The House’s very aggressive budget plan for next fiscal year (starting in October) is the latest turmoil gripping Washington. The Republican budget plan calls for trillions of dollars in regressive tax cuts. And the budget numbers tell us the most likely place to get money to partially pay for the tax cuts will be severe cut backs in Medicaid—the source of health insurance for over 25% of Americans and close to 60% of children, and a major source of basic health care from nursing homes to rural hospitals.
The House’s action, and likely resulting crisis, is a major step towards next fiscal year’s budget. But it shouldn’t be confused with two other looming budget crises. First, we could see government shutdown all but essential services in mid-March (discussed in my last Forbes blog). Second, the government could default on our bonds and trigger a major economic panic because we are pressing against America’s legally authorized borrowing limit.
The Trump And Republican Budget Calls For Trillions In Tax Cuts
But for now, let’s focus on the pending tax and Medicaid budget battle. Trump and the Republicans are dead set on massive tax cuts for the rich. They will do so mainly by renewing the cuts for individuals and households passed in Trump’s first term that expire at the end of 2025. (The 2017 corporate tax rate cut from 35% to 21% is permanent.)
Those tax cuts are expiring because in Trump’s first term, the Republican Congress had to comply with budgetary rules, and making all the tax provisions permanent would have pushed the deficit past the guidelines. So Republicans bet that Congress wouldn’t let the provisions expire when they came due. And their 2024 election trifecta win of the House, Senate, and Presidency now allows them to craft future tax and budget policy.
According to the Congressional Budget Office, just renewing the expiring Trump tax provisions would cost around $4 trillion over the next 10 years. Trump also campaigned on additional tax cuts, including further corporate rate cuts, not taxing Social Security benefits or tips, and higher deductions for state and local taxes. Adding these new tax cuts would add trillions more to the deficit.
Just as in Trump’s first term, Republicans now must make their ambitious tax cuts fit within the Congressional budget rules meant to control—or at least manage—the federal deficit and debt. Some spending offsets must be found to at least partially pay for the top-heavy tax cuts; the rest of the money will come through increased government borrowing.
The House Takes The First Step In The Budget Process
The House’s recent approval of the overall budget resolution lays out tax and spending targets and instructs each appropriations committee to hit a specific target. Then those committees must “reconcile” their specific actions with the overall budget resolution, and that total budget for next year will be negotiated with the Senate under Congressional budget reconciliation procedures.
The advantage for Republicans is that reconciliation can’t be filibustered, a blocking action that requires 60 votes to overcome. So Republicans can pass it with a simple majority if they can agree on an overall tax and spending package.
The Biden Administration used reconciliation for the American Rescue Plan to fight the pandemic’s economic effects, and also for the Inflation Reduction Act that invested in clean energy. Under President Obama, reconciliation improved health insurance under “Obamacare” and expanded student loan reform.
But Republicans face major hurdles in getting to a final budget, including finding a way to pay for the multitrillion dollar tax cuts. The tax writers on the Ways and Means Committee have authority to spend up to $4.5 trillion on tax cuts. Since they are very unlikely to raise taxes to cover the costs, spending reductions in programs must make up the deficit gap.
The budget resolution calls for between $1.5 and $2.0 trillion in spending cuts to partially offset the tax cut cost. Even that won’t be enough. The rest would be covered by borrowing an additional $4 trillion, vastly increasing the federal debt.
Republicans Will Very Likely Have To Cut Medicaid To Pay For Tax Cuts
Three House subcommittees must do the heavy lifting on spending cuts: Education and Labor (cut $330 billion, most likely from student loans and K-12 education aid); Agriculture (cut $250 billion, mainly from SNAP—the food stamp program); and Energy and Commerce (cut $880 billion).
So the Energy and Commerce Committee must come up with over 60% of the total cuts from their programs alone. This is where Medicaid comes in. The committee oversees trillions in spending, with especially significant amounts in both Medicare and Medicaid.
But Medicare cuts are—at least for now—off limits. As The New York Times reports, “President Trump has said repeatedly that he does not wish to cut Medicare. And most House Republicans have made a similar pledge.” That leaves Medicaid as the biggest potential target, since “even if the committee cuts everything (they oversee) to $0, it will still be more than $600 billion short” of what the budget resolution requires.
Deep Medicaid cuts will rattle America’s health care system along with state and local budgets. Forbes contributor Dr. Arthur Kellerman says “if Trump’s Medicaid cuts happen, healthcare costs will rise and access to care will decline for everyone—including you.”
Medicaid Cuts Will Hurt People, Hospitals, Health Care, And State Budgets
Medicaid spending comes from federal funds combined with state contributions, which vary by state. Federal funds only cover 50% of Medicaid spending in blue states like New York and California, but over 75% in Mississippi, which has much less generous services and coverage.
Severe Medicaid reductions will push states to cut services and coverage, leaving more people without health insurance. That means more people won’t get basic health care and rely more on emergency rooms, both major factors in pushing up overall health care costs.
And Medicaid cuts will hurt states and hospitals. Combined state and federal Medicaid spending is the largest single component of many state budgets. Medicaid is especially important for rural hospitals. The healthcare advisory firm Chartis reports “46% of rural hospitals are operating at a loss,” across blue and red states. Deep Medicaid cuts could easily drive many of these hospitals into closing, worsening health care in rural areas that voted strongly for Trump and Republicans.
Deep Medicaid Cuts Could Split The Republicans
So far, Republicans have dodged the political fallout that deep Medicaid cuts will cause. Several polls show Americans think we already are spending too little on Medicaid, not too much. Republican House members in swing districts, who supported the initial overall budget resolution, have said they won’t necessarily vote for deep cuts in the final budget package.
On the other hand, hard-core conservatives want even deeper spending cuts. With a very small majority, and assuming united Democratic opposition, finding House votes in support of a final budget package will be very challenging.
Republican House members with significant Latino populations wrote to Speaker Johnson that “nearly 30% of Medicaid enrollees are Hispanic Americans” and that “slashing Medicaid would have serious consequences.” Seniors and their families also are worried—Medicaid makes up around 60% of spending on “long-term services and supports,” including nursing homes.
A full reckoning around Medicaid won’t happen until come when committees start voting on specific budget cuts. The Republican Congress will then be faced with actually implementing these deep cuts and accepting the economic and political damage they will cause, or walking back some of the promised Trump tax cuts. Either scenario will cause enormous tension and fighting within the Republican ranks.
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