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Michigan particularly vulnerable to federal budget cuts

December 22, 2017

BY JACK NISSEN/Capital News Service

LANSING — The money Michigan draws down from the federal government is the second- highest in the country, according to the Michigan League for Public Policy.

While Congress wages war on tax reform and health care, the uncertainty over Michigan‘s budget has officials nervously awaiting the outcome.

“It’s why we’re so concerned about the federal tax plan that’s being discussed at this point, either in the House or the Senate,” said Rachel Richards, legislative coordinator at the League, a nonpartisan institute that analyzes economic opportunity in Michigan.

All of the state’s 18 departments are at the mercy of the federal government, Richards said.

“There’s nothing set in stone currently, but the areas where we receive federal funding — like Medicaid, food assistance and child care — may be impacted by moves at the federal level,”  Richards said.

Michigan’s estimated budget in 2018 is $56.3 billion. The state budget office reports that 42 percent, or $20.1 billion of that would come from the federal government.

Leveraging federal dollars to support state programs generally makes sense. But acquiring so much money from the federal government has a dark side, said Craig Thiel, a research director with Citizens Research Council, a governmental policy research organization. What happens if it’s taken away?

“You could argue both sides of that,” Thiel said. As government funds less, the states have to pick up more of the tab, which can be concerning.

“That’s just the arithmetic of things.”

The risk of relying on federal dollars to fund state programs isn’t lost on the national level either.

“It’s a fair statement, given the level of deficit that the federal government has been running, to say ‘at some point, there would be spending cutbacks as one part of a solution to resolve that’,” said John Hicks, the executive director of the National Association of State Budget Offices based in Washington, D.C.

The  League for Public Policy reports that both tax plans in the House and Senate would provide massive tax cuts for wealthy taxpayers, leave little for middle class individuals and grow the deficit by $1.5 trillion over the next decade.

“While the Legislature is allowed to lower tax revenue, we fear that at some point lawmakers down the road will see this and try to right-size the budget,” Richards said. “That means cuts to things that improve quality of life, like education and food assistance.”

If a tax code like the one being written at the federal level passes, the impacts on the budget would happen indirectly.

“What we anticipate this tax plan doing in the long run is affecting federal dollars to states,” Richards said. “For example: if the federal government had fewer dollars coming in, we would expect a reprioritizing of federal dollars that go to programs important to Michigan residents.”

Michigan’s budget isn’t threatened only by Congress. Some state legislators are trying to pass tax cuts that some officials say would be bad for many of the same programs that receive funds from the federal government.

The problem of receiving less money from above is exacerbated by Speaker. Rep. Tom Leonard, R-DeWit, who is attempting to lower taxes even more, said Meghan Swain, the executive director of the Michigan Association for Local Public Health. “We already have liabilities like transportation and infrastructure that will have to be paid for out of the general fund.”

Last February, Republican lawmakers proposed gradually decreasing the income tax from 4.25 percent to 3.9 percent, a move that the House Fiscal Agency estimated would result in a $1.1 billion budget hole by 2022.

It failed 52-55. But the bill could be brought up again.

“There’s going to be some pulls on the 2019 budget if any cuts happen,” Swain said. “Michigan won’t be able to backfill any of those programs.”

Federal proposals that might impact state budgets are nothing new. Over the 2017 summer, efforts to repeal the Affordable Care Act would have drastically changed health care funding if they had succeeded.

“Everything that’s happening in Washington, D.C., will have significant impacts on the state,” said House Democratic Leader Sam Singh of East Lansing, ”and that’s why you’re seeing people really try to stand up and protect the systems that are in place, systems like Healthy Michigan.”

The Healthy Michigan plan was an expansion of Medicaid dollars from the federal government to states under the Affordable Care Act. It was meant for covering more individuals not under the original health care plan. About 91 percent of health care in Michigan, or $18.4 billion, is funded by federal dollars.

“It was a bipartisan effort that helped cover close to 700,000 people,” Singh said. A lot of small business owners were able to provide access to healthcare they couldn’t afford beforehand.

Michigan was among 31 states that expanded Medicaid when it was offered.

With the increased coverage came more costs. The New England Journal of Medicine reports that Healthy Michigan cost the federal government almost $3.6 billion in 2016.

Singh said he’s worried that programs like this may be slashed as part of governmental cuts.

“There’s been concern that you could see that program get cut, and that would mean going back to the old system.”

In response to the potential repealing of the Affordable Care Act, Michigan House Democrats issued a “Health Care Bill of Rights.” It’s a resolution that would require insurers to continue key Obamacare provisions, even if the law were repealed. The bill was referred to the Health Policy Committee.

Richards said that beyond health care, federal funding for roads and temporary assistance for needy families could be in the crosshairs of federal budget cuts.

The National Association of State Budget Offices, which analyzes how federal policies impacts state budgets, has yet to analyze how this tax policy would change things.

Hicks said, “We won’t be able to do a state-by-state analysis for a while.”

Once the bill becomes law, there’s still going to be a lot to unpack in how it affects each state’s budget, he said.

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