The emerging policies of President Donald Trump lack the coherence typically associated with incoming administrations. However, several themes, which he plans to pursue in his first 100 days in office, are clear. The first is full-throated support for repeal of the Affordable Care Act, with no obvious replacement in sight. The second is embarking on a major expansion of federal infrastructure spending. A third is revamping the federal tax code, by lowering top individual and corporate tax rates, partially paid for by curtailing some deductions. All three of these initiatives will have potentially major impacts on state and local governments.
Affordable Care Act (ACA).
Let’s begin with the Affordable Care Act (ACA). Trump’s policies to repeal the ACA will have major consequences on the local, state, and national level. A major part of the ACA was an expansion of Medicaid eligibility to all citizens (up to an effective income threshold of 138 percent of the federal poverty line, $16,400 for an individual, and $33,530 for a family of four, in 2016). Traditional Medicaid is the major federal program that provides fiscal assistance to states. State spending is matched by the federal government in a fiscal structure that encourages states to provide Medicaid benefits. For every dollar spent, the federal government pays about 57 cents.
For the Medicaid expansion under the ACA, the federal government is currently paying 100 percent of the cost, going down to 90 percent by 2020. However, nineteen states have declined to participate in the expansion, thus foregoing a huge increment to federal grant monies. However, faced with very strong political pressure from health advocates and hospitals, a number of these states are considering accepting the Medicaid expansion after all.
Elimination of this part of the ACA would result in a decreased flow of dollars to states equal to as much as $60 billion, and an increase in costs of charity care that would help to bankrupt already fiscally unstable hospitals that mainly serve the poor. The cost of charity care would be pushed back on states and on cities with high concentrations of lower income people (which means a reduced tax revenue base, leading to an overall reduction in funding). Invariably, fewer health care services would be offered, which could lead to a loss in worker productivity. For example, a of the implementation of the Affordable Care Act in Georgia found that the vast majority of those who signed up for health insurance under the ACA had put off visits to the doctor in the prior year because they could not afford the costs. With access to regular healthcare, workers can manage any health challenges that come up, rather than waiting until things get so serious they need to take off work – something that was much more common in the pre-ACA healthcare system. The costs in terms of lost productivity from worsened health conditions represent an additional cost of the proposed elimination of the ACA.
Last but not least, proposals for a block grant for traditional Medicaid, and elimination of the Medicaid expansion, would drastically reduce the fiscal role of the federal government in state finances. The evidence from the Welfare Reform Act of 1996, which did the same thing for welfare, though on a much smaller fiscal scale, makes it clear that there would be a sharp reduction in spending on medical care for the needy. While a few states, such as New York and California, might be willing to put up more of their own dollars, the many states with conservative governors and legislators would withdraw state dollars.
Infrastructure Spending
In principle, the reduction in federal aid to states that would result from the elimination or curtailment of the ACA could be offset by an expanded program of federal investment in infrastructure spending, which Trump has proposed in various ways. However, this would need to be done very strategically in order to be effective. Greater federal spending on capital projects would have a multiplier effect on jobs and income. In addition to the short-run stimulus, improvements to the nation’s infrastructure – roads, bridges, mass transit, ports, airports, sewerage, water distribution and treatment facilities, schools and other public buildings – would lead to enhanced private-sector productivity.
The key issues here are financing and project selection. There has been considerable speculation that some part of the financing would come from private investment. Such investment would be incentivized by tax credits. This would be extremely inefficient in terms of the cost in foregone tax revenue per dollar of private funds leveraged.
The key point about public funding of infrastructure is that the risk premium on borrowed money is very low. The federal government can borrow at very low interest rates, compared to private borrowers. Private equity, in the form of public-private partnerships, or a national infrastructure bank initially capitalized by the federal government, requires a higher rate of return to compensate for the risks taken on by private investors. The higher rate of return translates into higher project costs. If the return to private equity is paid for by the future revenue from tolls on highways or bridges, the level of tolls can be substantially higher, even if the private investment share is a relatively small fraction of the total project cost.
The second key issue in a national infrastructure plan is which projects to fund. The typical way that this would work politically is that each state would demand and get its share of the federal funds. However, the shares are proportionate to political power, and not to population. Since states with smaller populations have much more power in the senate relative to their population, they typically get a higher per capita share of federal capital grants.[1] In terms of the contribution to productivity, grants to big urban areas typically rank much higher per dollar spent than grants to rural areas. For example, the “Gateway” project to repair and build new tunnels under the Hudson river connecting New Jersey and New York would have a very high rate of economic return, but even if the federal government paid only half of the projected cost, the amount of money required would take up a significant share of the total federal allocation.
There is a fundamental conflict between geographic “equity” and efficiency, where the latter is defined in terms of the enhancement to productivity. Ultimately, a balance must be struck between the political reality of something for everyone and the productivity imperative. Since Trump’s political support is much lower in urban than in rural areas, we can expect a tilt in the awarding of funds towards lower population density areas of the country. The greater this tilt, the lower the return in terms of economic growth of any additional funds for infrastructure funding.
A problem in the past has been that the announcement of additional federal funds for infrastructure projects has had the perverse effect of causing a delay in local funding, as cities and states wait for the promised funding to materialize. This ‘announcement effect’ is counterproductive. To minimize such an effect, the federal funds must be awarded in a timely fashion, with clear rules for distribution. A reasonable approach in terms of grant design would be to have a lump-sum portion, awarded simply on the basis of population, with a minimum amount for each state, and a matching component, under which recipient governments would have to put up some share of the project costs. The lump-sum share would favor rural states, while the matching share would favor richer urban areas of the country.
Tax Reform
The third major initiative the Trump administration is prioritizing what is euphemistically called tax reform – specifically, reducing personal income and corporate tax rates. As shown in numerous analyses, the immediate impact of the proposed reductions would be a very large increase in the federal deficits. Trump has promised that the revenue reductions will be offset by the surge in growth unleashed by such cuts. However, the clear lesson of the past 35 years of tax debates over supply side economics is that the main effect of reductions in the top marginal rate in the personal income tax, whether at the federal or the state level, is to increase the disposable income of the top income classes, and increase government deficits.
The corporate initiative would be equally ineffective. As shown repeatedly in reports by Citizens for Tax Justice, many of the most profitable corporations already pay extremely low corporate income tax rates. Repatriation at reduced rates of profits of U.S. corporations currently stashed abroad would provide another windfall to the owners of capital, while doing little to stimulate investment or job creation in the U.S. While a reduction in the U.S. corporation income tax rate would lead to a reduction in tax avoidance efforts, the proper response would be to lessen the opportunities for corporate tax avoidance, as opposed to the Trump strategy that essentially ratifies this behavior as unassailable and inevitable.
At the sub-national level, the tax initiatives would, paradoxically, favor the richer states, which provide a disproportionate share of federal tax revenues. These states by and large did not vote for Donald Trump. The reduction in federal top income tax rates, by clearing the “tax field” for lower level governments, would allow the richer states to increase their own tax rates on high-income earners.[2] This ‘devolution’ in the tax system would increase the fiscal disparities between richer and poorer areas of the country. “Making America Great” would be transformed into “Make (parts of) America great”, while leaving the weakest areas and states to their own devices.
To summarize, the three main economic initiatives of the first 100 days of the Trump administration – repealing the ACA, expanding infrastructure funding, and revamping the federal tax code – would all have adverse long-term consequences in terms of the distribution of income and wealth. While they would promote some short-term stimulus to the U.S. economy, the cost is an increase in deficits, a redistribution of income geographically, and a reduction in the long-term productivity of the U.S. economy. The hope, which appears quite vain as of this writing, is that Congress will reject or modify the worst aspects of these proposals.
[1] See Howard Chernick, “The U.S. Grant System.” In Stephen Payson, Editor. Public Economics: The Government’s Role in American Economics, Westport, CT.: Praeger Publishers, 2014.
[2] See Howard Chernick and Jennifer Tennant, “Federal-State Tax Interactions in the U.S. and Canada.” Publius: The Journal of Federalism, Vol. 40, No. 3, Summer 2010, pp. 508-533.
This post appeared as part of a Roosevelt House series on the first 100 days of Donald J. Trump’s presidency. To read the rest of the series, click here.
Howard Chernick is Professor Emeritus of Economics at Hunter College and the Graduate Center of the City University of New York. He is a research affiliate of the Institute for Research on Poverty at the Univ. of Wisconsin, a board member of Citizens for Tax Justice, and a past member of the board of the National Tax Association. Research interests include fiscal federalism, urban public finance, anti-poverty policy, and tobacco taxation. He is the editor of “Resilient City,” a book published by the Russell Sage Foundation in 2005 assessing the economic costs of the 9/11 attacks on New York City. In addition to cities in the United States, including his hometown of NYC, Professor Chernick has studied the finances of cities around the world, including Montreal, Stockholm, and Kolkata, India.
