California and New York are experiencing a developing situation which does not involve Hollywood scandals or Wall Street collapses. The governments of Sacramento and Albany now consider stopping their annual financial transfers to Washington as a viable option for the first time since the 1980s.
The discussion involves actual state officials who are examining the possibility of stopping their annual Washington money transfers. The political reality of governance confronts the government with an unpleasant truth which everyone wants to avoid. The combined $266 billion annual payments from California and New York to the federal government exceeds their fair share because they fund a system which opposes their core values.
California dedicates billions to renewable energy development, yet its federal tax money supports fossil fuel subsidies. The federal government redirects funds from New York’s immigrant integration programs to operate mass deportation operations which split apart the communities New York has worked to unite. Any law-abiding citizen will eventually question whether their tax money supports their own demise.
The process behind this plan appears more reasonable than people might think. State governments operate their own tax collection systems for various federal taxes. The state of California could redirect highway trust fund money to state infrastructure projects instead of sending it to Washington. The state of New York could redirect education-related federal taxes to support New York schools instead of letting them disappear in federal bureaucratic systems.
The described situation exists. We have witnessed similar situations in the past. Multiple states during the Civil War period stopped working with federal tax collection authorities. States across the nation have refused to execute federal immigration laws and drug enforcement programs in recent times. The existing practice of selective non-compliance provides a clear precedent for this economic approach.
The situation will change when additional blue states begin to observe the developments. The federal tax resistance model established by California and New York will motivate Washington, Oregon, Massachusetts and Connecticut to perform their own financial calculations. The annual federal tax payments from Washington State amount to $40 billion but the state receives only $30 billion in return. The $50 billion Massachusetts contributes to federal taxes results in a $35 billion return. The substantial amounts of money represent actual funds which states could utilize to address their local issues.
The political strategy becomes more complex when other blue states begin to observe this development. The federal government requires blue state financial support more than people understand at present. The four states of California, New York, Washington and Massachusetts generate twenty-five percent of all federal revenue through their combined contributions. The loss of these revenue streams would make essential programs dependent on red states’ funding appear excessively costly. The funding of Social Security benefits for Florida retirees and agricultural support for Iowa farmers and Texas military contracts becomes impractical when major contributors choose to retain their money domestically.
The method creates an essential dialogue which the federal system has deliberately stayed away from during multiple years. The current federal tax system enables blue states to fund essential public services in red states. The funding for Kentucky’s infrastructure comes from California taxpayers. The funding for Mississippi schools originates from New York workers’ tax payments. The current funding system enables recipient states to thrive but creates growing discontent among states that provide financial support.
California taxpayers who send money to Washington could potentially solve their homeless crisis and housing shortage and infrastructure problems with the funds they currently send to the federal government. New York performs financial assessments to determine how its federal tax money could support universal pre-K programs and subway system repairs and climate resilience initiatives.
However, the federal response to this kind of tax resistance would be swift and severe, but that’s exactly what makes it politically powerful. Federal authorities can’t arrest entire state governments. They can’t shut down California’s economy or freeze New York’s banking system without triggering a constitutional crisis that makes the current political tensions look like a friendly disagreement. The more heavy-handed the federal response, the more it validates the blue state argument that the system has become fundamentally illegitimate.
The actual matter at hand is not about blue states’ ability to operate without federal funding since they already provide more money to the system. The real issue centers on whether blue states will endure the inevitable political disorder that would emerge from such a move. Because once this particular genie gets out of the bottle, there’s no putting it back. Multiple states will begin to doubt their participation in a system which fails to benefit their interests. The federal government faces a revenue crisis that can’t be solved by printing money or raising taxes on the remaining compliant states.
This isn’t about secession or breaking up the country. The situation demands a complete re-evaluation of how states relate to the federal government. The current system has reached such a point of dysfunction that major states would rather face federal penalties than stay in the system. The system requires immediate correction because of this development.
State capitals throughout blue states are currently engaging in discussions about this matter. The Washington D.C. establishment remains unaware of the fact that their main revenue sources are searching for alternative funding methods because they focus on political performances. The political structure of the United States would experience a complete transformation when California and New York choose to stop functioning as financial resources for a federal government that opposes their interests.
And honestly? It’s about time someone called that bluff.
-John Freisen, Corresponding Economic Journalist to FUSA