The Budget Debate over SALT, Debt, and Medicaid
Are the astronomical numbers real? Or is it birds fighting over crumbs?
Speaker Mike “The Magic” Johnson has just pulled another lagomorph out of his toboggan. Had another vote in the House of Representatives been lost, passage of a ten-year tax- and-spending reconciliation bill would have collapsed. With nary a Democrat crossing the partisan aisle, Johnson could afford only the one Republican “nay.” Taxes are to be cut by $4.5 trillion, expenditures by $1.5 trillion, leaving projected deficit growth somewhere around $3 trillion.
IMAGO / Annabelle Gordon
A big step has been taken, but the reconciliation bill must still find its way through the Senate, and final appropriations must find the balance between Medicaid and SALT. Medicaid is the name for free health insurance available to those of limited income. SALT refers to the deduction against income allowed for taxes paid to state and local governments. Currently, only $10,000 dollars is allowed.
Each has its political constituency within the Republican coalition. Rural and southern representatives want to protect Medicaid. Six warned Johnson that “slashing Medicaid would have serious consequences, particularly in rural and predominantly Hispanic communities.” Representatives elected from high-tax states want to lift limits on SALT deductions. “Any increase, whether it’s going to be doubling [the limit], or tripling it, or quadrupling it, is a win. But, you know, we’d like to see it a little more than doubled,” declared Nicole Malliotakis, who represents a Republican district in high-tax New York. A third faction—let’s call them fiscal conservatives—would allocate budget savings toward reduction in the national debt.
The battle, though intense, is more symbolic than real, despite the astronomical numbers and media histrionics. When one looks behind the headlines one discovers very little change is afoot. Still, I place higher priority on Medicaid preservation than either SALT or Debt concerns.
To understand what is happening we must first strip talk-show hysteria from the conversation. Taxpayers may be thrilled to hear their taxes are to be reduced by $4.5 trillion, but, in truth, no less than $4 trillion of these cuts simply keep the current tax rate intact. Otherwise, taxes would return to the heights reached during the Obama Administration. Once that amount is set to one side, only $500 billion remains, an amount to be spread over the next 10 years.
Fifty billion dollars annually, is a considerable sum, close to no less than one-seventh Elon Musk’s estimated net worth. 😊 But the amount hardly lives up to the President Donald Trump’s claim that this “is one beautiful bill… that will “without question make American great again.” Nor does it seem deserving of the passion voiced by Democrat Greg Casar, congressman from Texas, who pledged “to go to the mat and fight all the way until we stop this budget and finally demand that, instead of a tax break for greedy billionaires, that we . . . expand the programs that working people deserve.”
Much of the $50 billion is likely to pay for an increase in the limits on SALT deductions. The remainder is likely to be used to eliminate tax tips received by restaurant employees and to enhance deductions from the corporate income tax.
These wrinkles are not meaningless, but, in truth, nothing drastic is happening on the tax front.
But how about Medicaid? Is that scheduled for the executioner’s guillotine? Not really. No one likes to tighten their belts, but the prospective cut in federal Medicaid expenditure is probably no more than 6 percent.
Committees in the House of Representatives are asked to reduce expenditures from current levels by $1.52 trillion dollars over the course of ten years. Of that amount $880 billion must come from programs overseen by the oddly named House Committee on Energy and Commerce, which is charged with responsibility for Medicare, Medicaid, food stamps, and other nutritional programs. If cuts are spread out evenly across the next decade, The Energy and Commerce committee will recommend cuts of $88 billion dollars in these programs next year. If cuts are across the board, federal Medicaid expenditures will fall by 6 percent from current levels. The other major cuts would come from Medicare (currently funded at $840 billion annually) and then from the food stamp and other nutritional assistance programs (currently funded north of $100 billion).
A 6 percent cut in Medicaid would ease the rapid growth in Medicaid spending that began with the passage of the Affordable Care Act passed during the Obama Administration. Federal expenditures now come to $584 billion dollars annually.
Speaker Johnson says the cuts to Medicaid will eliminate “fraud, waste, and abuse;” other Republicans say they have been assured that recipients will not lose their benefits. Cuts at the margin seem warranted given the program’s excessive regulations, waste of physician time on administrivia, and abuse by those who find ways to charge the government for unneeded tests and services. Exactly how and where the knife will fall remains an open question, but projected changes hardly deserve the “slash” verb applied by CBS. The scalpel, not the sledgehammer, seems to have been Johnson’s tool of choice.
The Speaker’s caution is conditioned by changes to the Republican political coalition. Once a party of the middle and upper class, Republicans now seek—and receive—an increasing share of political support from less educated, lower-income, rural voters, regardless of race, color, or creed. Those votes might be lost if Republicans were perceived to be abandoning Medicaid. A center at New York University estimates that over 24 percent of Americans are currently recipients of health care under the program.
Support for SALT comes from a different quarter. Taxpayers can now deduct no more than $10,000 in SALT taxes from their federal incomes. When the Obama Administration was in office, wealthy homeowners could deduct from at least five to more than ten times that amount from their taxable income. With the SALT limits imposed by the first Trump Administration, it became vastly more expensive to live in California than Nevada, New York rather than Florida, Massachusetts instead of New Hampshire. Outward migration from high-tax to low-tax regions accelerated.
At this point Trump is letting Congress sort out the issue. He says rapid growth will be more than enough to cover projected deficits. But fiscal conservatives so concerned about deficits they want deep cuts in both Medicaid expenditures and tight limits on SALT deductions.
“Magical” Johnson somehow squeezed all these irreconcilables into the Reconciliation bill, but many more paths must be traversed before a law emerges from the legislative labyrinth. Still, one can see the major contours of the final legislation. Limits on SALT deductions may increase slowly, rising, perhaps, at the same rate as the cost of living. Elon Musk’s Department of Government Efficiency will discover or make-up Medicaid efficiencies. Despite the concerns of fiscal conservatives, the size of the deficit will be stretched.
I would sacrifice SALT and limits on the national debt to keep most of Medicaid intact. It is a precious resource for those who are both sick and poor. Shouldering fiscal responsibility to the states would foster a race to the bottom in health benefits. The SALT deduction is of greatest benefit to the affluent; most taxpayers simply take a standard deduction. Those who complain about state and local taxes should leave Massachusetts for New Hampshire or follow Meta and Musk to Texas. If enough people and businesses decide to shift their place of residence, states might learn to operate their own programs at more efficient and effective levels.
As for the projected $300-billion-dollar annual increase in the size of the national debt, that is more than offset by a $600 billion annual reduction in its real value, if inflation edges upward at the accepted rate of 2 percent per year. The topic is worthy of further analysis in The Modern Federalist, but there is less behind the debt mania than is generally assumed.
America’s federal system works best when each tier of government takes care of its own business. Medicaid and Medicare are a federal responsibility, just like Social Security and national defense; other public services are best provided by state and local governments without any artificial SALT subsidy from the national government.
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Paul E. Peterson is a senior fellow at the Hoover Institution, Stanford University and a professor of government at Harvard University.