How Kansas Fiscal Cliff Led to Health Care Bill Collapse

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By Jason Mast

Sen. Jerry Moran (R-Kan.) stood between the gold beams and glass walls of Reagan National Airport’s Terminal C waiting uncomfortably, and waiting, and waiting.

It was the Thursday before the July 4 recess, two weeks before Moran would become a national name for killing the second Senate health care bill, and the senator’s flight to Kansas City was delayed four hours—mechanical failures, the loudspeaker announced. Constituents angry over the bill would be waiting across Kansas for the coming town halls, and the Republican party stalwart was uneasy. The political atmosphere weighed on him, he later told Jim Ward, and he worried toxic partisanship had made it difficult to help people.

Ward, the Democratic minority leader in the Kansas House and an old friend of Moran from their time together in the state Senate, told Bloomberg BNA he was waiting for the same flight. He and Moran spoke, trading news on spouses and kids.

“Are you still enjoying your job?” Ward asked eventually.

“Not at all,” he said.

Moran killed the Senate bill’s second iteration July 17, announcing in a joint statement with Sen. Mike Lee (R-Utah) he would vote “no” on a motion to proceed. He cited the closed-door, partisan bill-crafting process as the underlying motivation.

However, Kansas political leaders cited other reasons that Moran, who has voted against his party only once this congressional session, opposed the bill: the new political landscape that emerged in the wake of Kansas’ 2012 tax cuts, and the bill’s impact on rural Kansans and rural hospitals that Moran saw during recent trips through the state.

‘Heading to Disaster’

The Senate proposals’ potential impact on rural Maine and Alaska have received considerable attention because of Sen. Lisa Murkowski’s (R-Alaska) and Sen. Susan Collins’ (R-Maine) opposition.

However, the fiscal crisis arising from the 2012 cuts left the Sunflower State particularly unequipped to absorb the proposed federal spending cuts. The decisions that Kansas has and would have to confront provide a glimpse into the tough choices other states would ponder if a $772 billion Medicaid cut went through—with many of those states facing large deficits this year.

“I’ve known him for a long time,” said Rep. Susan Concannon (R), vice chair of the Kansas House Health and Human Services Committee. “I feel like he’s a guy from our rural Kansas area who understands we’re heading to disaster. We might still be.”

Old Taxes, New Politics

Gov. Sam Brownback (R) signed one of the largest income tax cuts in state history a year into his tenure, promising they would prove low taxes could spur economic growth and pay for themselves. The plan was designed by some of the same economists behind President Donald Trump’s tax plan.

The economic growth never materialized. Kansas started slashing funds for core programs, to close ever-increasing deficits. This spring, facing a nearly billion dollar budget shortfall by 2019, the Legislature overrode Brownback’s veto to raise taxes and restore some funding.

In the past five years, the political makeup of the Kansas Legislature has changed dramatically. Moderate voters, activated by the wave of cuts, elected Democrats and moderate Republicans in 2016, said Dr. Robert St. Peter, president and CEO of think tank Kansas Health Institute. Kansas politicians now say the Legislature is divided into thirds: Democrats, moderate Republicans who oppose the tax cuts, and ultra-conservatives that include some who voted to restore taxes.

“The overwhelming outpouring you’re seeing nationally now, we had in Kansas two years ago,” Ward said, adding that “Kansas voters have washed their hands of Sam Brownback.”

Rep. Steven Johnson (R), chair of the Kansas House Tax Committee, said the state’s core political makeup hasn’t changed, but acknowledged that the “political winds change.” However, Ken Kriz, an economist at Wichita State University, pointed to the April special election to replace new CIA Director Mike Pompeo in Kansas’ 4th Congressional District as an example of how strong those winds may have shifted in Moran’s eyes.

Pompeo, a Republican, won in November by over 30 points. Ron Estes, the Republican nominee to replace him, won by just over 6 points.

“Today, it makes sense to vote against the health care bill,” Ward said. “But where Kansas politics goes in the next year and a half—that points to what he does with the next bill with a few tweaks.”

How Much Is 4 Percent?

Among the most notable effects of the tax cuts was that Kansas, which cut education funding in 2009, lacked the resources to restore school spending as other states did after the Great Recession. That left the state with a school funding system the Kansas Supreme Court ruled in March didn’t “meet or exceed the minimum constitutional standards of adequacy.”

In part to avoid slashing education further, Kansas cut funds from the state health care system. Brownback instituted a 4 percent across-the-board cut for 2016, including cuts to the state’s privatized Medicaid program.

“It ended up being much higher than that—the way it affected nursing homes and clinics,” Concannon said. “It was thought that, ‘It was just 4 percent, it’s not that much.’ But it was that much.”

Kansas lawmakers restored Medicaid funding this year with an HMO privilege tax, but cuts to the program led to a $56.3 million drop in what Medicaid reimbursed providers. It’s a significant fall, said St. Peter, particularly in a state that saw one hospital close in 2015 and where one recent study shows one third of rural hospitals are at risk of closure.

“Their margins are pretty slim, and anything that affects their revenue line can have a big impact,” St. Peter said.

$1 Billion in Cuts

Brownback’s 2016 budget cut $56.4 million from Medicaid. The Senate bill that Moran killed would have cut $211 million over two years from Kansas—about $1 billion over the next decade, according to Kansas Health Institute analysis.

Some have speculated wealthy, liberal states might decide to increase taxes and spending to fill gaps left by the Senate bill’s $773 billion in Medicaid cuts. Thomas Shimkin, legislative counsel and director at the Multistate Tax Commission (MTC), said only a few could—such as New York, Vermont, and Massachusetts, which had a universal program prior to the Affordable Care Act.

“The odds in almost every state are very close to zero,” Shimkin said.

Many said that Kansas would be among those doomed states.

“There’s not a way to replace a billion dollars in our budget,” Concannon said. “It would be devastating.”

The way the Senate bill cuts Medicaid exacerbates the problem for Kansas. The bill phases out the Medicaid expansion, meaning states such as Alaska and West Virginia that expanded would see the steepest drop. But it also establishes future funding from the baseline of what states are now spending per person. Alongside the 2012 tax cuts, Kansas privatized Medicaid, creating a system that St. Peter said maximized savings and would set a lower baseline than most other states.

There’s no room left for cuts, he said.

“It’s not like they can just implement managed care to save money,” St. Peter said. “We’ve already done that.”

National Fiscal Crisis

Cutting Medicaid would exacerbate the state’s fiscal crisis by hurting hospitals that provide one of the largest sources of employment—and thus, indirectly, tax revenue—giving the state even less money to fill in the gap, according to Concannon. “There’d be a domino effect,” she said.

But “Kansas is not unique,” said Richard Auxier, a research associate at the Urban Institute’s Tax Policy Center.

Thirty-one states faced fiscal deficits this year, according to the MultiState Associates. Ten entered July 1 without a budget, according to the Tax Foundation.

States are receiving less revenue than anticipated. Nineteen of 21 states that publish data saw cash flow fall below forecast in April and May, and income tax revenue fell in 24 of the 41 states that collect it, according to a July 17 Rockefeller Institute report. Overall state income tax fell 4 percent.

Part of the fall comes from people and corporations shifting income to the 2018 fiscal year in anticipation of Trump tax cuts, said Lucy Dadayan, co-author of the Rockefeller report. Still, much of the decline can be attributed to economic fundamentals, she said. For example, more retail stores are projected to close this year, mainly in the Rust Belt, than in any year since the Great Recession. And oil prices have fallen.

States dependent on sales tax or energy taxes are struggling, she said.

“States have just been slow on adapting to the economic reality,” Dadayan added, noting that it took until 2017 for all states to collect taxes from Amazon and that oil states have ignored warnings to diversify their tax base.

Big Vote Fatigue

Medicaid cuts could come at a time when states are particularly unprepared to take on additional costs, Auxier said. States such as Oklahoma added cigarette and alcohol taxes to make up deficits, he said, but filling in Medicaid losses would require steep sales or income levies.

Kansas could have additional difficulty levying these because of what Auxier calls “big vote fatigue"—a reluctance to make large political decisions after already overriding a government veto to raise taxes.

The Kansas Supreme Court heard arguments July 19 on whether the new budget’s education funding is adequate. If the court says “no,” Kansas may have to raise hundreds of millions more dollars.

“There’s a real reluctance to spend money on anything else until we know what our obligation will be on school funding,” St. Peter said.

Other states don’t face the same court orders, but their futures under a Senate health care bill are no clearer.

“It’s uncertain how any state would respond,” Auxier said. “We haven’t seen anything like this before.”

To contact the reporter on this story: Jason Mast in Washington at jmast@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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