capita ratio was 236%.  Nor is this a northeastern blue state phenomenon.  For Minnesota, this ratio was 166% and Illinois it was 163%.  To give some perspective at the red state end, six red states have no Fortune 1000 corporate headquarters and accompanying nationally sourced profits and taxes.  Even in Florida, the headquarters per capita ratio is under 50% (with 6.2% of the national population, Florida had only 30 Fortune 1000 corporate headquarters).

The impact of having a corporate headquarters extends beyond corporate taxes.  A corporate headquarters supported by nation-wide revenues increases the personal taxes attributable to a state as high-paid corporate officers (and other professionals in a headquarters ecosystem like bankers, lawyers, accountants, advertising executives and others) contribute to the headquarters state’s share of federal personal income taxes.

Leaving aside this positive impact on a state’s share of individual federal taxes, a comparison of states’ federal tax receipts with federal spending by state shows that corporate taxes cover a substantial portion of these blue states’ federal spending “shortfall.”  For example, in 2013 the $25 billion in federal corporate taxes collected from New York companies equaled 69% of the $36 billion by which New York’s federal tax payments exceeded federal spending in the state.  The corresponding percentages for other blue states were also substantial, usually approaching or exceeding 50%. 

One can argue that not all of the corporate taxes paid in a state are based on nationwide revenues.  Some come from genuinely local businesses.  However, this factor must be offset by personal income taxes paid by high earners supported by all those large corporate headquarters.  Such increased personal taxes also probably offset the rest of the “shortfall.”

What this analysis can show us is that if blue states are subsidizing red states with federal expenditures, red states are supporting those blue states with the revenues which are the source of those higher federal tax payments.  Indeed, if I were a radical leftist rather than a firm supporter of free enterprise, I might point out that it appears that blue states are holding red states in a quasi-colonial relationship.  Predominantly blue state based corporations exploit red state colonies for revenues, while buying their passive acquiescence through federal spending centrally controlled from Democrat blue Washington, D.C.  I might further point out that the SALT deductibility primarily benefits the “large corporations” and “millionaires and billionaires” who are the great villains of the evermore leftist Democrat critics of the tax reform.  But perhaps, like the fictional Scrooge who exploited others and then thought the money was all his, our blue states will come to realize that we are all purple, all in this together, and wish their poor red state Cratchit cousins a happy tax reformed Christmas.

James W. Lucas is an attorney in New York City. He is the author of Are We The People? How We the People Can Take Charge of Our Constitution and Timely Renewed: Amendments to Restore the American Constitution and of posts on www.timelyrenewed.com.