Tax cuts in good times blamed for states’ economic troubles in bad
Tax cuts in good times blamed for states’ economic troubles in bad
The mask of good economic times has fallen away, revealing what happens when states have to struggle to make ends meet. A new study from the Kaiser Commission on Medicaid and the Uninsured in Washington, DC, looks at the battles in five states and finds that even when good times resume, these states will only be able to struggle wearily to their feet.
State-level researchers and policy experts in Idaho, Indiana, Missouri, North Carolina, and Texas were asked to describe their states’ Medicaid programs and overall fiscal situation, explain recent trends in Medicaid spending, and identify their states’ response to growing fiscal pressures in their Medicaid budgets.
Vicki Wachino, associate director for the Kaiser Commission, tells State Health Watch the states were chosen for their geographic diversity and for being among the large number of states experiencing a budget shortfall.
"It’s hard to choose just five states and say they are completely representative," Ms. Wachino says, "but I believe that if you look at the experiences of these five states, you get a flavor of what’s going on in the nation as a whole." If that’s the case, what’s going on is not a pretty picture in many respects and may get worse before it gets better.
Written by Jocelyn Guyer, senior policy analyst at the Kaiser Commission, the report says the five states experienced higher-than-expected revenues in the mid-to-late 1990s.
The states responded by cutting taxes and, to a lesser extent, improving Medicaid programs by expanding eligibility for children, families, the elderly, and the disabled; simplifying Medicaid application procedures for children; and increasing provider reimbursement rates.
Creating structural deficits’
Ms. Guyer says the tax cuts, combined with maintaining or expanding Medicaid spending and other programs, contributed to "structural deficits" that state revenue structures could not crawl away from.
"The strong economy and, in some cases, budget gimmicks allowed the states to mask their structural budget deficits in recent years," the report says. "Although it did not create the structural deficits identified by most of the authors, the recent economic downturn has exposed the fiscal challenges states face as a result of the revenue and spending decisions they made during the mid-to-late 1990s."
According to Ms. Guyer, even as the economy rebounds, the states will continue to feel the impact of their decisions for some years to come.
The themes in the Kaiser analysis include:
• The boom was followed by a bust.
Although their fiscal situation was strong in the mid-to-late 1990s, each of the states studied recently experienced a dramatic reversal of its economic status. Idaho had a budget surplus of $179 million in 2000 and anticipated a surplus of $300 million in 2001. But by the end of FY 2001, the expected surplus had become a shortfall due to higher-than-expected spending, lower-than-expected economic growth, and a $100 million tax cut adopted in the 2001 legislative session.
Indiana used nearly one-half of a $2 billion surplus for one-time, targeted purposes. The FY 2000 budget ran in the red by $400 million, and with a weakening economy in FY 2001, the state is in a "severe fiscal crisis," the report notes.
When Missouri’s revenues went up by as much as 10% in the 1990s, the state responded with a series of tax cuts. Planned expenditures were kept at the same levels rather than being reduced.
Revenue growth has begun to lag, and estimates have been cut to 3% and even lower. State officials see an "impending budget crisis."
In four years, North Carolina has gone from a series of tax cuts and budget surpluses of up to $1.4 billion to facing a serious budget crisis. By the end of the 2001 legislative session, North Carolina had adopted tax increases designed to bring in about $1 billion, and there still are significant fiscal challenges.
The Texas economy grew faster than the nation’s in the past five years, despite a series of tax cuts. But with a weakening economy, its legislature has called for a study of the current tax system and is considering cuts in Medicaid and the State Children’s Health Insurance Program (SCHIP).
• Medicaid improvements came in the good times.
Missouri expanded Medicaid eligibility for children and their parents, as well as for the elderly and disabled. North Carolina also expanded eligibility for the elderly and disabled and extended the amount of time that transitional coverage could be available to families who would otherwise have lost Medicaid when their earnings increased.
Idaho changed its income verification process so families could avoid having to prove income by providing pay stubs.
Indiana used SCHIP funds to expand Medicaid coverage for children to 150% of poverty and later established a separate child health program for children with family income between 150% and 200% of poverty. And in 2001, Texas increased Medicaid provider rates for the first time since 1992 and adopted improvements to the Medicaid application process for children.
• The rate of Medicaid spending growth increases.
Spending increases for Medicaid were attributed to increases in the cost of providing prescription drugs and other services, and also because of enrollment growth due to eligibility expansions and, in some cases, a reversal of the Medicaid caseload decline that many states experienced when their welfare reform efforts unintentionally caused families to lose out on Medicaid coverage in the 1990s. Increases in Medicaid spending of more than 10% were not unusual.
• Cuts in Medicaid and/or SCHIP were considered or adopted.
The report says the growth in Medicaid and other health care expenditures, combined with increasing budget difficulties, has caused each of the five states surveyed to consider or adopt cuts in Medicaid and SCHIP.
In the spring of 2001, Idaho eliminated its outreach program for children, created a new limit on SCHIP spending, froze the number of beds for mental health patients, and froze Medicaid reimbursement rates for services and durable medical equipment at FY 2000 levels.
North Carolina established a waiting list for enrollment in SCHIP in January 2001 because more children had enrolled than the state had estimated would be eligible. And Texas adopted a mandate that the state reduce Medicaid general fund spending by $205 million.
To meet that requirement, the state is considering requiring Supplemental Security Income beneficiaries to enroll in managed care, increasing utilization review for prescription drugs, adopting supplemental drug rebates, and adding copayments to Medicaid.
• Medicaid has been used to plug holes in overall state budgets.
Although it is common to view Medicaid as a source of fiscal pressure on states, analysts in the surveyed states say that at times the program has been used to address other problems in state budgets. "Some of the states relied on creative financing arrangements that allowed them to draw down federal Medicaid funds and use them for other purposes than health related activities. Others established Medicaid rainy day’ funds that were intended to help the state cope with Medicaid spending increases during difficult economic times, but then used the money in the funds for purposes other than Medicaid," Ms. Guyer says.
• Budget rules and policies have shaped the role of Medicaid in the state budget.
Use of creative financing, tax increases, and Medicaid cuts are typical responses across the states studied, Ms. Wachino says. "[But] a lot of the progress that states made in the late 1990s in improving Medicaid programs now is in peril." It’s ironic that states often complain about Medicaid growth when their own use of creative financing techniques to help soften non-Medicaid budget problems led to much of the growth, she says.
The key lesson, according to Ms. Wachino, is that a conservative approach to financing in boom times can prevent problems when times are tough. In retrospect, then, the tax cuts that many states adopted when revenue was up were shortsighted, she says.
"However, I will give states credit for those that created rainy day’ funds," Ms. Wachino says.
Kaiser also learned that the way a state structures its budget process clearly impacts how other programs are structured. The prime example, Ms. Wachino says, is Texas, which has budgeting rules that allow the state to submit a Medicaid spending request that reflects anticipated Medicaid enrollment growth. But it can’t incorporate into its base request for Medicaid spending the anticipated effect of medical inflation, rate increases, or higher utilization. Instead, the agency must request funds needed to cover such expenses in the form of "exceptional items." As a result, the base appropriations bill filed early in the Texas legislative session has not included any funding for Medicaid-related exceptional items.
Kaiser says this policy has helped create the sense that appropriating funds to cover Medicaid cost-per-client growth is discretionary, or even expansionary, even though there is little dispute that the additional funds are needed.
Ms. Wachino acknowledges that states face difficult choices, but says there are alternatives available for them to deal with budget shortfalls by setting priorities and making a decision to continue funding for necessary Medicaid efforts.
[Contact Ms. Wachino and Ms. Guyer at (202) 347-5270.]
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