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September 19, 2003

Funding Formulas Tilted to "Red States"

For a while, I've been ranting (see here and here) about the fact that Bush "red states" receive far more federal spending on average than they pay in federal taxes.

Calpundit jumped in recently but was backed off by one conservative critic who argued red states get more aid because they are poorer-- ie. have lower per capita average incomes -- and therefore need more social spending.

Statistical Fallacy: And here you get a classic statistical fallacy-- having a lower AVERAGE income does not therefore mean you have fewer VERY POOR people needing social spending. An average can often disguise the presence of many very poor people and a few astronomically wealthy people.

Hmmm, that sounds a lot like New York City and southern California, huh-- part of two "blue states" that receive far less in federal funds than taxes paid. Both states have massive poor populations that are screwed because their states receive far less of the federal bounty than they should.

And the funding formulas in social spending make it worse. The problem is not just because military bases and other non-social spending goes to conservative red welfare states, but because even spending formulas for social programs are tilted towards "red states."

How Medicaid Screws Urban Blue States: Check out this report from the General Accounting Office on how the Medicaid funding formula is tilted against California and other blue states like New York. Medicaid is based on formulas giving more matching grants to states with lower per capita income REGARDLESS OF THE ACTUAL MEDICAID NEED IN A STATE. As the GAO Report notes, "the formula [using Per Capita Income]...is a poor proxy measure for the components of funding ability—states’ resources and the size of and costs to serve their populations potentially eligible for Medicaid services." Medicaid reimursement is extremely complicated so it will take a while to wade through the numbers, but the affects are clear.

As one example, the GAO report compares Wisconsin and California:

Because the current Medicaid matching formula does not reflect the fact that Wisconsin has fewer people in poverty and lower costs to provide health care services to its population in poverty than California, Wisconsin’s federal matching aid enables it to spend more than twice what California could spend per
person in poverty—$7,532 compared with $3,731.
For about 30 states, the system works as its supposed to, helping high-poverty states get additional funding.

The Losers: But the big losers in the funding program? New York, Florida, California and Hawaii are the big-time losers. With 31% of all people in poverty living in those states, they start out with "below-average funding ability before federal matching aid is added and move farther below the average after federal matching aid is added."

So the bottom-line is that "blue states" are not screwed because they are rich and don't need federal spending. They need it. The formulas just are biased against them.

BTW this is one more argument why "block grants" are bad. You should have the funding for Medicaid and other social programs dependent on individual need, not based on state funding formulas. The Medicaid matching funds system already distorts aid for health care by being partially targetted to state rather than individual need. Block granting the program would just make the system that much more inequitable.

Posted by Nathan at September 19, 2003 11:08 AM