Bridging the red-blue divide: a proposal for US Regional Tax Relief

The United States is the only large federal country that does not have an explicit way to reduce the economic disparities among more and less developed regions. In Germany, for example, federal revenues are distributed by a formula that takes into account the relative level of wealth of each state (the so-called Finanzausgleich, or fiscal equalization). Similar mechanisms are found in Australia, Canada, India, and other large federal countries. The United States, on the other hand, has no such explicit redistribution. Each state is generally considered equal and sovereign and the federal government does not distribute revenues to equalize the states’ spending capacity. While the overall impact of the federal tax and transfer system may be to shift revenues from richer to poorer states, this is not openly acknowledged, and to the extent it is discussed in the literature, it is generally condemned as unfair to the states that send more revenues to Washington than they get back in federal transfer payments. Nor  is it politically likely that the US will adopt a formal fiscal equalization mechanism, because unlike Germany or Canada it decisively settled the problem of secession in the Civil War and therefore does not fear a potential break-up along regional lines.

This Article proceeds from the normative position that the increasing gap between the richer and poorer areas of the United States is a problem that requires federal intervention, and that the federal tax system can play a role in that intervention. There is increasing evidence of a yawning economic gap between the eastern heartland (the region between the Mississippi and the eastern slope of the Appalachians) and the rest of the U.S., which translates into higher permanent unemployment and minimum wage employment, opioid abuse, imprisonment, and premature death. This gap contributed to the political division of the country revealed in the 2016 presidential election, and needs to be addressed if we want to prevent ever further polarization.