The coming decade is almost certain to see Americans take more seriously our large national debt. I see this as a silver lining that will push states to think more deliberately about taxes and public services.
Poor states, including Indiana, will likely struggle far more than affluent states. Three federal programs illustrate how states are treated differently.
The first is Medicaid. Under the current plan, states each pay a different share of the total cost. Typically, poor states pay a lower share. Indiana ranks 32nd, paying under 25 cents on each dollar of Medicaid spending in the state. The richer, top 10 states pay between 36 and 41 cents out of every dollar spent on Medicaid.
Conceptually, it would seem easy to cut federal spending and simply have all states assume equal shares of Medicaid. The problem with this approach is that taxpayers in rich states, including New York, California and Illinois, pay much higher federal taxes than do folks in Indiana, Kentucky and Tennessee.
The political challenge is obvious. When it comes to Medicaid, rich states pay more into federal taxes and get back less. I don’t know how that can possibly remain as part of a long-term budget solution. This simple fact affects all federal funding programs.
A second issue will be federal transfers to state and local governments for education, housing and infrastructure. Today, the U.S. Department of Education provides substantial grants to local schools, with most of the money going to poor rural and urban school districts. This is a transfer from rich to poor places, much like the Medicaid system.
Indiana receives less federal money per student than the typical state. Almost 40% of K-12 students participate in some type of federal education program that accounts for almost $2,000 per student each year. There are good arguments for the federal government exiting the K-12 funding space. But, education funding is less characterized by funding moving from rich to poor states than Medicaid or other programs are, which will make ending this type of funding more politically fraught.
Agricultural subsidies are so enormous that the U.S. farming industry receives more in subsidies than it pays in taxes. Not all of this goes to relatively poor rural counties, but most of it does. Indiana ranks 15th in agriculture subsidies, receiving $2,570 per resident last year. North Dakota got a whopping $39,324 per resident, while Rhode Island received $18.12 per resident. American consumers would be far better off ending agricultural subsidies. While some food prices might rise, there’s no chance it would rise by the $1,568 per resident we are spending on farm subsidies.
There’s probably no federal program that is so clearly a negative value transfer of money from affluent, largely urban taxpayers to rural, mostly wealthy, businesses. While these have been around since at least the Great Depression, the growing gap between rural and urban places makes their continuation far less likely. I cannot imagine any broad fiscal debate that would not also address farm subsidies.
The Department of Commerce's Economic Development Administration exemplifies smaller but questionable federal spending. With a $325 million annual budget, the EDA funds infrastructure projects and "job creation" programs, primarily in rural counties and low-income municipalities.
The problem is that much of this economic development represents shuffling existing jobs and capital rather than creating new wealth. There's no reason the federal government should pick regional winners and losers with grants and subsidies. A tighter federal budget will challenge this spending.
As Americans wrestle with debt, we should acknowledge several things. Our federal taxes as a share of GDP are at a 50-year low, while our spending as a share of GDP is at a 50-year high. Both taxes and spending will have to converge to reduce the debt.
We also have to acknowledge that the web of taxing and spending we’ve created in the federal government heavily taxes richer, mostly Democratic-leaning cities and states. At the same time, these programs mostly relocate funds to poorer, primarily Republican-leaning states and rural counties.
Good-faith compromise requires spending cuts and tax increases everywhere. However, the cuts will necessarily be concentrated in places represented by GOP members of the House and Senate. That will lead to some interesting politics and political rhetoric in the years ahead.

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