Just Taxes Blog by ITEP

Besides Eviscerating the Safety Net, Trump Budget Would Put States in a Fiscal Bind

May 26, 2017

There has been considerable discussion about the human impact of the Trump budget’s draconian cuts to what remains of the social safety net. A long-standing conservative talking point in response to such criticism is that states can pick up the tab when federal dollars disappear. But at a time when many states are facing budget shortfalls and the effect of federal tax reform is yet to be determined, it is outlandish to suggest that states are flush with cash to make up for federal spending reductions.

The fiscal impact of Trump’s budget plan on states must also consider how Trump’s tax plan will affect state revenues. Lacking a concrete plan, it is too early to make any assumptions, but it is safe to assume that no state will experience an uptick in revenue thanks to federal reform in the magnitude anywhere close to large enough to pay for new spending pressures brought by Trump’s budget.

About the budget

The Trump budget would force state policymakers to decide whether they value their residents’ education, health, and safety enough to step up to these challenges, as the federal government backs down from them. The intention of Trump’s proposal, and others like it, is to shrink government and decimate funding for programs that provide food assistance and health insurance to low and moderate-income people, and support to rural and urban local governments.

Let’s start with SNAP, the Supplemental Nutrition Assistance Program formerly known as food stamps. The administration’s budget claims it would build “A New Foundation for American Greatness” by shifting 25 percent of the spending to states. SNAP benefits are currently paid entirely with federal funds, making it one of the last remaining entitlement programs for low-income families and extremely effective during economic downturns. Last year SNAP benefits totaled $66 billion nationwide. Even at 10 percent cost-sharing at which the budget plan proposes to start, states would need combined $6.6 billion in revenue to maintain current benefit levels. States don’t have that revenue. According to the executive director of the National Association of State Budget Officers, John Hicks, states already have “tight margins right now.” For states struggling to fund public education (Kansas is the most recent example of a state under a court order to increase K-12 funding) and other necessary services, adding SNAP benefits is untenable. If states don’t have the funds to provide food assistance to families in need they’ll have to cut the amount of benefits, the number of beneficiaries, or both. An analysis from the Center for American Progress showed that, if fully phased in, Trump’s proposed cuts could eliminate food assistance for 8 million households.

Trump’s budget plan also cuts Medicaid funding by $610 billion over 10 years. This is accomplished by rolling back the enhanced federal match for Medicaid expansion and funding the program through a “per capita cap” model. States would choose between a block grant in which instead of a percentage match of federal dollars for every state dollar spent, they would receive a flat grant or a flat payment per enrollee. Medicaid is currently the second largest state expenditure in most states just behind public education. Such a drastic change in the financing of a program that provides access to health care to the most vulnerable would also represent considerable uncertainty for state policymakers working to fund the necessary public service. And the flexibility promised by the administration for states to innovate and lower cost of providing health care coverage, “isn’t going to be enough to fill the [budget] gap,” according to Hicks. This is all on top of the American Health Care Act’s plans to roll back the subsidies and cost-sharing available under the Affordable Care Act, thus pushing health care access even further out of reach for low- and moderate-income working families.

And if any states were planning to kick the proverbial spending can down the road to local governments, Trump has plans for them too. The administration’s budget plan would eliminate or drastically cut several funding streams essential to local governments’ ability to help their communities thrive. The budget plan would eliminate the Community Development Block Grant, a source of flexible funding that allows local governments to support a variety of services, including the HOME Investment Partnership Program, which supports affordable housing, and the Transportation Investment Generating Economic Recovery among others. Local leaders are not prepared to pick up this financial burden, and more than 350 mayors from all 50 states, the District of Columbia, and Puerto Rico have signed on to letters to Congress opposing the cuts. It’s reasonable to assume that with additional spending pressures that would be shifted to states under the Trump proposal, state governments would shift some of their spending priorities to local governments, putting them in even more dire fiscal straits.

This isn’t the first time the federal government has falsely claimed that starving essential safety net services of funding will force them to be more efficient. The 1996 welfare reform act signed by President Clinton changed the nation’s cash benefit program for poor families from an entitlement (like SNAP and Medicaid currently are) to a block grant (as is proposed for Medicaid). More than 20 years later, evidence shows that block granting Temporary Assistance to Needy Families (TANF) didn’t help those out of work find work, lift families out of poverty, or lead to effective anti-poverty innovations from states. Instead, states decreased the value of their benefits and increased barriers to access for the families that needed assistance. Now TANF is a shell of its former self. In 2015, only 23 families with children received TANF benefits for every 100 families with children in poverty. This is compared to 68 families for every 100 under TANF’s predecessor. When spending priorities are shifted from the federal to state level, state budgets cannot bear that burden.

Federal taxes and state revenue

Besides Trump’s budget proposal to gut programs and, thus, shifting the responsibility of paying for programs now funded by the federal government to the states, Trump and GOP tax proposals include a number of provisions that could affect state revenue. Ending the deductibility of state and local taxes, creating a new deduction for child care expenses, changing the taxation of carried interest, altering expensing of business investments, increasing the standard deduction, and other corporate tax changes such as “border adjustment” could all have ripple effects on state revenue systems.

Most states are already in tight fiscal situations with many facing large budget gaps. Unlike the federal government, most states cannot run a deficit and must balance their budgets. If federal funds disappear for key public services, those services may also disappear for those who need them the most.


Full Archive

All Blog Posts