Wait-and-See Approach to Health Exchanges May Haunt States

February 28, 2012 at 5:31 pm

A central component of the Affordable Care Act (ACA) is the creation in each state of a health insurance “exchange” — a competitive marketplace in which individuals and small businesses can choose among an array of affordable, comprehensive private insurance plans.  In states that don’t develop an exchange, the federal government will do it for them.

As the New York Times noted recently, state-level exchange implementation has stalled in some states with Republican governors and/or legislatures that remain opposed to the health reform law.  CBPP estimates that at least a dozen states (see map) are taking a wait-and-see approach as to whether or not they will establish an exchange, citing uncertainty until the Supreme Court rules on the ACA’s constitutionality this summer.  Yet many policymakers in these states have also said that if the Supreme Court deems health reform constitutional, they would much rather have a state-run exchange than a federal one.

States Delay Exchange Implementation Until Supreme Court ACA Decision

However, delaying a decision on whether to establish a state exchange until the summer could effectively be a decision to let the federal government set up the exchange.

The federal government will have to determine by January 2013 that each state will have its exchange up and running on time; as part of that process, states will likely have to submit plans for their exchanges later this year.  Then states will have to test their eligibility, enrollment, and management systems in the spring and summer of next year, commence an open-enrollment period for consumers to shop for coverage starting in October 2013, and go live with exchange coverage on January 1, 2014.

It’s hard to imagine how a state could take all the necessary legislative, policy, operational, and IT system development steps needed to meet this compressed timeline if it doesn’t start work until the summer.

A number of other states have forged ahead with development of their exchanges, and it’s fortunate that the ACA ensures that residents of all states will have access to affordable, decent-quality coverage options through an exchange, whether or not their state establishes one.  But it would be unfortunate if some states lose the ability to set up their own exchange when their leaders decide to “wait and see.”

Note: map was updated March 1, 2012 to include Alaska

Corporate Tax Reform Must Be Gimmick-Free

February 28, 2012 at 1:15 pm

The President’s framework for corporate tax reform affirms an extremely important principle: reform must not rely on budget gimmicks to hide its true long-term cost:

While a number of the measures that raise revenue in corporate reform . . . raise more revenue in earlier years than they do in later years, the President is committed to corporate tax reform that does not add a dime to the deficit, over the next decade or thereafter [emphasis added].

Any corporate reform should adhere to this principle.  Otherwise, policymakers could adopt a plan that doesn’t add to deficits over the official ten-year budget window yet worsens the nation’s long-term deficit problem.

Estimates by the Joint Committee on Taxation (JCT) show why the principle is so important.  JCT found that if we eliminated nearly all major corporate tax expenditures (credits, deductions, and other tax preferences) and dedicated the resulting revenues to lowering the corporate rate, we could drop the rate from 35 percent to 28 percent.  That wouldn’t add to deficits over the next decade.  But, as JCT noted, it would add to deficits in the long run because much of the savings from eliminating corporate tax expenditures wouldn’t continue outside the ten-year budget window.

Most notably, the savings from eliminating “accelerated depreciation” (a set of rules that allow firms to deduct the cost of new investments at an accelerated rate) would peak at $67.3 billion in 2017 but fall sharply thereafter, to $44.5 billion by 2021, and likely continue to fall in later years.

Given the nation’s long-term budget problems, a well-designed corporate tax reform proposal should help rein in deficits; the fact that the President’s framework aims only at revenue neutrality is a major weakness.  Still, the Administration gets it exactly right when it makes clear that reform must be fiscally responsible not just in the early years, but over the long term as well.

The Latest on State Budgets

February 27, 2012 at 1:38 pm

Our newly updated survey of state budget shortfalls suggests that states continue to face a long and uncertain recovery:
29 States Have Projected or Have Addressed Shortfalls for Next Year

  • States’ budget challenges remain considerable. Twenty-nine states have projected or addressed budget gaps totaling $47 billion for fiscal year 2013, which begins July 1 in most states.  (See map.)  States that haven’t already done so will have to close these gaps before the fiscal year begins, since nearly every state is required to balance its budget.  (These 29 states include some states with two-year budget cycles ending in fiscal year 2013, most of which have already closed their projected 2013 shortfalls through spending cuts and other measures scheduled to take effect next year.)
  • State finances are recovering, but slowly. Shortfalls are generally smaller than in previous years.  But they remain large by historical standards — the largest in at least two decades for the fourth state fiscal year after the end of a recession — as the economy continues to be weak and unemployment is still high.

Shortfalls persist because state revenues are coming out of a very deep hole caused by the recession.  While revenues grew by 8.3 percent between July 2010 and June 2011 (the 2011 fiscal year for most states), they would have to continue growing at that pace for seven more years to get them back on a normal track, as the graph shows.

States have already made deep cuts to services that are critical to their economic fortunes, like education.  (As this study from the Federal Reserve Bank of Cleveland shows, education plays a large role in determining a state’s income growth over the long term.)  Such cuts will likely grow if states do not raise additional revenue.

Continured Revenue Growth of 8.3% per Year Would Not Restore Losses from Recession Until Fiscal Year 2019

As my colleagues Nicholas Johnson and Erica Williams have noted, policymakers can prevent further cuts to services and reverse some of the cuts that they have made since the start of the recession by boosting revenues, such as by raising taxes on high-income taxpayers and profitable corporations.  That’s a sound way for states to lay the foundation for a strong economic future.

How States Can Close Corporate Tax Shelters

February 27, 2012 at 12:20 pm

Testifying last week before Maryland lawmakers, I explained why the state would benefit from joining the 23 states that have adopted a tax reform known as “combined reporting,” which treats a business composed of a parent corporation and one or more subsidiaries as a single corporation for tax purposes.

States without combined reporting are vulnerable to a wide variety of corporate tax shelters and tax-avoidance strategies in which businesses artificially shift profits to subsidiaries located in “tax-haven” states, as I explained in this 2007 report.  Combined reporting nullifies most of these shelters in one fell swoop.

The following excerpt from my testimony rebuts the claim that adopting combined reporting will make it harder for a state to attract and retain businesses:

[T]he record of combined reporting states in retaining manufacturing jobs . . . may be a reasonable indicator of whether combined reporting has a negative impact on the attractiveness of a state for investment, since manufacturers in theory don’t need to be as close to their customers as retailers, construction contractors, and other types of service businesses need to be and therefore can choose to locate where state and local tax policies are more to their liking.

In the last 10 years, every state except Utah and North Dakota has experienced a net loss of manufacturing jobs.  And yet there is no indication that the presence of combined reporting has played a role in a state’s relative success in retaining such jobs.  Of the 15 states with corporate income taxes that had the best record in retaining manufacturing job in the last decade, 10 were combined reporting states.  (This group of 10 includes Utah and North Dakota.)  Conversely, of the 15 corporate income tax states that lost the greatest share of manufacturing jobs, only two were combined reporting states, and only for a few years at the end of the decade.  There appears to be no correlation between a state’s adoption of combined reporting and its relative success in retaining what are theoretically the most potentially footloose firms and their jobs.

And there is a good reason for this.  All state and local taxes paid by corporations represent no more than 2 percent to 4 percent of their total expenses, on average.  On average, the state corporate income tax represents less than 10 percent of that already small share. And combined reporting will boost corporate tax collections on the order of 10 percent to 20 percent in most states.  It thus should not be surprising that the evidence I’ve just cited suggests that combined reporting has not been a disincentive for corporations to continue investing and creating jobs in states that adopt it.

Click here for the full testimony.

In Case You Missed It…

February 24, 2012 at 3:58 pm

This week on Off the Charts, we focused on the federal budget and taxes, the economy and unemployment, Temporary Assistance for Needy Families (TANF), and housing policy.

  • On the federal budget and taxes, Richard Kogan showed why former House Speaker Newt Gingrich’s claim regarding the potential savings from repealing the civil service laws is incorrect.

    Kathy Ruffing explained that switching from the official Consumer Price Index (CPI) to a “chained” CPI would trim the growth of benefit programs and boost future tax revenues.

    Chuck Marr outlined our analysis of the President’s corporate tax reform framework.

  • On the economy and unemployment, Michael Leachman noted that the Recovery Act continues to save jobs and support the economy.

    Chad Stone listed three important facts about unemployment insurance (UI), and we highlighted our analysis of the changes that the recent legislation to continue federal emergency UI makes to the UI system.

  • On TANF, LaDonna Pavetti pointed out that when Congress recently extended the program, it failed to fund Supplemental Grants, which 17 mostly poor states have relied on to help operate their TANF programs.
  • On housing policy, Barbara Sard cautioned that proposals to raise rents on households with little to no income who receive federal housing assistance could create serious hardship or even homelessness.

In other news, we released reports on the President’s corporate tax reform framework, a new Congressional Budget Office report on the impact of the Recovery Act, and switching to the “chained” consumer price index.