Tax Analysts Blog

Confidence Game

Posted on Jul 20, 2009

Fresh mint juleps in frosted glasses should be on hand today when the nation's governors finish their meetings in Biloxi. Imagine four summer days in Mississippi and nothing but trading stories about budget problems. And to make matters worse, Congress could soon be adding to their troubles with an expansion of Medicaid as part of the big healthcare reform bill. Democratic Governor Phil Bredesen of Tennessee fears it could be "the mother of all unfunded mandates."

Just months after pouring billions into state coffers as part of the stimulus bill, Congress now is looking at proposals to add to the states' financial burden. It is not because the states' fiscal health is improving. It's because Congress is getting more desperate for money. Unbelievably, Finance Committee chairman Max Baucus has proposed a tax incentive for states to borrow funds (i.e., an expansion of authority to issue tax credit bonds) to pay for their share of costs for expanded Medicaid coverage. In other words because the federal government does not want to tax or borrow to pay for its programs it will pass the burden to the states. Moreover, states would be borrowing long-term to pay off short-term funding obligations. "One governor said it would be like taking out a mortgage to pay a grocery bill."

The pushback from the states is just one example of expanding fault lines in the Democrats' healthcare effort. Last week CBO Director Elmendorf dropped a bombshell by saying the House plan would lose money, rather than save it. Some Democrats don't like the House-proposed surtax on the wealthy. And when confronted with the CBO's estimate that the House version of healthcare was $200 billion in the red, OMB Director Peter Orszag gave the gimmicky response that expanded physician payments included in the bill (the quid pro quo for AMA support) should be included in the baseline.

It's too bad for healthcare reformers that they could not have made their big push when the federal government was flush with cash. Then they could have just charged the whole thing to the national credit card -- like the Republicans did with the Medicare prescription drug benefit -- without any of this pain-in-the-ass deficit neutrality. But politics, like life, is not fair.

The care-free days of budgeting are gone. We simply cannot afford to make the budget deficit worse. On the contrary, financial markets need assurance that instead of playing budget games we are serious about deficit reduction. As Clive Crook wrote in his column today: "The public debt is on an explosive path. The danger is that when it comes to confidence, what the stimulus gives, the debt projections take away."

Probably the only sensible way out of their predicament is for Democrats to agree to a cap on the tax exclusion for employer-provided heathcare benefits. Indebted to the unions for their electoral successes, President Obama and Democratic leaders won't consider it. And, with the lame excuse that the move would be "politically risky," the New York Times says capping the benefits should be a considered only as a last resort. The "gray lady" got it backwards: it is the obvious first-choice method for funding healthcare reform.

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