Off the Charts Blog | Center on Budget and Policy Priorities

As states finalize their budgets for the next fiscal year, Minnesota stands out for making smart changes to its tax system that will position the state for future economic growth.  The legislature passed a tax plan last night that — after years of spending cuts — raises revenue to avoid more cuts and to make new investments that brighten the state’s economic future.  It also modernizes the state’s tax system so that it generates adequate revenue for a thriving state in a 21^st century economy.  Governor Mark Dayton supports the legislation and is expected to sign it.

The plan creates a new income tax bracket for the state’s richest households, repeals some tax breaks for companies operating outside the United States, raises revenues through changes to estate and gift taxes, and increases tobacco taxes.  It also helps modernize the state’s outdated sales tax system, including by taxing some digital goods and by requiring some online retailers to collect sales taxes on purchases by Minnesota residents.

The new revenue will prevent more than $600 million in cuts over the next two years to services such as schools, community colleges, natural resource protection, and programs that help seniors live independent lives.

The revenue also will enable the state to make substantial new investments in education.  For example, Minnesota will provide free full-day kindergarten in more public schools across the state, and it will substantially improve access to high-quality preschool for underprivileged children — an investment that research has proven boosts the incomes and productivity of children when they grow up.

Among other priorities, the plan also will allow the state to hold tuition steady in the state’s colleges and universities, and to increase financial aid for low- and middle-income families.  Over the last five years, Minnesota has cut funding for higher education by 30 percent, leading to substantial tuition hikes.

These investments in the state’s education system will pay off with stronger economic growth in the future by producing a better educated workforce with the kinds of skills and training that employers — especially high-wage employers — will need in the future.

The new revenue also will allow the state to reduce property taxes for many homeowners and many low- and moderate-income renters, who pay property taxes through their rent.  And, it will allow for more state aid to local governments, helping them further limit property taxes.  These substantial reductions in property taxes, combined with the income tax increase for wealthy residents, will make the state’s currently regressive state and local tax system fairer.

States that are still considering tax and spending changes — and how to boost their economies while supporting middle- and lower-income families — should look carefully at Minnesota’s plan.

A House subcommittee is putting health reform in the hot seat again today, when it holds a hearing on the “looming premium rate shock” that health insurers have warned about.  But widespread rate shock isn’t looming.  In at least a few states where insurers have already proposed their 2014 premium rates, the doomsday predictions of skyrocketing premiums have not materialized.

Yes, a relatively small number of people with coverage in the existing individual insurance market can expect premium increases in 2014, particularly if they are young and healthy, are not eligible for new federal subsidies or expanded Medicaid coverage, and have a relatively skimpy plan today.  But others will pay less, and still others will be able to get better benefits for about the same premiums.

Moreover, health reform means that uninsured people and those who have health problems will no longer be shut out or priced out of the individual insurance market.  Millions of people will be eligible for new federal subsidies to help them pay their premiums and cost-sharing charges, which will offset supposed rate shock for many people.

The House Energy and Commerce Oversight and Investigations Subcommittee, collected a trove of documents from insurance companies to prepare for its hearing today.  The documents tend to emphasize the largest potential rate increases and the types of people — men, in particular — who may experience them.  Insurers developed many of these projections as the industry was lobbying to repeal or delay specific provisions of the health care law, such as the health insurance tax and new restrictions on what older people can be charged for coverage compared to younger people.  They don’t necessarily reflect the premiums these companies actually plan to charge consumers in 2014, and it’s not clear how many of the higher-rate scenarios will actually occur.

Now, the companies are preparing to sell insurance in a reformed marketplace.  We are starting to see the actual premiums that insurance companies want to charge next year, and greater transparency and competition are helping tamp down premiums, at least in some states.  In Washington state, some people would pay less in premiums or pay about the same prices for more comprehensive coverage if recently proposed premiums take effect, in contrast to what the industry had predicted.  And in Oregon, after the insurance department posted proposed rates from various insurers, two companies with relatively higher premiums said they would redo their requests and submit lower rates after seeing their competitors’ rates.

In both of those states, regulators are reviewing the insurers’ rate proposals to decide whether to approve them under health reform.  Other states are doing the same, so more data points are on the way.  We expect that they, too, will show little evidence of widespread rate shock.

Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear  Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period).

That date’s important because it was in late 2010 — and based on CBO’s August 2010 projections — when fiscal commission co-chairs Erskine Bowles and Alan Simpson issued their original budget proposal, which called for over $300 billion in Medicare cuts and nearly $60 billion in Medicaid savings through 2020. The original Bowles-Simpson proposal is often considered an appropriate benchmark for evaluating other deficit-reduction plans.

The figure below compares CBO’s Medicare and Medicaid projections from August 2010 with the projections that CBO released last week.  (The note to the figure explains adjustments that we have made to provide comparability.)  Medicaid spending is $311 billion lower, and Medicare outlays have come down by $590 billion — far more than the savings that Bowles-Simpson recommended.

No one knows how long this good news will continue.  Some analysts conclude that fundamental changes in the health care system are responsible for most of the slowdown in cost growth.  Others find that the recession is the primary factor, with systemic changes less important.

Even if cost growth remains moderate, however, Medicare and Medicaid spending will keep rising as more baby boomers become eligible for benefits.  Making the U.S. health care system more efficient thus remains a major budget challenge.

But CBO’s new projections provide further evidence that Medicare and Medicaid are not in crisis.  Responsible reforms, such as those in President Obama’s budget (which would produce $400 billion in health care entitlement savings in the next ten years and $1trillion in savings in the subsequent decade), can help restore fiscal responsibility without shifting costs to vulnerable beneficiaries or states.  There is no need for sweeping and misguided changes, such as establishing a per capita cap in Medicaid or raising the age of eligibility for Medicare.

This week on Off the Charts, we focused on SNAP (formerly food stamps), health reform, housing policy, the federal budget and taxes, and state budgets and taxes.

• On SNAP, Stacy Dean explained that the farm bill that the House Agriculture Committee approved this week would force nearly 2 million low-income people off the program.  Dottie Rosenbaum noted, in the last in our “Facts on SNAP” series, that SNAP responded as designed to the recession and will shrink as the economy improves.  And Chad Stone pointed out that SNAP enrollment remains high because the jobs market remains abnormally weak.

• On health reform, Shannon Spillane listed some of its accomplishments to date.  Judy Solomon explained why the coming cuts to hospitals that serve many low-income and uninsured patients reinforce the importance of health reform’s Medicaid expansion.

• On housing policy, Will Fischer pointed out that a new tax credit to help low-income renters afford housing would be a valuable complement to the existing Low-Income Housing Tax Credit.

• On the federal budget and taxes, Chye-Ching Huang rebutted recent criticisms of estimates of how tax proposals would affect different income groups.

• On state budgets and taxes, Erica Williams emphasized that North Carolina should reinstate its Earned Income Tax Credit (EITC).

In other news, we released a paper on the SNAP cuts in the House Agriculture Committee farm bill and updated our backgrounder on the number of weeks of unemployment benefits available in each state.

A variety of news outlets featured CBPP’s work and experts recently.  Here are some highlights:

Renters Face a Housing Squeeze
Bloomberg Businessweek
May 17, 2013

The Facts About Food Stamps Conservatives Don’t Want You to Hear
US News & World Report
May 16, 2013

House Agriculture Committee Approves Farm Bill
New York Times, The Caucus
May 16, 2013

Are Health Care Costs Healing Themselves?
National Journal
May 15, 2013

Hospitals could lose $500M in federal money to pay for uninsured in 2014
Associated Press
May 13, 2013

My latest post for U.S. News & World Report’s Economic Intelligence blog addresses conservative critics’ argument that SNAP (the Supplemental Nutrition Assistance Program, formerly food stamps) is “broken” and must be “reformed.”  In reality, as our recent blog series shows, SNAP expanded as it’s supposed to during the severe recession of 2007-2009 and subsequent slow recovery and will shrink as the economy improves.

But why, as critics note, did SNAP enrollment continue rising after 2009, even as unemployment began to fall?  Because, it’s not unusual for poverty and hardship to continue rising even after unemployment peaks.

Moreover, the last few years have been very different from a typical recession and recovery, as our Legacy of the Great Recession chartbook shows.  The unemployment rate thus has been a relatively poor indicator of the state of the labor market, for two reasons in particular.

First, the unemployment rate doesn’t include the many people who want a job and would likely have one in a stronger labor market but haven’t looked enough to count as officially unemployed.  Nor does it include the many people who would like to work full time but can only find part-time work.

The graph below, which highlights the share of the population with a job (the so-called employment to population ratio), paints a grimmer picture of what’s happened to employment.  Part of the sharp decline reflects higher unemployment, but the rest reflects a decline in labor force participation.

The Labor Department estimates that 22 million Americans who want to work either don’t have a job or are working only part-time when they want to work full-time.

Second, the unemployment rate doesn’t tell us about long-term unemployment — those out of work for at least 27 weeks — which remains historically high (see second graph).  With the deep and prolonged recession and weak recovery, SNAP has become increasingly valuable for the long-term unemployed, since it’s one of the few resources available for people who have exhausted their unemployment benefits.

In short, the number of people qualifying for and receiving SNAP benefits is still high because unusually high unemployment, reduced incomes, and limited job opportunities all persist.  The best way for policymakers to lower SNAP costs would be to aid the economic recovery to create jobs and boost incomes.