If blue states think they’re going to be shielded from the coming Trump tsunami, they’re sorely mistaken.
Much has been written about how the unified Republican front in Washington is going to betray the working-class whites of deep-red Trump country. The coming Obamacare repeal, fewer worker protections and additional fraying of the safety net will inflict enormous pain.
Blue states might appear to be relatively insulated from much of this turmoil, since they’ve already locked in many of the progressive policies Republicans aim to roll back at the federal level.
But make no mistake: Blue states are also in for a world of pain — specifically, fiscal pain. There are at least three major reasons why. Two of them are driven by that newly unified Republican front in Washington; the third is their own fault.
First, the coming tax overhaul.
President Trump has been relatively vague and inconsistent about what his preferred tax plan looks like, beyond including major cuts that primarily benefit the highest earners. The Republican-led Congress, on the other hand, has at least one relatively detailed plan ready to go.
Its plan, like Trump’s, would sharply reduce tax rates, especially at the top. Additionally, it would eliminate most itemized deductions — including those for state and local income and property taxes.
Unsurprisingly, these deductions are most often claimed in relatively high-tax states such as Connecticut, New Jersey, California and New York. You know, places that just happen to vote Democratic.
Whether this facet of the GOP tax plan is specifically designed to stick it to liberal elites is debatable. Either way, though, it would be “devastating on the state of New York, California, et cetera, if you didn't allow the people of this state to deduct their state and local taxes,” New York Gov. Andrew Cuomo (D) told reporters last week.
Second, Medicaid block grants.
On Sunday, White House counselor Kellyanne Conway reaffirmed her boss’s — and his chosen health secretary’s — commitment to restructuring Medicaid so that states receive flat, lump-sum payments, called “block grants.” This would replace today’s system, in which states and feds share costs for eligible Medicaid enrollees, whose numbers can rise and fall with changes in the economy.
But transitioning to block grants is trickier than it sounds. How do you decide how big each state’s initial lump-sum payment should be? How will it change over time?
One option is to permanently freeze payments at current levels, perhaps indexing them to inflation. But this locks into place huge discrepancies between states and doesn’t provide much flexibility as relative economic conditions change. Today, federal Medicaid spending per low-income state resident varies dramatically across the country, from a low of $1,051 in Nevada to more than 11 times that in the District, according to calculations from the Urban Institute’s John Holahan and Matthew Buettgens.
Which is why one other likely alternative — and one that might appeal to many Republican legislators — would be pegging the size of a state’s lump sum to its per-capita income. The higher-income the state is, the less money it gets.
As economists Jeffrey Clemens and Benedic Ippolito explained recently, this formula “would result in a seismic redistribution of federal spending.”
Among the biggest winners would be lower-cost-of-living red states; among the biggest losers, high-cost-of-living blue states. Texas, for example, would gain about $8 billion in federal Medicaid funding relative to what it receives today. New York and California would each lose more than $15 billion annually.
With fewer federal funds coming in, these states would be forced to cut health benefits for the poor, siphon off money from other programs, raise taxes or some combination of all these things.
Third, and finally, unfunded pension obligations.
As it turns out, some heavily Democratic states have little room to shift funds toward safety-net programs such as Medicaid. That’s because they’re among the states that most need to raise the share of revenue that they contribute to their government pensions to avoid an increase in their already-large unfunded pension liabilities.
Among those most in trouble: New Jersey, California and Oregon, according to calculations from Stanford Graduate School of Business professor Joshua Rauh. (Being a pension basket case is hardly a Democratic affliction, needless to say; plenty of Republican states are struggling, too.)
This last affliction can’t be blamed on the new Republican White House and its allies on the Hill. But that doesn’t mean they won’t enjoy the show.