Opinion: Federal Aid to New Jersey is Negative — But Not Because of the Shutdown

Richard F. Keevey | January 11, 2019 | Opinion
The Garden State perennially pays significantly more to the federal government in taxes than it gets back and that’s not about to change anytime soon

Credit: Amanda Brown
Richard F. Keevey
The current federal shutdown is negatively affecting millions of people across the country, including many of us in New Jersey. But the impact on the Garden State is much less severe than elsewhere — and that’s because we already suffer from a lack of federal investment.

First, some background. The largest federally-supported program in New Jersey is Medicaid. It and most other human service and education-type programs are funded this year for New Jersey ($12.3 billion) as federal appropriations have been signed into law for these particular programs. The state budget is $37.5 billion in state supported funding, plus $ 15 billion in federal assistance. So, in the short-run my guess is the immediate impact of the federal shutdown on the New Jersey budget is minimal.

But, what is interesting and important in the long run is the continued New Jersey negative balance of payments with the federal government. We are the second worst in the country — meaning our citizens pay significantly more to the federal government in taxes than we receive in money flow.

Why does NJ fare so badly?

Federal spending in New Jersey versus taxes paid this year comes to $0.82 on the dollar. Our payments were $119 billion and our receipts were $98 billion, a gap of $21 billion. Only New York was slightly worse. Other “losers” include Connecticut and Massachusetts. Forty-one other states had a positive ratio, with some states receiving more than $2.3 for every dollar they paid in federal taxes — such states as Kentucky, New Mexico and West Virginia.

Now, you can quickly realize that the payment number ($119 billion) is significantly greater than the $15 billion that is anticipated in the state budget. The difference includes other types of federal spending in New Jersey, including Social Security, Medicare, contracts with private corporations, wages to federal employees, and other federal procurement activities.

The receipt side includes taxes paid by New Jersey citizens and corporations, including individual income taxes, payroll taxes, corporate income taxes, estate taxes and excise taxes, such as on gasoline and tobacco.

Why the disparity? One obvious answer is that New Jersey has a larger share of high earners and therefore a greater share of personal income flows to the federal government. And, on the flip side, Social Security and Medicare payments are greater in states with larger elderly populations.

Another key factor is that other states, such as Maryland and Virginia, have large federal facilities with lots of federal employees and contracts. New Mexico has large government research facilities.

A more subtle factor is that the design of certain federal formulae penalizes a state like New Jersey. For the Medicaid program we receive a 50 percent reimbursement for all expenditures; other states receive as high as 75 percent. Why? The formulae reward states with lower wealth — New Jersey is one of the richest states and therefore receives the minimum reimbursement.

Neither fair nor fixable

For certain transportation programs money is not sent where it is needed. Current formulae allocate more money to places with lots of land and no people. Wyoming receives a lot more transportation aid per population than does New Jersey. In 2016, Alaska received $677 for each person while Massachusetts received $87 per person. Fair? I do not think so. Fixable? I doubt it.

When I served in the state government there was always the argument (from an opposing political faction) that a particular governor (of either party) was not doing enough to garner federal assistance and more effort was needed. I think you might agree that there are circumstances beyond the ability of any governor to obtain more federal aid. It is just not possible. We are stuck with the current situation.

So, how about the future? Will the imbalance be about the same? Unfortunately, I think it will be worse. The recent Federal Tax Cut and Jobs Act of 2017 will have a significant impact on high-income earners in New Jersey, such that more taxes will be paid to the federal government by these folks. Furthermore, my guess is there will be more spending cuts at the federal level because of the increasing deficits and debt levels caused in part but not entirely by the recent changes in tax law.