Senate talks on tax package focuses on Medicaid payments to states

Senate Democrats and Republicans are focused on gradually phasing out increased federal Medicaid payments to states to reach a deal on a tax extenders package.

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The two parties have wrangled over the bill for over eight weeks, with Republicans balking at the cost of the package. The Senate failed to move forward on a version of the bill last week that cost $118 billion and added approximately $60 billion to the deficit.

The bill failed on a 56-40 vote with two Democrats, Sens. Ben Nelson (D-Neb.) and Joe Lieberman (I-Conn.), siding with Republicans.

Sen. John Thune (R-S.D.) said at least some Republicans might be swayed into supporting the extenders bill if Democrats agree to a package that cuts the extra spending in half so that only $30 billion is added to the deficit.

The tax extenders package includes a number of tax breaks as well as an extension of unemployment benefits, which many senators in both parties want to approve.

“My guess is that some Republicans, because of UI [unemployment insurance], want to be able to vote for a bill and would accept a certain amount of non-paid-for spending,” Thune said.

Senate Finance Committee Chairman Max Baucus (D-Mont.) told reporters that he and Senate Majority Leader Harry Reid (D-Nev.) are close to securing the 60 votes needed to pass the bill.

“We’re close,” he said. “We’re close; no announcement yet.”

The Medicaid funding at issue originated in last year’s stimulus bill, when Congress voted to increase the federal portion of Medicaid funding by 6.2 percent. The payments are known as Federal Medical Assistance Percentage (FMAP). The stimulus provision expires at the end of the year, and states have warned they will be forced to lay off teachers and other public servants in order to increase their portion of Medicaid funding.

Democrats have sought to extend the stimulus provision until June 2011, but Republicans have balked not only at the cost, but at the idea of setting states up with a payment that will eventually be cut.

Members on both sides of the aisle on Tuesday made it clear they are focused on the issue.

“What our Republicans believe is that the bill spends too much money and not enough of the money it does spend is offset,” said Senate Minority Whip Jon Kyl (R-Ariz.). “Part of that money is called FMAP — that goes to states … My guess is that [Democrats’] third iteration of the bill probably will reduce it some and will provide some additional offsets.”

Reid told reporters the legislation remains a work in progress.

“We’re going to make some changes,” he said. “I’ve had a couple of meetings today already and we realized that the No. 1 issue, at least that’s been explained to me by some of my Republican friends, is the aid that we’re trying to get to states.”

Draft legislation floated on K Street on Tuesday weans states from FMAP funding by phasing out payments over a six-month period. Democratic Senate staffers disavowed the proposal, saying it was a product of K Street lobbyists seeking to gin up support for the bill.

Centrist Republican Sen. Susan Collins (Maine), whose support for the bill could be crucial to its survival, floated the idea of winding down state funding under FMAP over a year ago.

“I have always felt … that it was a disservice to states to have a cliff in the Medicaid funding where one month they are getting it completely and the next month they are getting none,” she said. “That’s something I proposed over a year ago. I did not propose it as a way to reduce the cost of this bill. I just think it’s a good policy.”

Collins has twice voted against procedural motions on the tax extenders bill because of their cost.

“That’s been my No. 1 concern,” Collins said of extenders adding to the deficit.

Kyl said he isn’t sure winding down FMAP is the elixir Democrats think it is in garnering Republican support for the bill.

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“Whether that will satisfy more Republicans remains to be seen,” he said. “There are other issues with the bill as well, including issues related to the tax provisions.”

Senate Republican Conference Chairman Lamar Alexander (Tenn.) argues Republicans should help fix a problem that Democrats largely created by themselves when they included additional FMAP funding in the original stimulus bill.

“The Democrats created this financial cliff that states are going to run off at the end of the year by expanding Medicaid,” he said. “Just to add that in again [to the bill], in my view — even if it is paid for — just extends the cliff another year for states, and it would be bad policy.”

Vicki Needham and Alexander Bolton contributed to this article.