In the United States, there have been recent calls for secession of various states, including some in the South. A common response to proposals for Southern secession is that most Southern states receive more in federal spending than their inhabitants pay in federal taxes. (For examples, see the Google search results for the phrases “secession” and “more than they pay”, “The Sanctimony of the South” by Gram Slattery, and “What seceding from the U.S. will cost you”, among many others).
The argument is that, since these states are fiscally dependent upon the federal government, they would be foolish to secede, and, according to Mr. Slattery, engaged in “sanctimonious whining” to even argue for doing so.
The problem with the argument as stated, and a significant problem at that, is that there exist other benefits and costs to secession besides those related to fiscal transfers to and from the central government. Fiscal transfers are only one issue among many, and there is good reason to think that, despite losing fiscal support from the federal government, seceding states could benefit heavily from secession. Some reasons are as follows:
- Tax haven status: Free from the United States federal tax system, states could choose to become tax havens for wealthy individuals and corporations. Such could offer substantial benefits to the local populations from revenues on the relatively low taxes imposed on foreigners moving in, increased local investment, and other benefits of immigration (see the item on “immigration policy”).
- Regulatory policy: Various businesses might wish to incorporate in the United States due to familiarity with its legal system, language, and business culture, but wish to avoid onerous regulations. States which seceded and proposed more friendly regulatory systems could benefit substanitally from foreign investment. For some, this invokes the image of smog-spewing factories located just outside the US border, but if the secession were on amicable terms, the seceding state could agree to impose some kind of Pigovian tax on pollution and remit funds to the US government as compensation for cross-border emissions.
- Immigration policy: Many right-leaning Southern states might impose restrictive immigration laws upon seceding. Indeed, I would not support such policies. However, seceding states could instead decide to expand legal immigration, possibly as part of a strategy to ease their fiscal burdens and repopulate dying cities. Former New York City Mayor Michael Bloomberg actually suggested that the federal government allow increased legal immigration to Detroit to encourage economic development. Seceding states could pursue such policies freely. A variety of benefits to immigrant-receiving areas exist, including windfalls in the value of developed land, increased division of labor, revenues from immigration taxes, and numerous others.
- Other economic and non-economic benefits of increased autonomy: The freedom to conduct “policy experiments” is quite valuable. States with residents opposed to the War on Drugs could decriminalize or legalize drugs without the fear of federal intervention. Liberal states in the Northeast could secede and impose all kinds of policies that would otherwise stand no chance against Republican opposition in Congress. Residents of seceding states might appreciate their greater individual influence over issues previously handled by a central government.
It is also worth noting that one of the states with a prominent secession movement is Vermont, which pays a fair amount more in federal taxes than it receives in spending. It would be amusing to see the anti-secessionists accuse Vermonters of greed instead of foolishness for wanting to leave!
Certainly, a host of other issues would arise, such as how to handle federal infrastructure and land, how immigration and trade between seceding states and their mother countries would work, and the possibility of mutual defense agreements, among others. But such issues have been resolved in previous secessions, including the one which created the modern United States. To merely bring up the “fiscal transfers” argument as though it ends all debate on the matter does gross injustice to an important issue.
Gains from Trade 
Another thing that people arguing based on fiscal disadvantages don’t consider is the possibility of the fiscal transfers being reactionary policy. That is, perhaps the US passed a policy that would have hurt the South especially much, and to win support they threw in some transfers.
In fact, I think this cascade of rent-seeking is one of the strong marks against government action – once a group receives a special privilege, other groups retaliate with their lobbying for their own interest (“why should they take MY money without me getting anything back?” goes the argument), which draws money from another part of society, and so on. And if the process happens to straddle generations*, then this becomes an infinite struggle to pull ever more resources or policies their own ways.
The transfers to the South could be an example of this. Simply because they lose the transfers doesn’t mean they will necessarily be worse off. To give an analogy, if someone takes your car and gives you $1000 as consolation, you’re not happy. If they were to give you your car back but ask for the $1000 back, you would indeed lose money, but you’d likely be happier.
That’s true as well. Of course, people then ask for concrete examples of what the South has “paid” for its transfers, but one can then point to the various things I’ve listed.
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