Federal tax plan and ongoing federal budget debates make N.C.’s future uncertain

Six months have passed since the federal tax law took effect, and there should be no uncertainty by now that President Trump and many in Congress intend to continue to call for more federal budget cuts and promote a federal cost-shift to the states.

While the $1.5 billion federal rescission package that Trump proposed appears to have been stopped by the Senate this week, the federal dollars that were at risk that support many critical state programs and services is concerning.  The truth is that real uncertainty exists today and is likely to remain in the coming years as the President and some in Congress intend to reduce the discretionary federal budget—a large part of which is sent to state governments to support local community priorities. Furthermore, uncertainty will continue to lurk on the federal horizon as more legislation is introduced to change the federal tax law and more health-care changes are proposed. Our nation faces a highly challenging fiscal future, and this requires all states to maintain fiscal flexibility to adapt effectively.

North Carolina receives approximately $14 billion from the federal government every year to support critical programs and services across the state, including Medicaid for seniors, children, and people with disabilities; highway transportation improvements; child support enforcement; workforce training; emergency preparedness; and substance use disorder prevention grants.

If federal budget cuts are made to these programs, our state lawmakers will be confronted with some very difficult choices.

In North Carolina, this is a serious concern. Based on the existing use by legislative leaders of a state spending formula and the ongoing rounds of tax cuts that already prevent our state from investing adequately in the things that promote prosperity for all, it should be no surprise that North Carolina is ranked as one of the states that is most affected by federal funding changes.

Analysis shows that since 2008, North Carolina’s population has grown by 11 percent – approximately 1 million people – yet state spending has only increased by 1 percent during that same period.

North Carolina lawmakers must begin to plan and prepare for the proposed federal budget cuts and changing policies that have already started to affect our state budget.  Here are a few of the ways that federal volatility could continue to play out for North Carolina budget writers:

1. The federal cost-shift cuts that are already taking effect and affecting our state budget include those that are based on the Federal Medical Assistance Percentage (FMAP). For the past three years, our state has seen federal medical assistance for Medicaid and the Children’s Health Insurance Program (CHIP) remain consistent; however, that has begun to change as North Carolina next year will have to cover an additional $33 million just to maintain the same level of Medicaid services. Furthermore, the federal medical assistance that our state receives for CHIP is also set to return to its historical lower percentages beginning in 2020 (i.e., decreasing from federal assistance that is close to 100 percent to one that is closer to 75 percent).
2. Earlier this year, President Trump also proposed eliminating various programs that would affect local governments and communities all across the state and which require planning on the state’s part, such as the Low-Income Home Energy Assistance Program, which helps keep poor families safe and healthy by assisting with energy costs; the Social Services Block Grant Program, which allows states to tailor social services to the people’s needs; and the Community Services Block Grant Program, which helps counties and cities tackle serious challenges facing communities like affordable housing and creating jobs through the expansion and retention of businesses.
3. The President’s rescission package is the latest example of another set of budget cuts that states must plan for. The rescission package is both cutting programs and reducing the budgets for future spending in key areas and would be felt by people and local governments all across the country over the next 10 years. Among the programs most affected are the Federal Highway Administration program, public and rural housing initiatives, and rural water and waste disposal programs.
4. An additional way in which the state’s finances could be affected by federal volatility is through policy changes. On healthcare, Congress has pushed to convert Medicaid into a per-capita cap model. If this took effect, North Carolina would be harmed as funding would be capped by enrollee and not based on true healthcare costs and needs, meaning the state would end up having to cover more in costs to maintain many of the existing services. Furthermore, Trump’s infrastructure plan does not provide for much federal assistance as the plan counts on state and local governments working with private investors to come up with much of the money.

Overall, as North Carolina’s lawmakers wind down their short session, it is critical that they ensure our state has all the tools available to maintain fiscal flexibility for the coming years.

Luis Toledo is a Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center.