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Parts of stimulus favor some states over others

Given the inherent conflicts between the bigger and smaller and wealthier and poorer states, it's not surprising that two parts of the stimulus spending bill hammered out by key members of Congress favor some states at the expense of others.
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Given the inherent conflicts between wealthier and poorer states, it's not surprising that two parts of the stimulus spending bill hammered out by key members of Congress favor some states at the expense of others.

Consider these two big-ticket items that, together, account for 20 percent of the total cost of the $790 billion bill, which was approved by the House Friday and is headed for Senate approval as well:

  • About $87 billion for states to be channeled through the Medicaid program to provide medical insurance to low-income Americans.
  • About $70 billion in tax relief for people who would otherwise have been hit by the Alternative Minimum Tax (AMT), a kind of parallel income tax designed to ensure that high-income people do not escape paying some income tax.

Both of these provisions will tend to favor people in high-income states such as New York, at the expense of residents in lower-income states like Kentucky.

Let’s examine the AMT measure first, which is far less complicated than the Medicaid provision.

As the nonpartisan Tax Policy Center at the Urban Institute and Brookings Institution reports, “Since the AMT disallows the state and local tax deduction, residents in high-tax states are more likely to pay the tax.”

And unlike the regular income tax, the AMT is not indexed for inflation so, unless Congress passes temporary fixes, it would affect more and more people every year.

According to the Tax Foundation, another nonpartisan think tank, the three states with the highest state and local tax burdens last year were New Jersey, New York and Connecticut. The three with the lowest state and local tax burdens were Wyoming, Nevada and Alaska.

Where the AMT would bite
According to the Tax Policy Center, “Families in high-tax states were almost three times more likely to face the AMT than those in low-tax states.”

That explains why taxpayers in the high-tax states such as New York have the most to gain from easing the bite of the AMT, as the stimulus bill would do for one year. If Congress does not pass the AMT “fix” included in the stimulus, about 25 million Americans would be hit with a tax increase.

The Medicaid provision is much more intricate.

In 1965, when Congress created Medicaid to provide medical insurance for low-income Americans, it was aiming to reduce disparities among the states in medical care for the poor and ensure that higher-income states would bear a bigger burden of the program’s costs than lower-income states.

That’s why under a matching formula called the federal medical assistance percentage, or FMAP, Medicaid pays a higher percentage of the program’s cost in states with low per capita incomes and a smaller percentage for those with higher per capita incomes.

How the Medicaid match works
As explained by the National Health Policy Forum, a relatively low-income state such as Kentucky gets 70 percent of its Medicaid spending paid for by the federal government. In other words, for every dollar the state of Kentucky spends on Medicaid, the federal government will put up about $3.

A high-income state such as California however, gets only a 50 percent match from the federal government. So for every $1 California spends on Medicaid, the federal government also contributes $1.

Some critics have said the FMAP formula does not deal adequately with recessions or with the reality that some states have far bigger Medicaid-eligible populations than others.

The formula uses a backward-looking calculation for income: it looks at a three-year average of per capita income in each state. So it’s three years out of date when a recession decimates incomes. As a result, the federal matching money for states tends to lag behind declines in incomes once recessions hit.

The stimulus bill aims to deal with this problem by temporarily tweaking the formula. The bill increases each state’s Medicaid match by 6.2 percentage points until the end of next year.

But the bill goes further to help states with high unemployment.

States that have seen their unemployment increase would get a bonus: more Medicaid funds than they would have gotten under the traditional FMAP formula.

It seems logical to target aid to the states that need it most.

But it also happens that some of these high-unemployment states, such as New York, have relatively large Medicaid benefit outlays, compared to lower-income states.

And Medicaid is structured to give an incentive to states to spend generously. The Medicaid match applies to all of a state’s Medicaid spending — so relatively big-spending states such as California know that every dollar of their programs will be matched by the federal government.

According to Sen. Charles Grassley, R- Iowa, the senior Republican on the Senate Finance Committee, the tweaking of the Medicaid matching formula ends up giving an excessive boost to the bigger-spending Medicaid states.

Grassley complained that his state and others would get substantially less than bigger states such as New York because of "bias" in the formula.

“As Sen. Grassley sees it, using unemployment as a targeting mechanism is perfectly reasonable,” said his spokeswoman Jill Gerber. “It is when it interacts with the Medicaid FMAP formula — as it does in the Conference agreement — (that) it biases toward specific states.  It funnels a lot of money to states with large Medicaid programs.”

Estimating which states will gainThe Government Accountability Office analyzed the Senate version of the stimulus bill to estimate how much each state might gain in new Medicaid benefits from the tweak of the FMAP formula.

A definitive assessment of the bill’s effects is not yet possible because new benefits will be calculated based on each state’s unemployment rates through the end of next year. But based on the most recent state unemployment data and on that GAO estimate, Grassley may be only partly correct in his criticism.

New York, for example, with about 6 percent of the nation’s unemployed in December, would get 14 percent of the benefits paid out under the new Medicaid matching formula.

And Massachusetts, with about 2 percent of the nation’s unemployed, would receive about 3.5 percent of the benefits under the new matching formula. Yet South Carolina, with nearly 2 percent of the nation’s unemployed, would get only 1 percent of the benefits under the new formula.

But California, according to calculations based on the GAO estimate, would get 12 percent of the new Medicaid benefits, even though it has about 15 percent of the nation’s unemployed. Other big states such as Texas would get new Medicaid benefits roughly in line with their share of the nation’s unemployed population.