Tax policy center. I will be replacing len berman next week, but the ever efficient Tax Policy Center is already putting me to work. First thing id like to do today is acknowledge our online audience who are with us. I encourage all yo all of you te your thoughts and observations using liveaturban. We ask you to email events at urban. Org. We will make a point to use these questions in the q a portion of the program. Im excited to be joining the Tax Policy Center, and i thank you all for joining us today to grapple with important issues surround our states fiscal futures. The panel will examine obstacles and opportunities governors and legislatures will face, and the decisions as they pass new budgets. That budget this year or budget process this year appears to be exceptionally challenging, given the uncertainty about what federal policy will look like in a wide range of areas. As the new Administration Stands up, and new policies are shaped, its important recall many of the programs being discussed are implement it a as a standalone level to educating our children, building our roads, provision of a social safety net is largely done by state and local governments with the federal funds paying for about onethird of state expenditures. The federal government to provision of funds and setting policies affects the overall agenda. Independent of expect the policy state budgets are still going to a long recovery from the Great Recession. Although state revenues have been going for the past five years, they remain to be low and according to spending and taxes are below 2008 levels in real terms in 32 states. States also base longterm liability. With unfunded pension liabilities and growing healthcare costs. States are also entering the current budget cycle with about half of the states reporting unexpected shortfalls in revenue in part due to Economic Conditions. Governor brown opined about Incoming Administration in congrescongress and said many oe proposed changes could a series and detrimental effects on states budget and economy. Concerns about changes are not limited to just democratic governors. Governors from arizona, kentucky and michigan all are urging caution an in adopting changes especially with respect to health care. Our discussion today will cover both effects of federal policy and whats happening in state capitals, and if prior discussion are any indication, the days discussion should provide some leather, too. In addition to this afternoon, theres also a brief available for state and local finance initiative which exams potential effect of the proposed policies. We are excited to announce that the spending drivers web tool is going live today and this will allow users to delve deeper into what drives spending differences across different states. We are fortunate to need of a group of leading experts to discuss these issues. Lori montgomery was Deputy National editor of the Washington Post helps lead of the coverage of washington, politics will be the moderator. Lori has a historic career covering both feel Obama Administrations. Its important know she has a prior study spent a begin a in texas at the dallas times with sally and riches. Let me kick things off by turning the mic over to lori montgomery. Welcome to the state of the state. Its my job to introduce your panel. So immediately to my right we have joe henchman from the Tax Foundation. John hicks, executive director of the National Association of state budget officers. Kim rueben, director state and local finance initiatives here at the urban institute, and nick johnson, Senior Vice President for state fiscal policy for center on budget and policy priorities. We are going to start off by talking about a survey of the states done. Its going to be about an easy time i know in washington, we are certainly having hard time grappling with the new reality. I think since friday with that executive orders on aca repeal, tilting and wall, banning syrian immigrants come reinstating torture, opening set a black sites. We have put out the front page and where ripping it up before we go to bed. I cant imagine what state budget officers are feeling right now. Could you tell us where things stand . Id be glad to. My scen theme is cloudy with a e of storms. States revenues and spending and introductions that have been growing more slowly since the Great Recession than in Previous Post recession periods. We had, mark said, 32 states are still a spinning at the level they were before the Great Recession, adjusted for inflation. When you adjust the population, 39 states are still spending at a level lower than prior to the Great Recession. And for a period of recovery, this length of recovery, thats a bit of a surprise. Last year in fiscal 2 fiscal 20f the states had revenue shortfalls. This year half the states are predicting revenue shortfalls. We have its a numbers like that since the Great Recession when 36 states had revenue shortfall in fiscal 2010. Prior to that, post recession, we average about 10 states a year who have revenue shortfalls. So to have half the states in backtoback years have revenue shortfalls, its a combination of thing. One, predictability clearly, and the other is that Economic Conditions underlie most of state revenues. States are procyclical, meaning most other money comes from income and sales taxes. So why were they short and the last two years . The an answer is because economc forecasts were overstated. Growth in income and output and other things didnt reach what underpinned state revenue forecasts. A couple of numbers. Last year state general fund tax revenues grew only 1. 8 . Thats a very low a very low despite the low unemployment. This year states have revise the estimate and expected to go about 2. 3 . Again a very low number, the next year the budget theyre putting together right now are projecting a little sunnier revenue situation at 2. 9 . Those are. Those are still historically low numbers your personal income taxes took a hit last spring, nonwage income came in lower than everybody estimated. Sales tax revenues are surprisingly weak, given the economic recovery. You will see under 2 sales tax growth this year for almost a backtoback year. Economists give explanations, things like lower prices on goods and a gap between whats consumed and what is being taxed, online sales tax for example, not being collected for states. You are going to see Corporate Income tax receipts declined for the second straight year. And we dont know yet what the impact of prospective federal tax changes will hold for this spring. Did Capital Gains get deferred from december to january, and what will we see in april . So we dont know yet even though congress hasnt made any tax changes yet. If you states are still suffering. The oil states and particularly two o other coal states, wyomin, west virginia. Medicated grows, has been going faster than state revenues have grown. Pensions are more notable issue that states have been dealing with in the last decade. Most of the states have reformed their pension systems in some form, but investment returns are still causing states to get out the checkbook. Medicaid has gone from 14 of the states a general fund to almost 20 in the last 20 years. That has crowd out other spending, Higher Education has declinedecline in terms of the f state spending. But one good news, states have stocked up their savings account, the rainy day funds, since the Great Recession. States on average are sitting at about 5 of state revenues, which is a little bitwhy they were before the last two recessions. The states have taken lessons from the Great Recession. So, kim, urban has a new report out, state budget in the truck era. What can you tell us about what the federal government is about to bring in to this cloudy forecast . And so this is sort of either an exercise in optimism or pessimism, or thinking that we know something about what is going to happen based on what people have proposed before. What i did with richard, my colleague at the Tax Policy Center, is we went through some of the things that a been proposed before by both President Trump during the election and speaker ryan and people in congress to try and figure out whether we could forecast what we think is going to go, what they are going to do going forward. We talk a lot about taxes based on stuff going on in the Tax Policy Center, an, and healthca, aca medicaid based on work document herb and by all Health Policy center. But it is not complete. It is of the things without we had the best grasp on. For example, theres nothing in this report that talked about the epa. Not on my agenda, not the fact that thats what we went first is sort of interesting. So what do we do . As mark said before, tax systems and spending are really relied on what the federal government does. So about a third of the money comes from federal sources to state and local governments, they said some of the rules and the agendas, if we think about whats been going on with healthcare in terms of the expansion in coverage is largely based on incentives are put into place by the federal government for state and local governments. And for the tax system, states typically use of the federal tax system and the terms and definitions to do their own taxes, especially their income taxes. If we think about especially states that are reliant on income tax systems, often they conform to the federal system so as we change the federal tax system, its going to trickle through and go back to it states do. If i go through broadly some of these areas and that we can get into details as we go along, so on the tax system, we think there is going to be a lowering of rates. There is some discussion of getting rid of some of the deductions like the state and local tax deductions. Theres some talk although not a lot of detail about broadening the base. So if we change rates thats not going to directly affect states. If we brought in a base that could help states. However, it can also, the uncertainty is whats kind of killing states right now. I think part of the reason states revenues are below where they thought they were going to be is because people are waiting to see whats going to happen, especially for taxes on Capital Gains and corporate taxes as it expecting those to go down. If you are a high income person and you have the option of realizing Capital Gains now or waiting a few months and doing it in 2017 when the tax law and the tax breaks might be different, you have an incentive to wait. I think partly weve already seen that a that in sort of thef the weak state budget forecast. If we think about healthcare, and are two things. If we basically repealed without replacement of aca, that means if states do nothing, they will save a little bit of money but millions will be uninsured. If they decide that it is unacceptable to have that many more people be uninsured, their costs are going to go up. If things had stayed the same, states will already seen their costs go up because that 100 pick up on the federal government was going to start declining. So they they already thought that there aca costs were going to go up. Irrespective of that we also think that depending on independent of whether they keep the expansion or not with medicaid, its pretty likely they are going to change certain what the rules are. Theres a lot of discussion about a block of granting would basically mean that states would get a certain amount of money based on sort of whats going on now, which could grow over time. At that states would have more discretion but then it would also have more responsibility for making sure that all the services are covered. Given that healthcare costs are growing much faster than most of the economy, that could leave them on the hook for more and more over time. There were some estimates that it come out of cbp, while it would be a couple of percent shortfall in the next couple of years, once you get out 10, 12 years, that could be up to 33 decline in the amount of federal money going for medicaid which would mean that states would actually have to figure out ways of replacing that money or cutting the services that they offer. So nick and joe, i would guess that there might be some opportunities for stager, but it sounds like there are many more challenges for states. Do you want to start, nick . And i would say cloudy with a chance of storms, thats an optimistic forecast that i thik its going to be stormy. And thank you all for having this session. A great turnout in which i think really testifies to a recognition that in this era come in the truck era, states may matter now more than ever before. What happens at state capitals, what happens to states is kind of a big impact on everything that happens in this country over the next several years. You know, and the reason i think we dont have to be uncertain in our forecast, it will be stormy, is that every president , in every presidency, the first year of the administration, make things happen. Theres a lot of uncertainty about which of the many big things that are on the table will happen, but if you think about the virtue of the Obama Administration, the recovery act, the first year of the Bush Administration, the tax cuts that do. The first year of the clinton administration, the reagan administration. Big stuff happens to him and typically we were talking about stuff that involves dollars, budget stuff. Stuff can get through the senate with a 51 vote majority. You dont need 60 votes to do something if you are doing it to the budget reconciliation process. On the tax side, on medicaid and other programs that we will be talking about fall under that category, stuff they can be done through the reconciliation process. I think it would be a really challenging and interesting year. Heres what im really concerned about. In terms of the federalstate relationship in one of the most important roles that state split in our federal system is reducing poverty and expanding Economic Opportunity for families, for so many families who are having trouble making ends meet. For the last halfcentury, this is been a partnership between the federal government and the states. The federal government provides much of the funding, much of the structure and structures it in a way to meet changing needs. So needs spikes but theres a closing, the federal government is providing a lot of the fun and a lot of the structure to the states have some ability to innovate and to do things differently statebystate, community by community. This partnership is turned out to be very effective. The best available data show that the percentage of people for having a hard time making ends meet as measured by our approximation of the poverty rate, the number of folks living below poverty, has declined by about 41 over the last 51 years, largely thanks, largely thanks to this federalstate partnership calling for about one in four, to about one in seven. Americans living with incomes below the poverty line. Heres whats at risk of happening right now. The proposals we have seen, what do we expect to see from this administration and this congress, based on what has come out of the House Republican congress in previous years, what is in trumps own plan, what his nominees has put forward. These proposals would cripple this really Effective Partnership with the damaging impact on states and on families. Basically, we would shift this responsibility from, to help families make ends meet, we would shifted from the federal government to the states at a time when states really cannot afford to take on this big new responsibility. As john said states are already facing budget shortfalls. Things are going to be tight in coming years. Rainy day funds, reserve funds at 5 , thats great but thats nowhere near what it would take for them to get through a a recession, particularly if these federal programs, these automatically stabilizing programs the rise and fall are not there anymore. Think about medicaid block grants, the chance, its not just 10 or 12 years. Very few years states will start to get under the proposal for instance, the House Republicans put out last year very few years, two or three years states would start to get much less money than they would under current law, to the point were tenuous enough they will be getting 33 that we might otherwise expect them to get. Another key program is the step program formally known as food stamps which is key. Right now its 100 federal dollars. States administer it but they dont pay for it. A block grant which would shift the response onto the states and give states this holding area of responsibility for funding, again without any additional dollars to pay for. In fact with less money. This isnt just theoretical about what would happen. We did this 20 years ago the 20 years ago we took the tanf program which was a really important state, federal partnership to help families make ends meet every turn that into a block grant. It was 16. 5 billion 20 years ago. It still 16. 5 it still 16. 5 billion in nominal terms, which means that you adjust for inflation, its 40 less beneficial, and because its a block grant and states can form an out of it to find other things, the money going into assistance for lowincome families has dropped even sharper, even further. Its dropped about 73 . So the number 20 years ago, the tanf program was helping about twothirds of the families who are living in poverty. Now its helping about one in four. Weve seen what happens when we alter the structure of these federalstate partnerships. So thats my big fear and thats what i think, and from a state perspective, from a state policy perspective they will have all this to responsibility, no new revenue, uncertainty on the tax side. Uncertainty with other parts of the budget, and we should talk about Discretionary Spending and all the other ways in which states get the federal money. It just adds up to a really dangerous and challenging time i think for state governments. Joe, what do you think the state are taking away from this moment . First i want to thank you for posting this. Theres a lot of panels and events in washington, d. C. All the time, but this one i know for a fact has real impact, real decisionmakers watch these and have takeaways from these and they, as nick mentioned him and sinful room. Its not a small room but every seat is filled and we have people in the back, too. Its certainly a hot issue in washington, d. C. Right now. I think im going to disagree with a lot of what nick said so let me start off with an area of agreement, and that being he and i certainly walked the talk in terms of states mattering. We dedicate our professional careers to state policy is something i think a lot of people just give lip service to, but his organization at ours are sorting out there trying to make the states truly equal partners in the federalist structure we have in the United States. Im going to disagree with his characterization of it as a partnership. And no disrespect to any Congressional Staff or federal workers who may be in the audience, but for the most part federal employees view the states as an administrative arm for spending money that they give to them with lots of and when this money, when it does the round trip to washington to go back to the states, it picks up all these mandates and conditions. Ive had plenty of democratic legislators and governors in the state complaint about these, let alone republican wants. Usually the democrats behind close doors, but certainly its not any partisan divide that, its not so much a partnership that the feds set the rules and give the money, and if you dont do what the feds say, they take them anyway. Weve talked about medicaid a little bit. Medicaid, i seen some numbers recently and you will correct me if im wrong, but it is growing in state budgets about four to 5 a year and it is god and everything else. May be more evidence about how the aca has not effectively banned the cost curve and we need to try Something Else. Something that has been mentioned on the panel at all which i think is the fundamental thing. If youre going to take anything away from what i say, let it be disparate Economic Growth is the underlying issue. Because if the economy continues to grow at one or two or 3 a year, you can complain all you want about how the feds are not giving 7 a year of our revenues are not going six or 7 a year or the feds are not providing more money and all of that. Because it incomes and sales and Property Values and everything are only growing at the pace of the economy, theres not more money to build to spend on the services and programs. The pie is stagnant and everybody has to fight over the crumbs we can talk all we want about how did we restructure these or complaint and get the feds to give more money to the state of whatever the solutions we are going to come up with but ultimately if you want to solve this problem we have to figure out why are we growing so and uniquely and why is our national gdp solo and how can we fix them . Im not a child partisan. I dont think anyone can accuse me of that, but trump partisan a track record of being able to fix things if its done correctly and if its done in the right way. At the Tax Foundation weve had our economic model that runs, it give a tax proposal we run it through it and it sees what the impact will be on Economic Growth, on job creation, on the federal deficit. Weve gone back historically and we see the results that came at the kennedy tax cuts and the first reagan tax cuts which did to allow for Economic Growth, and then for some of the other tax changes which didnt do a lot for Economic Growth. Theres similar characteristics across them especially in the treatment of capital and investments and Wealth Creation that matter quite a bit. Some of the ideas that are emanating out of the House Republicans and the Trump Administration, talking about a border adjusted tax, talking about expensing for new investment, talking by getting rid of a lot of loopholes in the corporate code that induce companies to move overseas and outsourced back to the United States, moving to a territorial system. Right now u. S. Companies have to pay to taxes, the u. S. Tax any overseas attacks where foreign competitors only have to pay one tone. Addressing those issues will have an impact. Kim, you mentioned some people are sitting on their hands waiting to see what will happen before they spend money, especially on tax policy. I think thats exactly right. Tax policy does change behavior, does induce people to make different decisions than it would otherwise. We are waiting to see what will happen on federal tax policy. I know state legislators certainly will see what will happen, especially due to the close relationship between federal tax code and state tax codes. But its the only real good idea ive seen out there in terms of, you know, we talk about benny the cost curve, then the Economic Growth cost curve. Once we figure out a way to get our gdp back up to what it was historically, then maybe the pressure will ease up a bit, you havent few more sunnier days and nick will be so much worried about programs against each other. Thats kind of what i see the big debate happening right now, and i hope we can keep the discussion focused on Economic Growth. Kim, you seem to have something to say spirit i guess, you know, i would love there to be more Economic Growth and higher Economic Growth. I think youre right. I think if growth were higher, a lot of the problems would be easier. A lot of the things, and on the corporate side, i think there might be things that if they get it right could be helpful. But i think a lot of what is being proposed by both the people in congress and by trump give a lot of tax breaks to the top of the income distribution. And its not clear that it will lead to growth. And it will increase the size of the deficits. If we actually have an additional 6 trillion in our budget deficit and our debt, in our debt, thats not the deficit, i think that could slow down growth. I think that there is some evidence that some tax cuts and some tax reforms have helped, but i dont necessarily, you know, personally i dont think that comparing sort of cutting tax rates in comparing the gist of what was going on in the Kennedy Administration makes sense given how high they were then. I think taking some lessons about what we saw under bush is really important. And so i am afraid that we will see a return to what we saw under the Bush Administration where they kept taxes first and then they say that were going to have reform, but theres no money left, and i do that is really hard. I guess i am less optimistic that were going to see growth, from what is being proposed on the tax life as it now stands and how it is being proposed. I think there is some rule, room, to do some of the things. I would like to think if theyre going to do changes to corporate, they at least do it sensibly. If we are going to expense things we cannot, you know, a tax break for interest, say, which is not necessarily something that President Trump has proposed. So i dont want them to do things that we know are going to cost money and leave us even in worse shape to actually have funds to pay for things in the social safety net. Two points. One, theres a paper on our website that goes through the historical tax changes, Tax Foundation. Org, and you can see what was different about the kennedy and bush tax cuts compared to the proposal day, special on impacts on Economic Growth. It provides with how you described it. Why is that . We dont just kind of wave our hands and say it was a tax cut for the wealthy. Both of them were but they both have different impacts. The second point on impacting revenue actually agree with you. Thats one of the reasons we embark on our tax mode money toe able to emphasize look, there are tradeoffs. My monitor is always there is no solution to public policy, only tradeoffs. When you are embarking on tax policy you got a distribution will trade up, a growth tradeoff. If you dial two of them to hearw dial the other one down. To their credit, they have talked about making sure the overall plan is revenue neutral, after accounting for Economic Growth, which is shor more thant the case would be in the Bush Administration. They are getting a lot of pushback. I think senator rand paul just this week said dont worry about that, revenue stuff. But they are holding pretty firm on that so im hopeful it wont be a return to the bush era as you said. The same dynamic modeling, knowing how much comes from the assumptions that i baked into the model and how it goes forward, something, moving in that direction, part of that, how much we are seeing, with the actual policies. Not whether it does or doesnt. Maybe i will make it generally the debate would be. To the extent policymakers i thinking about federal debate and what to say about that, an enormous mistake for any governor or state legislator to sit back and say i will wait for the economy to start growing again thanks to these wonderful tax policies about the come out of washington but i dont want a big debate about that. That is not where state policymakers are or where they ought to be. State policymakers should be thinking about that Economic Growth curve and that is one of the things states care about, state legislators always thinking about their local economy. Medicaid back to a second, going slower than private insurance, cheaper than private insurance, states have a lot of incentives and tools to keep the cost of medicaid down. Every dollar spent on medicaid, wasnt 53 . They have incentives to keep those costs down. They have incentives because the other parts of the budget, education, transportation, Public Safety are things voters care very much about and things that are important for Economic Growth. When you think about taxes, i am glad tpc is building a model and the Tax Foundation building a model and we have some examples of what happens with these tradeoffs or when you do big tax cuts because they have to balance a budget. What we see in most states, really huge tax cuts over the past few years, kansas, ohio, michigan, maine, north carolina, Economic Growth, below national average, the good for the economy, they are not. Taking money away from school or higher read, transportation which is stuff we need to grow vibrant. We had Economic Growth, hard people doing very well. What are the opportunities we are missing. Where are we missing chances to unleash economic potential, huge numbers of americans left behind, investing more in education and support from children and families and infrastructure, may be a way to get around this Current Issue of Economic Growth. I want to remind people listening outside the room, if you have a question direct to events at urban. Org, congress was taking and go back to obamacare and repeal of the Affordable Care act which there were a lot the impact of the state. On the one hand you have subsidies, marketplaces, increase in insurance, the expansion of medicaid. We talk a little bit about what we expect them to do and how states will be looking at this particularly since our president is saying no one will lose coverage and it will be better for everyone. Let me start. As it relates to the Affordable Care act i want to be sure to be clear, there are three big elements. The third is the largest element that i am concerned about. The partnership is a Financial Partnership as nick described, the idea states raise their hand, there is more flexibility, 50 governors raise their hand. More flexibility in block grants dont have to be the same thing, states have already exhibited they want to be at the table. This is the single largest expenditure in their budget, the second part of the expenditure of state dollars. Maybe an example, we have never seen anything like the prospect of blocking medicaid at the state level. This is the first but we have nothing to compare it to. Good or bad, states revenues are tied to Economic Conditions. They rise and fall. Medicaid intentionally is set up as an automatic stabilizer when there is employment, people lose their jobs and healthcare, we have higher enrollment. When theres higher enrollment in medicaid you have higher medicaid expenditures, state revenues are dropping or not growing much, those are not Counter Cyclical in the financial arrangement that is states want to make sure there can be innovative they are still promoted to do in healthcare. And changing costs of medicaid. It is a myth to believe the matching rate of federal dollars leads states to spend more in medicaid. When you put a budget together with governor and legislators, the next dollar into medicaid, they want education and economic development. States have worked, combining lower cost outcomes. Do not want to take on the responsibility of being Counter Cyclical. What is not likely to happen, the eca, they will go away, whether they are on the other side on the programmatic side remains to be seen. As senator collins put out a proposal rand paul did too. We will see what comes of that. Healthcare is tough, tough to do whatever your background because taxes are important. The employer, deduction for employerprovided health care is wrapped up in that, 80 of americans, a huge majority get their healthcare through their employer. Step one is the decision to you change that or keep it the same . It is a very different decision. The healthcare experts i talked to dont like that, it works decisionmaking, drive costs up and is a fundamental flaw, very when the people i used to, may be difficult to change. On medicaid, the flexibility aspect of it it is a big part of the budget, to make changes to it, question is whether you are able to follow the. It hasnt been mentioned but president governor pens expanded medicaid in his state in a way that got away from the health and human services, a way to bring cost awareness to low income recipients. If you make a certain threshold you got to put some dollars in for your copayments or deductibles in an account you can draw stuff from. A classic compromise, people on the left angry it wasnt a pure extension of medicaid, people on the right that it was medicaid at all. Dont know how involved he will be, no one knows how involved any one particular player will be but that is one data point, that is down the road. I want to piggyback on fat, brings up an important point. Getting more flexibility, taking away from the fact that states were given a fair amount of flexibility with the expansion. They were able to take that expanded money and apply for waivers and apply for experiment and do some things. I dont want to overstate the value of that flexibility with the block grant. It is important, i think the point it is a much Larger Program is relevant, but i do think it is worth focusing on a point nick made that when we block grant the caniff money, a lot of that money stops going for the same purpose it was going for. It is going to pay for other things that face value. Part of it is if you think there is a fundamental value to the safety net, and having the federal government provide lower level that states should be providing is important because there is less competition if they are setting some of the rules there is benefit for there being a federal much of people who complain they are tying our hands and setting new policies, it is important to note we are country people can move from place to place it is is important to set what we think are basic standards for what we think are important for people to have in terms of healthcare, in terms of ability to live. There is some flexibility now, but if we move in this direction where we are repealing it. Block granting other parts of medicaid it could lead to tough tradeoffs if some of the federal money is sort of kept at a certain level, states no longer have the mandate to cover certain populations but they make the tradeoff, and populations covered and a larger uninsured, a fair amount of the ways they top to pay. There are tradeoffs there, there is benefit having the federal government to play this role. We pay x amount of money. The democratic governors, talking to washington about what they expect and want of this process. What democratic governors are saying, they want to maintain the basic structure and continue to get these funds. The other similarity, democrat governors, existing programs for flexibility and innovation. As in terms of how much cost there is flexibility, trying to with collective care and community care. It doesnt erupt into partisan fights. Researchers and policymakers worked together to keep the cost of medicaid at abysmal price. There is no way the scale of the cuts being envisioned, with block grant proposals, there is no way these can be accommodated at the state level, the benefits they received that will have negative effects on peoples health, ability to afford healthcare, the longterm health prospects, with academy over the long term coming over the question of how to strengthen that. Healthcare is tough. We sort of suggested it is hard to tell what they might do policy part. Do we actually think obamacare is going to go away . This will be an unconventional administration. The president might hang the banner in his office eventually. You are trained never to say i dont know on these panels, you are an expert so you must know. I dont know what the administration is going to do and i dont know if they know what they will do on health care. A lot of people get healthcare through their own cores or. If you dont change that it limits what you can do. You end up back in the same decision tree the democrats endeded up in in 20092010 when they were crafting the Affordable Care act but that had a lot of downside too. The fact that it is tied to employment means people are petrified about losing their jobs was one of the first things you think of if you leave your job is what will happen to healthcare for me and my family . It is not as portable as it could be if it was individual because it is almost all thirdparty paid whether the thirdparty is an Insurance Company or employer or government agency. Nobody ever asks and nobody answers how much things cost. You want to have a ball coming in the hospital with your doctor ask how much them service costs. They have no idea. A third or half is filling out paperwork to get to the answer. Is not a bill i could go on and on. Dont want to turn this into a Healthcare Panel but there are fundamental problems with our Healthcare System the portable care act did not come close to addressing. One of the ways the Affordable Care act didnt have to address the problem of employerprovided health care is the tax on high income plans. I havent written about this in a while. 18 . Do we think that is going to happen . I would think is supposition and i dont know what they will put into place. Some of the taxes on cadillac plans on medical devices and the things that take away the tax and they are changing it. Part of the optimism that maybe we could do a couple things around the edges we can call it Something Else but fundamentally not disrupt all of healthcare markets are lead to nobody being able to have health care coverage. I would think the things that are helping to balance the budget and make things sustainable, dont seem like the core maintaining markets. I dont know if others. Tax policies take us back to the conversation about states. Joe pointeded out, and said nice about revenue neutral tax changes. The reality is, you sit down and score the plan in congress and cross the federal government, not just the when you actually get to the see it on paper 5 to 10 trillion, usually when we talk about state budgets we get nowhere near the t word, 10 trillion over twee 10 years. In that context her enormous tax cuts have been on the table into tax reforms we have debates how to broaden the base, broaden the base here, cut rate here, how will it that out. From a state perspective if they broaden the base that might mean in the 1986 Tax Reform Act that might mean we get a windfall, if they start narrowing the base we lose a lot of revenue. The whole tenor of this debate is going to be geared towards narrowing the base, broadening the base, on that. That is a disaster for states. The proposal around making permanent exemptions for expensing, 50 exclusions for Capital Gains, these proposals would be damaging for state revenue assistance. The estate tax, in the first few days of this administration the estate tax hasnt come up but has been in all the republican plans to repeal the federal estate tax, president in past statement indicated he would like to repeal it also. There are 14 states that have estate taxes that piggyback on the federal estate tax. For most it is the most progressive part of their tax code, has a small number of high income folks in that use that money to pay for education and roads and Healthcare Human Services and transportation and other things state governments do. The federal government repeals its estate tax will be harder for states to sustain their estate taxes and that will cost them potentially 3 billion a year which is significant money in those 14 states. As it unfolds, it will be really important for states. I am not confident tax form at the federal level in this environment under this president will yield anything approaching the windfall states of gotten in past tax reforms that work revenue neutral in 1986. Lets go somewhere different with that. When you talk about trillions, i thought where you were going to go, something that worries me is when you blow that kind of hole in the federal budget and have discussions about what is on the table or off the table what does that mean for domestic discretionary funding . There are all sorts of little programs they are zeroing out, it is worth keeping in mind going down to state and local governments. If you actually have less money coming in and spend more on defense, where you make up that money and what that looks like in terms of spending on other projects, other things that are said to be a priority. I dont know where you get money to deal with big infrastructure if you cut the other side. It is worth keeping in mind the two sides of the budget need to work together. If you have less money coming it and we forget this sometimes in washington because deficits seem to be big and growing. And balance the budget at some level, cutting spending or raising taxes, or stop buying the debt. We will take questions at urban. Org. This raises a great point. And all the proposals we have seen from this administration, it is not so clear. Infrastructure in particular has got to be an area where states of gone holy cow, what . Could one of you explain what the proposal is . One of the ideas is in essence to repatriate corporate profits into the United States and provide a tax break if those are invested in Infrastructure Projects of a certain type. State in the United States we call Publicprivate Partnerships in types of Financial Arrangements that may go into transportation in the United States. There are a lot of Publicprivate Partnership projects out there today, can get financing. People are waiting to invest in good projects. Increasing the supply of capital can be invested wont increase the number of Publicprivate Partnership projects because it is the quality of the project and its ability to make return this that is the basics for that. That doesnt necessarily create more infrastructure. If it is also seated with real money, federal dollars or state dollars, the deepfreeze has the combination of funding, it is often 100 privately funded, that is the prospect of heading for infrastructure with investments on the public side. Debbie downer again, that is what i do. Reading through what was proposed when talking about 1 trillion in investments. This was baffling to me. It doesnt even specify who gets to decide what projects are eligible. The other thing that worries me is these tax credits are supposed to be paid back through many raised by projects which could work if you talk about highways or an airport. If you are talking about things like Wastewater Treatment for things that need to be rebuilt or maintained in a place that doesnt actually have a lot of traffic but is important we dont necessarily want bridges falling down in nebraska because they dont have the volume to pay for the building. I dont see anything in that proposal that led to increased money for things like maintenance for a project that wasnt going to have a specific return which worries me. Lets use an example people are familiar with was a bridge that connects Arlington Cemetery with arlington memorial. It is going to start falling down. If you are in dc, enjoy it. There are no tolls on the bridge, it carries more foot traffic than road traffic, it is not the main bridge between virginia and dc that commuters take. How do we fix it . I am not sure if it is the park service or the district of columbia or who is responsible for it, there is no money for it. The administration at the time, the Campaign Document on that focuses on how to finance the finance project with a stream of revenue. Over 30 years you have this revenue and how do you turn it into money upfront. I dont know how much to a lot of these projects. It is how do you get the funding to do it . How do you dont know how much it would cost but get the money to do that. At the state level, they are solving this through raising more money for transportation. The vast majority of cases adjusting gas taxes for inflation, they dont update. Half of the states or something have done that in the last couple years. There has been more Public Private partnerships, more toll roads, more innovative ways to get the money but a rail line in maryland, they found a contractor in the stream of revenue, there is a lot of room for innovation, transportation but we still get to the point where we need one or two trillion dollars. The vice chairman of the National Governors association said i dont have toll roads in the state and dont want them but joe is right, states have been raising revenue at this time of low Economic Growth and cutting other taxes but they are spending more and raising revenue to fill the transportation and taking their income tax or sales tax money in nevada and other cases and shifting it to bail out the transportation funds. New jersey has done this for a decade. A bipartisan plan to fix it. They muscled the Port Authority to give money to stay transportation funds, swept everything you can do short of raising the gas tax. I understand raising gas taxes are incredibly unpopular. That congresswoman was the deciding vote on the 93 one, when she passed the vote all the other congressman say that by, marjorie because they knew what would happen to her. We have all gotten used to paying half price for roads and bridges because the money we are putting in are not covering the cost. You can only coasts on that so long. An important broader point about relationship between states and the federal government going forward. One attitude states could be taking is sitting back saying all right, federal government, we are going to wait for this wonderful infrastructure to slow down or states can start a different course and say people in washington are battling over whatever you want to call it come in the states we are going to chart a different course, articulate a different way of doing things. Infrastructure, human services, fighting poverty, k12 education, investing in Early Childhood education, talk about economic development. Increasingly governors and policymakers looking at what is happening in washington and saying the antiinvestment antitax approach being taken by the federal government is not working in our state. We will take matters into our own hands and go forward and this will create tension between what the feds want and what the states want. Questions for the audience we want to get to but we have to talk about immigration. Before we go to questions are we seeing any state, innovation this to inform washingtons decision . Are there states that are solving these problems or figuring out how to attack in ways washington should Pay Attention to. There are a lot of those. Led National State legislators, suggesting where state legislators come together always putting on panels and events on the they try something, there are good results and bad results and take that lesson as well. One of the many issues i write on his marijuana taxation. States going different ways in legalizing and taxing and how they are structuring that which is good. Every time i come to this panel, the laboratories of democracy, 50 states and you want high tax, highlevel service it is there for you. We are always on the lookout for hightech lowlevel service and we want to find that service but it is a fundamental tension. What kim talked about we want baseline level, people disagree on what the baseline should be. All our elections and dbase should be what should washingtons 1sizefitsall policy be . I think we should let states decide that and let people fight it at the state level and then have the indiana fight or vermont versus New Hampshire fight over which is doing a better job. Be change let the states innovate, the problem i see the next few years the federal government will make it harder for the states to innovate and address problems, states dont want to spend more money on medicaid then they have doing that is true but there are times the medicaid funding stream is helpful for state that once to address the opioid epidemic, address the Mental Health issues and behavioral Health Issues driving homelessness, using medicaid money for Community Health which are proven to be so effective or education, investing in things that we know work better for teachers, classsize reductions in certain populations. My fear is that cuts will get in the way of states being able to use Revenue Streams to experiment and implement what is proven to work. I will say one last thing and take questions. One thing that is going on in the states, where we are seeing states innovating on the tax side if you think of marijuana taxes, sugar taxes, they are looking for ways to raise money, if they need funds going to tobacco taxes and things like that. The problem with having their budget reliant on taxes i dont think marijuana is something to discourage people to smoke it but in general the way these taxes are set up are partly to raise money but mostly to affect Public Health. There becomes a tension if a states budget becomes too dependent on taxes that arguably they should want to go to 0 because they want the behavior to stop. If you think about cigarette taxes, think about Something Like the soda taxes we can try to discourage young kids from drinking a lot of soda and getting obese, you end up setting up tension between your budget and the Public Health outcomes you are trying to do if too much tax revenue is coming from this. The spending goes up because revenue goes down and you have a gap. Remember states are mostly elastic growing with the economy revenue stream. Other revenues are stabilizers. They are not large portions of state budgets but the next billion is important. Lets turn in the room, does anyone have a question . In the back. Please identify yourself and your affiliation. I am a consultant in dc. A lot of conversation has floated around health care and infrastructure which is understandable. I have a workforce education question. I talk to employers, arkansas, ohio, dc, a refrain you hear again and again is we cant find workers with the skills we need and the number of people who quibble about, there is a trend toward needing more education to do the jobs that are out there. Had Hillary Clinton won the thought was out there about helping students pay for their education. Maybe not going to happen here. The situation with states, helping students get the education they need to fill the jobs we have q states are working hard on that. You go to the state of the state address by governors you will see that very question, that problem raised and ideas how to improve that. A number of states are moving to two year credentials or below, states are moving heavily into apprenticeships and nontraditional areas. A lot of governors are trying to get to the issue of the skills gap in advanced manufacturing, healthcare and it are several areas being focused on so tennessee, oregon, kentucky, several other states putting money where their mouth is in terms of assisting individuals to help pay for a Post High School credential related to in demand industries and in demand jobs. I do think plan we saw training and that is important. And some ways i am sad that we are missing that part of the conversation. If you think about what is being talked about, how we are going to restore good jobs for people who live in america, i am sad about the fact there is not more emphasis how we train people to do new jobs rather than focusing on eating up why jobs have left. It is backward looking rather than forwardlooking and states are trying to figure out ways of getting their populations the skills they need for these jobs. We dont see a lot of discussions about that. Far or technology than china or trade. I talked to a lot of people and hear the same thing which our Education System is not preparing people for the modern economy. My grandfather said you started job at 20 and retire at 65, the one job you have in your lifetime. Whereas here, for my generation and the ones after, it will be a lot of different jobs over your lifetime so you have to be fixable to have the skills to do those things and we are not preparing with that. There is innovation from states but a lot to be done to completely overhaul it and a lot more accountability. I am from california and will still talk about the days when pat brown was governor in the 60s, when he built the University System and the highway system and a lot of Capital Investment and a lot of rethinking how to do things. The way we construct in california was new, different from how it was constricted in the past. A lot more focus on the real life and it takes that kind of reinvention. The reason we dont have money to spend in education, a lot of the money goes to union salaries, protecting, everybody in Public School had that teacher that checked out long ago and couldnt get rid of them and a lot of Public Employee Pension Funds are underwater and a lot of money in chicago for education. A lot to bail out the pension fund. Not because too much money goes into them. What happened in education over the last 10 years is essentially a flatlining of, a lost decade back to 2007. There are 23 states spending less on k12 education than they were before this era when workforce is more important than it has been in the past and the situation Higher Education is worse. Both states spending less on inflationadjusted basis than they were ten years ago. The challenge is education is funded at the same local level and as we talked about at great length on similar panels state and local tax systems are antiquated in desperate need of modernization. We are taxing goods instead of services, we are not taxing purchases over the internet, corporations have too much room to move profits from state to state to minimize their tax, they have flat personal income taxes, Income Growth at the top of the income scale, tax rates for senior citizens, states bear some of the blame for failing to tends to Revenue Systems in ways to generate funds necessary to make investments in economic development. Spending on inflation, a graph someone posted on a various number of adjusted for inflation. Tuition was number one on the list, trip or something in real terms, student textbooks not far behind. That is where a lot of the money goes, whose pocket ends up and a lot of other housing transportation, at the inflation level and most consumer goods, clothing, computers, far below, less in real terms than they were back then. With technological revolution we have had, with the transportation and communications revolution, we still teach students the same way we did 150 years ago. That has to change. You in the back. American federation of teachers. Lots of questions but i start with this one. I am surprised nobody talked about the impact of sequestering and what it will do to state budgets as i travel around the nation talking with Union Leaders with eidolon to anticipated 10 to 15 cut based on eventual implementation of the sequester and trump talked about that as he was going around the nation and i wonder if you could talk about that. That is all he has been talking about. You talked a little bit about it earlier. Let me give you some numbers on the state level. In the last we 10 years, toss out medicaid, states have been getting 13. 5 of their budget last year with federal funds excluding medicaid. That was the lowest we have seen and we 10 years and states have already been living with a flat line or slightly declining set of domestic discretionary programs. Federal funds information for the states show if sequester goes into effect in 2018, 4 billion drop off, 519 billion base, dont see what that is into which programs, education states receive significant money on title i, school nutrition, those are the biggest federal Grant Programs to go to state that arent medicaid. We are waiting to see, dont know what the percentage change is but based on that information it would be 1 reduction. Part of the reason i didnt use the term sequester and we havent talked about that, all the things that are changing, those are in place but because we have a republican majority and a president who is a republican, how they come up with their decisions, i am not sure what was decided is going to be what is relevant. I think actually we have less money, they are talking about having more money go to defense and when we dont know what they are going to do with Social Security and better care, it might leave less money available for discretionary domestic programs. It could be worse than we are expecting under sequester. What we are going to do is to see a reset in the terminology. Your basic point, important to Pay Attention to the category of funding we so artfully call nondefense discretionary and i dont know why we dont have a better phrase but we better come up with a better phrase for it because people dont understand what we are talking about, school lunches, roads, Public Safety, housing, community development, housing vouchers, whole range of programs for Scientific Research under this awkward pocket. A lot of state budget offices dont understand it. A lot of legislators dont get it. As it gets ratcheted down over time, spending is at its lowest level, we are squeezing that chunk of funding and accelerating the squeeze in coming years depending on what the budget parameter is, that is something to keep your eye closely on. At the foot of the republican president i agree it is happening but it is more of a structural thing especially with the growth of entitlements. The committee on responsible federal budget, they are putting out projections talking how if we put everything on autopilot squeezing out everything eventually in coming years. If you cut taxes a lot. A lot of things can make it worse, but it is on the radar and for states that are used to getting so many millions or tens of millions or hundreds of millions of dollars i think you are right to be saying this is something we have to think about that this may happen and whoever told you it is not going to happen tell them lets not imagine some force of nature, a policy choice, very likely at least some leaders and the administration will try to accelerate that trend by ratcheting down caps. Over here. You. The guy with a nice smile. I work for senator joe mentions office. My question is broad about the uncertainty with the new administration has talked about. The Budget Committee had their hearing for the nomination for the office of management and budget, they tried to hit home about his ideas for Entitlement Program cuts and reform but they tried to hammer home contrary and differences that he does not want to cut various Entitlement Programs. How do you see the differences between the new proposed leader of the omb and the Trump Administration and how it will affect their policies and budget priorities. I feel the person being considered for oh and be is taking the fact that you have numbers that have to add up seriously in a way that i am not sure all the rhetoric and proposals that were part of the campaign and also on the part of any campaign dont necessarily add up but if we think about the specific comments that have been made it is impossible to think how they are all satisfied. You cannot cut taxes, guarantee healthcare, nobody loses healthcare and we are not going to cut any entitlements, these dont work. In some ways i feel it is tough to be in those hearings and have to answer questions, a serious person coming up with what the policies are because by nature we have in this and other hearings we have seen people ratchet back or hold back from the statements we have seen from the president or during the campaign. That is a Common Thread you see, that we all work to make sure the numbers add up. I forgot to say, be sure to read it. It walks through a lot of the tradeoffs. As for what will happen. And practice we wont the a lot of public daylight, past, there has been a lot of tension between president s and their omb directors because they are the people who want to make sure the numbers add up. King for a swing state senator. A swing senator. Lets take a question from somebody watching outside the room. The professor at the university of illinois and chicago. I have heard some policymakers, the aca may be altered between keeping somebody similar to the current Medicaid Expansion opting for some medicaid block grant program. Is this a realistic possibility . If so is it viable and in general is it advisable that federal policies face choices between different fiscal partnerships with the federal government . Talking about the proposal that came out earlier this week. There are great papers on our website folks should go and read and to answer the second question, the devil is in the details and if you want to know about this proposal, more generally it depends. Do you want to tackle the question whether it makes sense to have different partnerships with states . It is an interesting question. In general states give us flexibility, tell us what the purpose is and let us engineer the way we do it in our locality. In general, states, the sitting elected officials happy to have the choice. Elected official 20 years from now, i am not so certain. Of the choice is do the same or more but accomplish with less money, that wont go over very well. Something the Obama Administration did not give credit for, a lot of trial programs and small Grant Programs to offer these, and education of here is some extra education money, you need to fire your principal or send everyone through training or become a charter school, everyone is training so didnt result in anything and unemployment insurance, pick two of the four in order to get some extra money for administration and that has better results. I am all for flexibility but for healthcare the goal is we want healthy americans. Other questions . The core question when looking at medicaid and flexibility is how much they spend on mandatory services versus Optional Services option population. There is a figure ten years ago, 60 in average of state medicaid spending was on those optional populations, the data were faulty at the time, hard to get. With less spending available, money from other areas to continue funding those Optional Services . I think that is where we will see people having hard choices to make. We will see some states doing that and i think ironically in the reports of the policy center a few years ago, in part they found states that are more generous now which have an easier time figuring out where to raise money more easily, if some of those Optional Services have been covered with federal funds and you are in a state like to be they might have a harder time finding money to maintain those services but it is setting up some tough choices for states to make the decision about whether they are going to shift money to provide those services or cut those Optional Services. In the Great Recession, we saw some movement on the part of states with dental and vision where basically there were Optional Services that got ratcheted back. Some of that could lead to bad consequences if you think somebody cant see a dentist for a number of years that is more serious so they are all hard choices but not sure we know, i definitely dont think it would be 1sizefitsall. It would be variation to come up with the answers. There was one in the back. I am budget director of dc council. Yesterday trump signed the executive order limiting federal grants to sanctuary cities and the district is a sanctuary city. We received over 1 billion a year in federal grants, everything from Refugee Resettlement to Homeland Security to caregivers, it runs the gamut. I was wondering if you had any insight on the types of federal grants that might be targeted through the executive order and the impact on states and cities in general. It is unclear. It could be narrowly around a you, department of justice for Homeland Security grants targeted around this Law Enforcement or could be much more sweeping. If you read the language of the executive order and contemplate the possibility of very draconian hits to cities and a couple states, connecticut, california. The challenge from state and local perspective is you are catching folks between a rock and a hard place. This sort of nickname of sanctuary cities doesnt give an accurate picture what actually happens. When a Police Department is required to hold people, there are costs for incarcerating that person, for processing that person, legal liability costs for violating people a locality that violated someones Fourth Amendment protections against search and seizure was sued because the federal government doesnt reimburse for that. Got to set a cost that would come about if they started doing that. On the flipside the federal government threatening to take away money if they dont. Those costs last year more than 20 states considered laws that would prevent localities in those states to abide by the laws in the state legislatures could in conservative state legislatures hearing from police chiefs, mayors and City Council Members that dont want those costs and didnt want their cities made less safe because Police Departments couldnt do their jobs because they were paying attention i think it will be interesting and if they push it far. My understanding is if they push fund they cut to cities we will see lawsuits about that and years of legal action on the same uncertainty. It will be interesting and challenging to see how that plays out the theme is stormy weather, seems like a good place to close. I think the urban institute for hosting this event. Thanks for having such an informative panel and thanks for coming. [applause] [inaudible conversations] [inaudible conversations] [inaudible conversations] beaches we go live to the u. S. Senate floor for pro forma session. Legislative business will be conducted today. January 30, 2017
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