Takeover of Medicaid local share is easier said than done

by Bill Hammond |  | Poughkeepsie Journal

New York pushes more of its Medicaid expenses onto local government than any other state — an almost $8 billion cost-shift that contributes to high property taxes from Montauk to Niagara Falls.

Over the past two years, plans to eliminate all or part of New York’s “local share” have been debated in Washington, passed by the state Senate and touted by two current candidates for governor: GOP contender Marc Molinaro, the Dutchess County executive, and former Syracuse Mayor Stephanie Miner, a Democrat who’s running as an independent.

These proposals target a longstanding unfairness: The amounts paid by New York City and the 57 counties are based not on ability to pay, but historic patterns of need —meaning areas with the most poverty face the highest expense. The per capita cost is $630 for New York City and $279 for rural Sullivan County, but just $100 for prosperous Putnam County.

Over the past 12 years, growth of the local payments was capped and then frozen —steps that are now saving localities more than $3 billion a year. Still, the local share remains one of Albany’s most onerous unfunded mandates.

The current system is hard to defend, but it will also be hard to unwind. A forthcoming report from the Empire Center explores the major options, and all come with difficult tradeoffs.

Fundamentally, a takeover of the Medicaid local share would entail hefty hikes in state taxes, significant cuts in spending or a mixture of both.

The primary challenge is the price tag: The local share now stands at $7.6 billion, including $5.3 billion from New York City and $2.3 billion from the other 57 counties. Even in big-spending Albany, that’s a lot of money.

Raising that much in new revenue would entail a 15 percent increase in the state’s personal income tax, or an across-the-board 10 percent hike in all state taxes.

On the spending side, it’s the equivalent of a 29 percent cut in state school aid, or zeroing out the entire budgets for parks, environmental protection, economic development and prisons — combined.

Squeezing the savings out of Medicaid itself would be doubly difficult due to the federal funding system, which matches state-based funds on roughly a dollar-for-dollar basis. New York would thus have to cut overall Medicaid spending by $15 billion — or 22 percent — to save $7.6 billion for itself.

Another obstacle is the lopsidedness of the local share. Because New York City accounts for two-thirds of the current payments, it would stand to reap two-thirds of the benefit from a takeover. On the other hand, the taxpayers of downstate suburban counties, with relatively low Medicaid costs, would likely be net losers.

All of the recent proposals duck this issue by either limiting the city’s savings or excluding it completely. But this would deny relief to the most-burdened group of local taxpayers, while effectively requiring them to subsidize a takeover everyone else through their state tax payments. Such a carveout would be hard to justify as a matter of fairness, and likely a non-starter in the Legislature, where city representatives are a powerful force.

A solution discussed in the past was a sales tax “swap,” under which the state would assume the full costs of Medicaid in return for a share of local sales tax revenues. However, since the local share is now frozen, and income from sales taxes generally grows over time, such a swap no longer makes sense from the counties’ point of view.

Perhaps the most viable approach would be gradually squeezing savings from Medicaid over a period of years. New York spends more per capita on the program than any other state, a byproduct of broad eligibility, generous benefits and high per-recipient spending. If the program’s growth could be slowed by 1.4 percent a year — which would be no small matter — the state would potentially save enough to phase out the local share in less than two decades.

By any standard, eliminating the local share of Medicaid is a major reallocation of state resources that will require tough choices, both fiscally and politically. If candidates are serious about making it happen, they need to get specific about what choices they would make.