The Tax Bill: Bad News for Marketplaces and Medicaid

The tax bill (H.R. 1, The “Tax Cuts and Jobs Act”) that Congress passed this week is about more than cutting taxes for corporations and high-income individuals, although it is definitely about that. It’s also about cutting health coverage for low-income children and families.

The bill’s repeal of the tax penalty for not having health insurance coverage has received a lot of attention, and rightly so. Under the Affordable Care Act (ACA), most individuals are required to have health insurance coverage (the “individual mandate”); failure to do so results in a tax penalty (the greater of 2.5% of income or $695 per adult/$347.50 per child). The tax bill permanently repeals the penalty for months beginning January 1, 2019, but not the mandate itself.  

As our colleague Sabrina Corlette at Georgetown’s Center on Health Insurance Reforms has noted, the gutting of the individual mandate, “will be, in effect, the final death blow for the individual market.” She predicts that in the absence of the penalty, millions of relatively healthy consumers will no longer sign up for insurance, so that in 2019 health insurers will either leave the Marketplaces altogether or raise their premiums to the point of unaffordability for many.  

Whether or not the individual health insurance market collapses in most parts of the country, the penalty repeal will result in an increase in the number of people without health insurance. The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimate that by 2027, some 13 million Americans who would have health insurance if the tax penalty remained in place will not.

What has not received as much attention are the bill’s implications for Medicaid.  There are two, and both are important. (Trigger warning: the next few paragraphs  contain the word “entitlement”).

First, the bill will increase the deficit by $1.456 trillion (with a “t”) over the next 10 years. (This despite the fact that the tax penalty lowers the deficit impact of the bill by $314 billion over 10 years). Unofficial but credible estimates put the cost as much as a third higher. Whatever the cost, there is no dispute that it is not paid for. Contrast that with the refunding of CHIP for 5 years at a cost of $8.2 billion (with a “b”), which must be fully paid for.  

As Chye-Ching Huang at the Center on Budget and Policy Priorities has pointed out, this tax-cut-driven increase in the deficit sets the stage for efforts next year to cut entitlement spending. Of the 3 largest entitlement programs – Social Security, Medicare, and Medicaid – Medicaid is by far the most tempting political target, because close to half of its beneficiaries are children under 18 who can’t protect themselves at the voting booth.

Second, the bill limits the amount of state and local income and property taxes that individuals and couples can deduct to $10,000. This provision, nicknamed SALT (state and local taxes), is a dramatic departure from current law, under which there is no limit on the amount of state and local income taxes that taxpayers can deduct.  Nine states — AK, FL, NH, NV, SD, TN, TX, WA, and WY — have no broad-based personal income tax. The other 41, plus the District of Columbia, rely on state income taxes to help fund public health, K-12 and higher education, roads, and other basic services, including their share of Medicaid.  

As the Center on Budget’s Michael Leachman has explained, the deductibility of state and local income taxes is critical to the ability of states and counties to carry out their responsibilities. The deductibility of state and local taxes allows higher-income taxpayers to reduce their federal tax liability; limiting that amount to $10,000 will likely increase political pressure on states to freeze or reduce their income taxes despite increased need for existing government services and new investments. In addition, bond rating agencies might decide to lower state credit ratings because the $10,000 limit will make it politically more difficult for states to generate the revenues they need to carry out their responsibilities for governing. The effect of a credit downgrade is to increase state borrowing costs, putting even more fiscal pressure on them and constraining their ability to fund new investments in infrastructure.

States with income taxes whose citizens have high average incomes are at most risk from the $10,000 limit. Leachman projects the hardest hit to be CA, CT, MA, MD, NJ, NY, OR, and VA. Is it mere coincidence that, among these states, only Virginia has not taken up the Medicaid expansion, which will require a 10% state contribution beginning in 2020? Or that California and New York alone account for over one quarter (26%) of all Medicaid spending, and all 8 states together account for over one third (38%).  

Perhaps it’s not personal. But regardless of motive, the tax bill spells trouble for Medicaid beneficiaries and the providers who serve them. State income taxes will be undercut politically as a revenue source for the state share of Medicaid, and there are likely to be renewed efforts to cap the federal share in order to offset the $1.5 trillion (with a “t”) increase in the deficit. By putting both the state share and the federal share under pressure, the tax bill puts Medicaid beneficiaries and providers at risk.  

Andy Schneider is a Research Professor at the Georgetown University McCourt School of Public Policy.