July | August 2017







President Trump to Share Vision
for the Nation, States

By Jack Cobb, senior policy analyst, CSG Washington, D.C., Office
As Congress returns from their first district work period, they will start a six-week session with an address by President Donald Trump. The speech, a substitute for a formal State of the Union address during a new president’s first year in office, will be an opportunity for policymakers at all levels of government to hear the administration’s vision and policy agenda. State leaders will be listening closely for any details on a number of programs that are vital for state governments, including potential budget cuts; reforms to the Affordable Care Act; details of his proposed infrastructure plan; and comprehensive tax reform. Both the president and Speaker of the House Paul Ryan have made these issues a priority for 2017, and lawmakers at all levels of government hope to hear more details during Trump’s address to Congress on Tuesday, Feb. 28. 
Budget and Appropriations
In December, Congress passed stopgap spending legislation, also known as a continuing resolution or CR, to fund the federal government at 2017 levels through April 28 to avoid lame-duck dealmaking and allow time for Trump time to be sworn into office. House and Senate appropriators have expressed their desire to avoid another CR, which freezes spending at the previous year’s levels and affords federal agencies little flexibility in managing programs. 
These temporary budgetary measures also keep state government leaders from fully focusing on long-term results by making it difficult to predict the flow of federal funds.
“There is some uncertainty there. We just don’t know what’s going to happen with federal funding,” Delaware state Rep. Helene Keeley told CSG’s Capitol Ideas magazine in January. “It’s been unstable.”
Meanwhile, the White House recently indicated that it expects to release a fiscal year 2018 budget outline, also known as a "skinny budget," on March 14. The administration has not yet set a date for a full budget release.
The new director of the Office of Management and Budget, Mick Mulvaney, will have to quickly assemble a budget without a full Cabinet in place, while also anticipating congressional action to raise the nation’s debt ceiling by early fall. Mulvaney, a fiscal conservative who has opposed most budgets in recent years, may find himself in the difficult position of negotiating for new spending to meet the administration’s priorities and raising the nation’s borrowing authority to avoid default.
Closely tied to the budget debates is a much anticipated infrastructure development plan. Trump has vowed to inject $1 trillion into the nation’s transportation and infrastructure systems. Although details remain scarce, an infrastructure package could come in a variety of forms, including a tax reform bill, a stand-alone bill or even attached to a must-pass piece of legislation.
“Forecasts predict that our population will grow from 319 million in 2014, to 400 million by 2051,” said House Transportation and Infrastructure Chairman Bill Shuster of Pennsylvania during a recent hearing on infrastructure investment. “The movement of freight is expected to increase by 40 percent over the next 30 years. By the end of the next decade, air travel demand is expected to increase from 750 million passengers annually to 1 billion.”
While lawmakers on both sides of the aisle agree that rebuilding the country’s crumbling infrastructure should be a top priority, they remain divided on how to pay for the projects. The administration has suggested using a combination of tax credits for developers, increased federal spending and public-private partnerships.
Speaker Paul Ryan’s office has indicated an intention to bring infrastructure legislation to the floor this year. A federal infrastructure package could relieve states of the burden of finding money for their vital projects without federal assistance, though several states have already undertaken efforts to explore new strategies to fund infrastructure projects in the wake of federal inaction in recent years.
Affordable Care Act Repeal
Currently, the most closely watched issue for states is the possibility of partial or complete repeal of the Affordable Care Act, or ACA and, in particular, changes to Medicaid eligibility and funding, which is the single-largest component of state budgets.
By the end of 2016, 31 states and the District of Columbia had expanded Medicaid as allowed under the ACA. Beginning in January, states picked up a portion of the funding for the expansion population and will be responsible for further increases in 2018 and beyond.
Trump’s campaign pledge to repeal the ACA begs the question of how much federal financial support will be available to continue health benefits to the nearly 10 million people the Obama administration estimates newly enrolled in Medicaid through expansion. House lawmakers have proposed a block grant approach to Medicaid, which potentially would shrink federal funding for state Medicaid programs. Under a block grant, states would receive a fixed amount of federal funding each year, regardless of changes in enrollment.
“This (would) be a huge cost shift,” Judy Solomon, vice president for health policy with the Center on Budget and Policy Priorities, told CSG’s Capitol Ideas magazine in January. “States will be left holding the bag. Congress can look away once they devise the funding formula. States will have to make the cuts and take the political heat.”
Tax Reform
U.S. Secretary of the Treasury Steve Mnuchin has said that he will make reforms to the U.S. tax code his highest priority. Due to the interconnectedness of federal and state tax codes, any changes on the federal level will have a direct impact on state tax collection. State leaders will be closely listening to Trump’s address for mentions of reforms in two key areas: the tax-exempt status of municipal bonds and the federal deductibility for state and local property, sales and income taxes.
Any proposals to eliminate or reduce the tax-exempt status of municipal bonds will be met with a chilly reception from state leaders. Municipal bonds are predominantly issued by state and local governments for governmental infrastructure and capital needs purposes, such as the construction or improvement of schools, streets, highways, hospitals, bridges, water and sewer systems, ports, airports, and other public works. The volume of municipal bonds issued in 2016 hit $445 billion, which surpassed the previous high set in 2010 of $433 billion. Without the tax-exempt status, states would pay more to raise capital and compensate by foregoing discretionary actions that may be vitally important to constituents at the local level.
Eliminating the deduction of state and local taxes is being proposed by House GOP lawmakers, and many state legislators fear that losing these deductions would increase the burden of state and local taxes to constituents.
A 2013 report by New York Gov. Andrew Cuomo spelled out the potential impact of wiping out state and local tax deductions for residents of his state. “Elimination of the federal deduction for state and local taxes paid would result in a significant tax increase for many taxpayers, including those in New York,” according to the report. “It would take $14.8 billion in additional federal tax liability from New York families, for an increase of more than 30 percent—over $4,500—per taxpayer.”
The political dynamics between a GOP-controlled Congress and the new administration will ultimately determine whether progress will be made on tax reform, infrastructure spending, fiscal 2018 appropriations and health care reforms. How the federal government proceeds this year on any of these issues will have major implications for states and their priorities, and state leaders are keen to learn more about the options being weighed in each of these policy areas during Trump’s address to Congress tomorrow night.
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