When Democrats controlled power in Washington, Republicans screamed “states’ rights” to the high heavens, arguing against “federal overreach” on policy matters ranging from land use policy to local police priorities.
On each of these policy matters, the tables have turned, and Republicans now decry “sanctuary cities” and similar state efforts to pursue local policy initiatives (It must be noted, of course, that the Democrats exhibit some of the same hypocrisy towards the issue of Federalism).
The Supreme Court sided with the states, with Chief Justice Roberts writing that the act’s provisions to expand Medicaid amounted to “a gun to the head” that unconstitutionally, “undermine[s] the status of the States as independent sovereigns in our federal system.”
The chief justice properly noted that Medicaid spending accounts for more than 20 percent of the average state’s budget (it has grown to 28 percent in 2015), and a threat to withdraw federal contributions from states that did not expand Medicaid amounts to an “economic dragooning that leaves the states with no real option but to acquiesce.”
The tax bill represents another example of economic dragooning. One of the major features of the current plan removes the deductibility of state and local taxes from federal income tax. Republicans reason that the deduction implies a subsidy of high-tax states by low-tax states.
But this is a view contrary to federalist principles. The tax bill has the federal government claiming priority in taxation of individual incomes, whereas a true federalist approach would let states set local tax policy based on local needs and allow the federal government to tax effective incomes that remain. By taking the money first, the federal government strips states of much of their tax base, and their discretion in setting local policies as sovereign governments, including on issues regarding Medicaid policy.
To fully appreciate the fiscal constraints this bill places on the states, one must understand the financial structure of Medicaid. Whether states have expanded Medicaid or not, states must pay for their Medicaid obligations through state income, excise or sales taxes.
Unlike the federal government, states cannot engage in deficit spending, so there is little flexibility in how to raise funds to support this program. Meanwhile, Medicaid spending — healthcare spending for to the indigent — is a function of local health care systems, local health needs, and poverty.
Medicaid spending is also inelastic and generally counter-cyclical to the health of the overall economy. A state might invest more in bridges during an economic upturn and forgo spending when tax revenue declines, but it cannot tell Medicaid patients to address their health needs only when the state budget allows.
Following the Supreme Court ruling in 2012, states were given the choice to expand their Medicaid programs. While some states declined to expand Medicaid based on an assertion of their rights, some chose to do so as an equal exercise of their state sovereignty. Given that these states had the right to expand the program as a matter of choice, do they not then have the right to finance the expansion of the program?
Further, Chief Justice Roberts seemed to portend a limit on the federal government to force changes on current Medicaid programs, suggesting that the rights granted to Congress do not extend to “surprising participating States with post acceptance or ‘retroactive’ conditions.” Would this not include efforts to limit states’ ability to finance their Medicaid program?
Since state Medicaid programs continue to rely heavily on state tax revenue, doesn’t forcing predominance of federal views of tax policy translate into forcing federal Medicaid policy onto states?
In fact, forcing federal tax policy onto states translates into a commandeering of virtually every state policy.
Further, do states not have the right to protect their citizens from double-taxation in making this choice? Are the tax proposals not another “gun to the head” of the states, this time proffering no reciprocal benefit?
It is not surprising that Republicans are now unabashed in conceding that this legislation will restrict the actions of states. Speaker Ryan argued as much, suggest that eliminating the deductibility of state and local income taxes will stop "propping up profligate, big-government states."
Viewing the proposed tax legislation through the lens of Medicaid makes two things very clear Removing the state tax deduction will severely tie the hands of state policymakers in ways that vexed Chief Justice Roberts in 2012. The commitment to state sovereignty that motivated Republican health policy over the past decade is now nowhere to be seen.
Barak D. Richman, J.D., Ph.D is a Edgar P. and Elizabeth C. Bartlett professor of law and a professor of business administration at Duke University School of Law. Kevin A. Schulman, M.D. is a professor of medicine at Duke University School of Medicine.