From the Expert: Climate Change, Health Reform Could Impact State Budgets
By Chris Whatley, CSG Washington, D.C., Office Director
As states stare down the barrel of historic budget deficits, the fate of state finances is increasingly in Washington’s hands. While the impact of the Recovery Act on state budgets in the short-term is well known, the future of state budgets over the long-term may ultimately be determined by the heated debates playing out in Congress over climate change and health care reform.
Last month, the U.S. House of Representatives passed federal climate legislation, in a closely divided partisan vote, to create a cap-and-trade system. The House bill would impose an overall limit, or cap, on greenhouse gas emissions, but would allow companies to buy and sell, or trade, pollution credits in order to meet the established limits.
While opponents portray the bill as an energy tax that would cost consumers and threaten economic growth, supporters have found a new angle to advance their cause: the state budget crisis.
According to a Congressional Budget Office estimate, states would receive allowances—emission credits they could sell on the open market—worth approximately $50 billion between 2012 and 2016. These allowances would inject cash into the balance sheets of state budgets just as the stimulus dollars run out.
While this argument is unlikely to convince opponents with deep-seeded concerns over cap-and-trade, it may prove compelling to some senators who are on the fence on the merits of the proposal but concerned about state finances.
But what one hand gives another may take away. An equally contentious debate is raging on the Hill over health care reform, which has the potential to compound state budget woes. While there is growing bipartisan interest in passing reforms targeted at expanding access for the uninsured, the price tag of overhauling the nation’s health care system is approaching upwards of $1 trillion and members of Congress are exploring any and all options to contain costs.
Today, Douglas Elmendorf, director of the nonpartisan Congressional Budget Office said health reform measures being drafted by congressional Democrats could put the nation’s budget in even worse shape, driving the nation more deeply into debt, according to The Washington Post.
Competing House and Senate proposals would mandate the expansion of Medicaid coverage to as much as 150 percent of the federal poverty level. According to the Congressional Budget Office, the expansion of Medicaid could cost as much as $500 billion over 10 years. The question is: Who will cover these costs?
One idea considered on the Senate side would have states cover the cost of health care expansion through state-issued bonds, with the federal government potentially providing assistance with interest payments. Such an arrangement would fly in the face of a number of state constitutional restrictions and could have dire implications for state bond ratings.
The House proposals envision the federal government covering the full cost of the Medicaid expansion. Both the House and Senate proposals would impose maintenance of effort requirements that would prevent states from restricting Medicaid eligibility standards, methodologies or procedures in order to remain eligible for federal matching assistance. This requirement would take one of the states’ primary budget mitigation tools—adjustments to Medicaid programs—off the table for the foreseeable future.
Climate change and health reform represent some of this generation’s most contentious and consequential Congressional policy debates. Opponents and supporters of these weighty proposals both have powerful arguments and compelling perspectives to offer. Regardless of who prevails in Congress, it is clear the fortunes of state budgets will be tied to decisions in Washington for decades to come.