Matt Bai, writing in the New York Times Magazine, says that Bush’s just-enacted tax cut “won’t end up being a tax cut at all; it’s really just a tax shift”—at least for “a lot of Americans.”
Here’s his argument: “The tax cut will choke off revenue to the federal government . . . This means Congress can’t increase financing for the mandates it’s been heaping onto the states for 40 years. For instance, Congress shares with states the cost of Medicaid, the health care program for the poor, which gobbles up huge chunks of state budgets. Since Washington hasn’t seen fit to provide elderly patients with a prescription drug plan, that, too, falls to the states.” Congress gave some money to the states as it cut taxes, but the aid is inadequate to the states’ fiscal hole.
Bai continues: “If Bush and Congress cut taxes, and your governor doesn’t raise them, then the buck ultimately stops with your mayor, who has to find ways to pay the police and firefighters, paint schools and pave roads. That’ll mean higher property taxes or fees on services like garbage collection, or maybe the town will decide it’s time to reassess the value of your house. Either way, you’re likely to be paying someone else the money you no longer send to Washington.”
First of all, the explosion in Medicaid spending has not been the result of federal “mandates.” (A recent AEI report notes that “two-thirds of Medicaid spending is now devoted to constituencies and services that the states may, but need not, cover as a condition of receiving federal Medicaid reimbursements”—emphasis in original).
Second, how are we supposed to figure out how substantial the Bai effect will be? Are we to assume that if taxes were not cut, every dollar in tax cuts would have been spent on prescription drugs, etc.? (Didn’t we just read, earlier in the same issue of the magazine, that Bush’s tax cuts were bad because they would increase the deficit? Yes we did. The truer that claim is, the smaller the Bai effect.) If the feds increased spending, would each dollar of spending result in a dollar less in state tax burdens? How much would the states be raising taxes even without the federal tax cut? If the answer is that 80 percent of their tax hikes would be happening anyway, isn’t it possible that the federal tax cut is reducing the hit to taxpayers?
Bai never goes into any of these questions. And while he quotes conservatives to illustrate his points, he never allows the possibility of competing analyses of the state budget crunch to get in his way. Even if I were predisposed to accept Bai’s conclusion, I don’t think his article would be at all persuasive.