The primary obstacles hindering Republican consensus on President Donald Trump’s ambitious spending legislation revolve around deductions for state and local taxes (the SALT cap) and Medicaid funding. House Republicans are expected to continue discussions into the weekend after Representatives Andrew Clyde (R-GA), Chip Roy (R-TX), and Nicole Malliotakis (R-NY), among others, voiced concerns about the bill throughout the week.
Fiscal conservatives within the Republican party aim to maintain the SALT cap and further curtail Medicaid spending. Conversely, more moderate Republicans seek greater tax relief for states with high state and local taxes, alongside stronger guarantees for Medicaid coverage. Meanwhile, Democrats are observing from the sidelines, hoping the GOP’s internal divisions will lead to problems ahead of the 2026 midterm elections.
Many Republicans often assert that the federal government must either increase tax revenue or reduce spending to address budget deficits they attribute to Democrats’ reliance on entitlement programs. They are correct in pointing out that the level of fiscal debt is unsustainable.
However, Republicans should acknowledge their potential increased dependence on entitlement programs and federal funds compared to blue states. Democrats should capitalize on the opportunity presented by the Trump bill’s threat to retain the SALT cap and impose stricter Medicaid coverage requirements, which would negatively affect voters across the political spectrum. Ultimately, blue states are subsidizing the financial shortcomings of red states, a situation the SALT cap would perpetuate.
From 2018 to 2022, the total difference between federal tax revenue from states and federal contributions to states amounted to a transfer of over $1 trillion from blue to red states. In 2017, Republicans utilized the SALT cap to further increase the federal tax burden on blue states. The Joint Committee on Taxation estimated that the SALT cap generated $78 billion in federal revenue for the 2019 tax year, primarily at the expense of blue states.
Over a similar five-year period, that annual $78 billion translates to nearly $400 billion, approximately 40% of the total transfer payment. The states most responsible for the 50% of the estimated increase in federal tax revenues from the SALT cap are California (25.1%), New York (16.8%), New Jersey (6.4%), and Illinois (4.2%). New York, California, New Jersey, and Illinois are the states most affected by the SALT cap.
However, in fiscal year 2023, the per capita federal share of Medicaid spending in red states that have chosen to expand the program – the majority at this point – nearly matched ($1,960) that of blue states ($2,100). Even when considering total dollar amounts across all states, blue states received a smaller proportion of Medicaid funding from the Centers for Medicare & Medicaid Services compared to the federal tax revenue collected from them.
Many studies suggest the incremental dollars spent on Medicaid by blue states are a worthwhile investment. These states often exhibit lower rates of obesity, high blood pressure, diabetes, and cardiovascular diseases, alongside higher life expectancy. State residents were more likely to experience enhanced labor productivity, better educational outcomes, lower debt burdens, and higher credit scores. Both advantages lead to improved state fiscal health.
The Trump administration and MAGA Republicans deserve credit for consistency. Their stated desire is to eliminate FEMA’s role in disaster recovery, shifting the agency’s organization and funding duties to individual states. Once again, the consequences will disproportionately affect red states, given that natural disasters, excluding California wildfires, are less frequent in blue states. Florida (25%), Louisiana (20%), and Texas (5%) alone have received half of the nearly $40 billion in FEMA disaster relief, with almost three-quarters directed to red states since 2018. Dating back to 1980, weather and climate disasters have been significantly more costly for red states, with Florida and Texas leading US records at $450 billion and $436 billion in costs, respectively.
It’s worth noting that red states have, in some ways, benefited from blue states since at least the 1980s. The Base Realignment and Closure (BRAC) Commission, established in 1988, aimed to evaluate the efficiency of US military installations. The Commission was soon utilized to close bases primarily in regions with a strong blue state presence. Consequently, regions dominated by red states (e.g., Southeast, Southwest) have seen their share of installations increase by 6 percentage points, while regions dominated by blue states (e.g., Northeast, Mid-Atlantic) have experienced a decrease of 7 percentage points.
As Speaker Mike Johnson (R-LA) leads the Republican Party into what is anticipated to be a lengthy weekend of negotiations, the GOP must acknowledge that its narrow majority in the House and Senate could be jeopardized by missteps regarding the SALT cap and Medicaid cuts. Republican voters in both blue and red states have become reliant on both entitlements and federal funding, which are supported by blue state tax dollars. For Democrats seeking a clear advantage, this is it.
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