What If Taxpayers Could Choose If Taxes Went To The State Or Federal Level?

Authored by Ryan McMaken via The Mises Institute,

In recent years, we've examined any number of ways of decentralizing the American political system. These step-by-step moves can include decentralizing the monetary system, decentralizing the military, decentralizing immigration policy, and decentralizing elections.

Most recently, we looked at decentralizing the welfare state, and found that each US state is more than wealthy enough and big enough to run its own welfare state at the state level without any need of planning or centralization through Washington, DC. Whether or not one thinks a welfare state is a good or necessary thing, the fact remains the US government is not an essential part of the equation.

One piece of information that stood out the state-level analysis of tax revenue: the amount of taxes collected by the federal government far outpaces that collected at the state level. Nationwide, state-level tax bills are 28 percent the size of the federal tax bill. In a midsize state like Georgia, for example, residents pay 21 billion in taxes to the state government. However, those same residents pay a total of 86 billion to the federal government. The federal tax bill for Georgians is more than four times the size of the state tax bill.


Let's look at it another way: 

Of all the state-level and federal-level tax money squeezed from Georgia residents, only 19 percent of it goes to the state government. 

In the second graph, we can see how much of the tax revenue produced by each state's residents (in dollars) go to either state or federal levels.


Hawaii, for instance, tops the list with 45 percent of all its tax revenue going to the state. At the other end of the list is Delaware where only 13 percent of the total tax revenue is going to the state of Delaware. (This excludes local taxes.) At the national level, 22 percent of all revenues collected — by either a state government or the federal government — go to the states. 

This could be due to several things. In states where a high percentage of tax revenue goes to states, this may be due to low incomes, since federal revenues are heavily dependent on wages and income. A low income state may nevertheless collect state level sales taxes, property taxes, and other taxes. This may then drive a relatively high amount of tax revenue to the state. This may very well be the case in West Virginia, New Mexico, and Mississippi where incomes are relatively low. 

In some cases, though, the states at the top of the list may simply be high-tax states that collect a lot of revenue. Indeed, Hawaii, Vermont, and Maine are all relatively high-tax states according to the Tax Foundation

In every state, rich or poor, high-tax or low-tax, the federal government is getting the lion's share of taxes wrung from the pockets of the taxpayers. 

But, most of that ends up being spent in the states, anyway. So, an obvious question presents itself: why send all that money to Washington first? Why not just spend it where it originates?

More importantly, why not let the taxpayers themselves have more of a say over where that money goes in the first place?

Let the Taxpayers Decide

Years ago, Murray Rothbard proposed a thought experiment:

It would be ... instructive to allow the various [taxpayers] to check off what specific services or agencies they wish to earmark for expenditure of their funds. It would be still more fun to see vicious and truthful competitive advertising between bureaus: “No, no, don’t contribute to those lazy louts in the Department of Transportation (or whatever), give to us.” For once, government propaganda might even prove to be instructive and enjoyable.

But Rothbard's reform here is too timid. It assumes that the tax monies must first go to Washington, DC. 

But what if the taxpayers could decide — holding the total size of the tax bill constant, for the sake of argument — what level of government they wanted their tax money to go to. 

In the spirit of Rothbard's reform, let's allow the taxpayers to check a box deciding whether or not their tax dollars will go to DC or if they'll simply be sent directly to state or local government. 

Then we'll see just how much the taxpayers think they need federal bureaucrats do divvy up their money and eventually send some of it back to the taxpayer's home state.

It's a safe bet that the amount of federal revenue would decline under such a reform. Yet, not all taxpayers would want their tax revenues directed to the state and local levels only. After all, there is a very large number of Americans that live off federal tax revenue, whether they're Social Security recipients, military personnel, or highly paid engineers who fancy themselves as "private sector" workers, but who are really living off tax revenues as defense-contractor employees. 

Looking at a map of federal spending on a state-by-state basis, we might guess which states might see a relatively small amount of tax revenue directed to the state level by taxpayers in our little experiment. 


But even within these states, we'd see interesting conflicts among taxpayers. Younger workers, for example, might want their tax money to go to the state and local levels where their young children would benefit from state and local spending on schools. This would be in direct conflict with Social-Security recipients, of course, who live off the sweat of the brow of current wage earners, and who are more interested in getting a government check than in funding schools. 

In that case — as Rothbard might suggest — it would be fun to see the AARP run ads denouncing young workers for directing their funds away from federal programs and ignoring old pensioners. 

We might see similar conflicts between private sector and public sector workers. Small business owners might be more likely to appreciate state-funded and locally-funded amenities such as roads and local law enforcement. Your local plumber might be less enthusiastic about shipping his money off the Washington to fund the invasion of yet another country he's never heard of. 

On the other hand, a reform like this would allow states like California to achieve the more "enlightened" welfare state the state has always wanted. After all, this is a state that wants its own Canada-style single-payer health care system. Where the tax revenues produced by Californians kept the state, Californians could have their long-desired social-democratic paradise. The plus side is the rest of us wouldn't have to pay for it.


J S Bach Seasmoke Mon, 06/19/2017 - 20:10 Permalink

It's all about centralized CONTROL.  When the "largess" of the workers' own money is divvied up from one source, this fascilitates their enslavement by the (((evil manipulators))) on top.The genius of the Christian Founders' original republic was keeping the nation DE-centralized with power delegated to state and local municipalities.  This all ended with the advent of our usurious Federal Reserve System and its sister monstrosity - the unconstitutional federal income tax.

In reply to by Seasmoke

any_mouse J S Bach Tue, 06/20/2017 - 00:36 Permalink

Lincoln and the Slavery Issue.

The States were whipped into a frenzy and presented with the false binary choice of "either you're with or you are agin us". Followed by a devastating war over the ancestors of an eternal victim class.

Any sentiment for the Southern States was viciously repressed by the Federals in Federal Territories.

The Negro slaves were emancipated and the States became slaves of the Federal government.

In reply to by J S Bach

Common_Law Lordflin Mon, 06/19/2017 - 21:25 Permalink

They also coerce individuals into contracts the put them under federal jusistiction. But, it's perfectly legal because we have the constitutional right to freely contact and to contract away our rights. Much the same way you forfeit your right to privacy by signing Google's terms of service agreement.And just like "shrink wrap contracts" and "click wrap contracts" the terms are not required to be presented to you. You are legally "presumed" to know them by signing.More info here:http://sedm.org/Search/SubjectIndex.htmhttp://sedm.org/Forms/10-Emancipation/CitizenshipDiagrams.pdf

In reply to by Lordflin

I am Jobe Mon, 06/19/2017 - 19:11 Permalink

It's for the children.  But even within these states, we'd see interesting conflicts among taxpayers. Younger workers, for example, might want their tax money to go to the state and local levels where their young children would benefit from state and local spending on schools. This would be in direct conflict with Social-Security recipients, of course, who live off the sweat of the brow of current wage earners, and who are more interested in getting a government check than in funding schools. 

FoggyWorld I am Jobe Tue, 06/20/2017 - 00:12 Permalink

Boy do I as an older person disagree with that.  NOTHING to me is more important than seeing the younger members of our community get the very best of educations.   Problem seems to be two fold:  nowhere near enough great teachers and I would like to see the best of them paid substantially more and possibly for a longer school day.

In reply to by I am Jobe

adanata kp duty Mon, 06/19/2017 - 19:29 Permalink

The money goes out... and what isn't skimmed and actually comes back to the states, returns with HUGE strings attached. Remember, all these college "students" were indoctrinated in "government" schools following government "guidelines". If we must pay, I think states keeping the tax money is a great idea... now we can be enslaved to the state! This whole tax situation needs heavy reconsideration; i.e. NO personal income tax or property tax. Tax everything else we choose or do not choose to buy.

In reply to by kp duty

Inserenity Mon, 06/19/2017 - 19:28 Permalink

This is something I have been saying for years. The current system of the Fed collecting funds and then doling it back to the states with caveats and strings attached is nonsensical. States should be allowed to spend their own money on what is important to that state and fund the Federal Government for the few things that the constitution allows for, such as raising a standing army, etc.

hooligan2009 Mon, 06/19/2017 - 19:42 Permalink

<<<< the federal government wastes more tax dollars than states could?<<<< the states waste more tax dollars than the federal government does?IOW which is more incompetent in taking taxes and spending them in a smart way or are they equally incompetent and should not be taking any taxes from anybody at all

strickler Mon, 06/19/2017 - 20:22 Permalink

If all taxation was local, then state's would have to compete for the lowest tax burden.  Federalizing the vast majority of taxation relieves the states of competition and us of our money.

Kill or be Killed Mon, 06/19/2017 - 20:27 Permalink

When I ran for State Rep in Illinois that was similar to my platform. In our case it was to collect and distribute the taxes through the county and pay taxes ala carte but with a flat rate.

Hail Spode Mon, 06/19/2017 - 21:07 Permalink

Feds should get their taxes from tariffs, and taxes on multi-state corporations. Anything else, send the states a bill for it based on that state's share of income. Now state governments WANT the feds to spend money because they get to help spend it. If they had to help pay it they would be on the side of fiscal responsibility. You may not be surprised that this is the balance suggested in Localism, a Philosophy of Government. ... https://www.amazon.com/dp/B00B0GACAQ

Muppet Mon, 06/19/2017 - 23:56 Permalink

Property tax far out strips my income tax.  3 to 1.I don't agree with this article at all.... In fact, I cannot believe the Federal Government has stood by while Property Tax deductions have decimated Federa tax collections.How long can the Federal Government sit by while Property Tax undermines Fed tax revenues?

RightLineBacker Tue, 06/20/2017 - 00:06 Permalink

Good God!This is a wonderful eye-opening article.We obviously need a much smaller, much less expensive, much less intrusive and much less corrupt US Federal Government.Lets go local! Fuck the Federal ratpack.I live in Texas. We can handle our affairs a Million times more effectively than the corrupt fucking Federal Government. We also have fewer Jew bankers.Go for it!

Spungo Tue, 06/20/2017 - 00:36 Permalink

Government should generally be more local. I genuinely care about the schools in my area even though I don't have kids. Schools in another state? I don't give a shit.

gespiri Tue, 06/20/2017 - 03:05 Permalink

Funny.  Here in Switzerland (where I've been living for 15 years), it's actually the opposite.  The cantonal and communal (state and city) taxes are actually higher than the federal.  However, it has one of the lowest rates in the world (but you are REQUIRED to buy your own health insurance).  Therefore, you see you tax dollars going back to the city where you live instead of meddling in other countries' business.

Vin Tue, 06/20/2017 - 11:43 Permalink

Apportionment is the practice of having the States pay to support the fed govt according to their representation in the House.  So for example, if Cal has 53 out of 435 reps in the House (don't know if these numbers are correct), then they would pay 53/435 or 12% of the entire budget agreed to by the Congress.This method ensures that the big states which have the greatest vote in the House also pay the most to support the budgets that they vote for. Then each State can decide the best method for collecting those taxes.  Some may choose income tax, others may choose indirect taxes.Direct income taxes by the feds was something that the Founders did not want.  Repeal the income tax amendment.