Big Questions Hang Over State Budgets as Trump Era Begins

WASHINGTON — State governments face uncertainty over how their budgets could be affected by sweeping federal policy changes backed by President Trump.

Trump has endorsed sizable new investments in infrastructure, an overhaul of the federal tax code and the repeal of the Affordable Care Act, also referred to as Obamacare. Each of these moves would have implications for the costs states cover and the federal dollars they receive.

“State tax systems and spending are really reliant on what the federal government does,” Kim Rueben, project director of the Urban Institute’s state and local finance initiative, said Thursday during a panel discussion in the nation’s capital. The Urban Institute sponsored the event, which featured experts who shared their thoughts on state budgeting in the Trump era.

“I think it’s going to be stormy,” panelist Nick Johnson, who is senior vice president for state fiscal policy at the Center on Budget and Policy Priorities, said as he gave his views on the topic.

The possible rollback of the Affordable Care Act is a leading concern for states. Trump and Republican leaders in Congress have said they’d like to repeal the health care law.

Rueben offered an assessment of what eliminating the Affordable Care Act without a replacement plan would mean for states. “If states do nothing, they’ll actually save a little bit of money. But millions of people will be uninsured,” she said. “If they decide that it is unacceptable to have that many more people be uninsured, their costs are going to go up.”

Tied to discussions about repealing the Affordable Care Act is the potential for changes to Medicaid, which provides access to health care for lower income Americans.

Spending on Medicaid across all 50 states and the District of Columbia in 2015 was about $532 billion, figures compiled by The Henry J. Kaiser Family Foundation show. The federal government covered roughly 62 percent of these costs and states about 37 percent.

Joe Henchman, vice president of legal and state projects at the Tax Foundation, noted during the panel talk that Medicaid costs are growing for states.

“It's crowding out everything else,” he said.

Trump adviser Kellyanne Conway indicated recently that the president supports shifting the federal funding that goes to states for Medicaid to a block grant system. As is, the funding is open-ended and fluctuates according to factors like costs for care and enrollment.

If block grants are a fixed amount and program costs go up due to spikes in enrollment during an economic downturn, or for other reasons, states could be left shouldering the extra expenses.

“States would have more discretion. But then they’d also have more responsibility for making sure that all the services are covered,” Rueben said as she discussed the possibility of block grants. "Given that health care costs are growing much faster than most of the economy, that could leave them on the hook for more and more over time.”

Johnson said that with something like Medicaid block grants: “The devil's in the details.”

He raised a broader but related issue as well. “Here’s what I’m really concerned about,” he said. “One of the most important roles that states play in our federal system is reducing poverty and expanding economic opportunity for families.”

“For the last half-century, this has been a partnership between the federal government and the states,” with the federal government providing much of the funding, Johnson added.

But that dynamic could soon change, he said, based on what is known about the policy proposals the Trump administration and the GOP-controlled Congress are expected to pursue. According to Johnson: “These proposals would cripple this really effective partnership.”

Henchman highlighted what he sees as a different problem. “Economic growth is the underlying issue here,” he said. If the economy continues to grows at between 1 and 3 percent each year, “there’s not more money … The pie is stagnant and everybody has to fight over the crumbs."

Federal tax reform, Henchman suggested, could help spur growth. “That has a track record of being able to fix things if it’s done correctly,” he added.

Rueben questioned that premise. “A lot of what is being proposed by both the people in Congress and by Trump,” she said, would give “a lot of tax breaks to the top of the income distribution and it’s not clear that it will lead to growth.”

Trump has voiced support for vast new spending on U.S. infrastructure. As described so far, his plans would incorporate tax incentives and heavy private sector investment.

John Hicks, executive director of the National Association of State Budget Officers said “there are a lot of good public-private partnership projects that are out there today that can get financing. People are ready to invest in good projects.” Increasing the supply of private money available for infrastructure won’t necessarily increase the number of projects, in his view.

“It's really the quality of the project and its ability to make returns,” he said.

Rueben said that while projects like toll roads and airports have clear opportunities for investor earnings, this is not always the case with infrastructure like wastewater facilities or rural bridges.

“We don't necessarily want bridges falling down in Nebraska just because they don't have the volume to pay,” Rueben said. She said she hadn’t seen anything yet in Trump’s proposals about increased funding for infrastructure maintenance or for projects that won’t yield private returns.

The prospect of drastic federal policy changes comes as the overall performance of key revenue sources for states—such as personal and corporate income tax and sales taxes—were lackluster in 2016, according to a recent National Association of State Budget Officers report.

Meanwhile, slumps in the coal, oil and natural gas sectors have hurt the finances of states with economies that depend on those industries. And pension costs for public employees continue to exert pressure on many state budgets.

Johnson said that as debates play out in the nation’s capital in the months and years ahead, some states may choose to chart their own course.

“I think increasingly we are going to see governors and policy makers looking at what’s happening in Washington and saying … ‘the anti-investment, the anti-tax approach being taken by the federal government is not working in our state. We're going to take matters into our own hands,’” he said. “And I think this is going to actually create tensions.”