General Summary of Plan:
Imagine that some state wants to create some government program at the state level (We call this state the "donor state" for reasons you see later). The federal government itself won't do that program nationwide because it can't afford it in Bush's 2nd term.
This "donor state" that wants to create the program at the state level is unwilling to raise the necessary state taxes needed to to fund it, because people and businesses seeking to avoid extra taxation will move out to neighboring states, thereby partially frustrating the effort to raise revenue.
The solution to this is that the donor state agrees with neighboring states to raise taxes by the same amount (We'll call these neighboring states "recipient states" for reasons we'll see in a moment).
Since these neighboring "recipient states" and the donor state all raise their taxes by the same amount, there are fewer attractive lower-tax places for people and businesses to go, so fewer people and businesses move out of the donor state under this higher taxation.
This donor state can entice these other "recipient states" to cooperate and raise their taxes by creating a revenue-sharing consortium, under which these "recipient states" get back more revenue than they put in. This consortium is effectively a mechanism by which states make side payments to others in order to get cooperation.
Plan in More detail:
All these states form a consortium, in which they all levy a certain extra tax, say, equal to x% of income (I'm doing a flat % here, but this can be done with marginal rates too). These member states set their own state income taxes independently. But this separate x% tax on income must be uniform across states that are members of the consortium. Therefore when people pay taxes at the state level, they pay their regular state income taxes plus the extra x% of their income for this extra tax.
Then the revenues from this x% income tax are pooled from the different member states and redistributed according to some pre-negotiated distribution formula among the member states.
This distribution formula is negotiated between all the member states of the consortium. But, the formula must include the following two aspects to work:
- The donor state (which is the one that originally wanted to create the program at the state level) gets back less than it contributes to the revenue pool, according to the distribution formula. This is the cost of the consortium to the donor state. The benefit they get from the consortium is fewer residents and businesses moving out of state due to higher taxes. Therefore, the donor state uses the revenue they get back from the revenue pool to fund the government program they wanted.
- The other states (that is, the recipient states, which are the other members of the consortium) agree to join the consortium and raise their taxes by the same amount as the donor state. Their incentive to join the consortium and raise their taxes is that, under the distribution formula, they receive more from the revenue pool than they put in. Without this incentive, there would be no reason for another state to raise his taxes to the same level of the donor state. Depending on the rules of the consortium, recipient states can use this revenue from the revenue pool to pay for either the same government program that the donor state is implementing, a different specified government program, or they can use the revenue however they want at their discretion.
Finally, the rule is that, if a state lowers its x% tax below that amount of x%, it gets kicked out of the consortium for some temporary period and must pay some penalty money to other states. This is the mechanism by which it is enforced that the x% tax rate is the same across member states. It would be better to come up with more detailed penalties for states that lower the tax below x%, in order to ensure their compliance.
This idea is very flexible in its implementation. It can be modified to include several donor states and any number recipient states. The differential between the amount any state contributes and gets back from the revenue pool can be very large or very small, depending on the specific distributional formula that is negotiated. It can also be applied to many different policies. It also leaves open the possibility of coordinating programs across the member states or having the states run their own programs individually. For example, if the federal government were to abolish or somehow destroy Social Security, these states could create a (partial) substitute for it by forming a consortium, pooling revenues, and then redistributing money from the revenue pool to the retired residents of member states according to some distribution formula. Specifically, I would like to see New York enter a consortium with neighbors, in order to get far better port security, which I am sure that Bush will ignore in the next few years. Environmentally conscious states can also enter consortiums where they all levy the same gasoline tax or environmental regulations, and they entice other states to join by making side payments to them (either through the revenue pool in the case of the gas tax or some other mechanism in the case of regulations). This obviously doesn't work too well for things like global warming.
I'll add some qualifiers here. Whether the consortium works and the optimal design of it depends on various empirical relationships and sensitivities between variables. For example, the sensitivity to taxation of people moving out of state might be very small. That is, if people moving out of state is very insensitive to taxation, it may be beneficial for the donor state to run the program by itself instead of starting a consortium with other states. Also, you might need to create a very large consortium in order to decrease significantly the number of businesses and people who move out of state under higher taxes.
The purpose of this plan is to find ways in which blue states may be able to make social progress without relying on the federal government of George W. Bush. Bush's government will end substantial parts of the welfare state and prevent enaction of necessary new programs, like port security. The preceding was a plan to create a kind of "shadow federal government" by the cooperation of willing states. The purpose is to give those states a mechanism by which to create programs that substitute for those lost under George W. Bush, to supplement those made deficient by George W. Bush, and to create new programs which Bush refuses to enact. This plan is very rough. I also have a question about whether it is constitutional: