Community/Rural/Urban Development, Political Economy,

Maki, Wilbur R.

Nelson, Glenn L.

Stinson, Thomas F.

Waldo, Arley D.

Yoho, Carole B.

English

Research Papers in Economics

Staff Papers Series
Staff Paper E’82-8 June 1982
THE NEW FEDERALISM:
HOW WOULD IT AFFECT MINNESOTA?
A Task Force of Ehe Department of Agricultural and
Applied Economics, TJniversity of Minnesota
Depatiment of Agricultural and AppliedEconomics
Universityof Minnesota
Institute of Agriculture,Forestrymcl Home Economics
S[, PaLIl, Minnesota 55 i08THE NEW FEDERALISM:
HOW WOULD IT AFFECT MINNESOTA?
A Task Force of the Department of Agricultural and
Applied Economics, University of Minnesota
June 1982
Staff papers are published without formal review within the
Department of Agricultural and Applied Economics.by
THE NEW FEDERALISM:
HOW WOULD IT AFFECT MINNESOTA?
A Task Force of the Department of
Agricultural and Applied Economics
University of Minnesotafi
Under the banner, “New Federalism,” President Reagan has called for
sweeping changes in federal-state fiscal relations and service-providing
responsibilities. What is New Federalism? How would it affect Miniesota
residents? This publication answers some of the questions concerning the
President’s proposal,
1. WHAT IS THE PRESIDENT’S PROPOSAL?
The President has proposed a realignment of federal-state responsi-
bilities for social welfare programs and the eventual elimination of federal
funding for more than 40 existing federal programs.
The first part of the plan, known as the “Swap” component, would
have states assume full responsibility for administering and funding Food
Stamps and Aid to Families with Dependent Children (AFDC). In exchange,
the federal government would take over Medicaid.
The second part of the plan, the “Turnback” component, would shift
responsibility for 44 other programs from the federal government to the
states over a period of years.
*
Members of the Task Force were Wilbur Maki, Glenn Nelson, Thomas
Stinson, Arley Waldo, and Carole Yoho. All are members of the faculty of
the Department of Agricultural and Applied Economics. Waldo is also
Extension Economist, Public Policy; and Yoho is Extension Specialist,
Public Policy.2
2. WOULD STATES GAIN FROM FEDERAL TAKEOVER OF MEDICAID?
Yes.. The financial benefit to state governments would be substantial.
At present, Medicaid (which helps finance health care for needy people of
all ages) is jointly funded by the federal government and the states.
Medicaid is a major budget item and is expected to continue its rapid
growth. In FY 1980, the most recent year for which complete data are
available, the state and local share of Medicaid spending totaled about
$10 billion. This was 21 percent of total state and local public welfare
costs ($47 billion) “and 3 percent of total state and local expenditures
for all states ($369 billion). ‘
From FY 1980 to FY 1982, estimated federal outlays for Medicaid
increased nearly 30 percent (from $14 billion to $18 billion). Under
existing law, federal outlays are expected to reach $21 billion in FY 1984.
3. HOW MUCH WOULD MINNESOTA GAIN?
Minnesota would save $501 million in FY 1984 (the first year of the
program) as a result of federal takeover of Medicaid, according to
Administration estimates. Currently, 56 percent of the state’s Medicaid
costs are paid by the federal government, 40 percent by the state govern-
ment, and 4 percent by local units. The state and local share of spending
for Medicaid in Minnesota was $340 million in
a 35 percent increase over FY 1980.
4. HOW MUCH WOULD STATES LOSE BY TAKING OVER
The Food Stamp program is now federally
by the states. AFDC is jointly funded by the.
FY 1982. This represented
FOOD STAMFS AND AFDC?
financed but administered
federal government and the3
states. Nationally, federal grants to states for these programs totaled
$16 billion in FY 1980. This represented 17 percent of total federal
grants to states and localities and 34 percent of state and local outlays
for public welfare.
From FY 1980 to FY 1982, estimated federal outlays for AFDC increased
about 14 percent (from around $7 billion in FY 1980 to $8 billion in FY 1982).
Under existing law, the Administration expects federal outlays for AFDC to
drop to $7 billion in FY 1984. Some observer- believe this estimate is
too optimistic. Estimated Food Stamp outlays increased from $9 billion in
N 1980 to over $11 billion in FY 1982. The Administration expects these
outlays to reach nearly $13 billion in FY 1984, under existing law.
5. HOW MUCH WOULD MINNESOTA LOSE?
State takeover of AFDC and Food Stamps would cost Minnesota $202
million in FY 1984, according to Administration estimates. Under existing
rules, 54 percent of AFDC costs in Minnesota are paid by the federal
government, 38 percent by the state government, and 8 percent by local
units. Federal grants for AFDC in Minnesota totaled $98 million in
FY 1980 and $116 million in N 1982. Funding for the Food Stamp program
comes entirely from federal sources. Food Stamp payments in Minnesota
increased from $60 million in FY 1980 to $85 million in FY 1982.
6. IF THE FEDERAL GOVERNMENT TAKES OVER MEDICAID AND STATES ASSUME
RESPONSIBILITY FOR FOOD STAMPSAND AFDC, HOW WOULD MINNESOTA COME
OUT ON BALANCE?
The Administration estimates the Swap would provide Minnesota with
net savings of $299 million in FY 1984. The savings from the federal4
takeover of Medicaid are estimated at $501 million while the coat to the
state of -absorbing the Food Stamp and AFDC programs would be $202 million.
A critical assumption underlying the estimated impact on Minnesota state
government is that the federal government
consistent with current Minnesota benefit
will fund Medicaid at a level
levels.
7. WHY IS THE ASSUMPTION ABOUT MEDICAID BENEFITS SO IMPORTANT?
Medicaid benefits in Minnesota are much higher than the national
average. For example, Medicaid outlays in Minnesota averaged $1,817 per
recipient in 1980. This was 58 percent above the national average of
$1,147. (Only one other state, New York, had a
per recipient -- $1,985 -- than Minnesota).
If the federal government adopts national
those prevailing in Minnesota, Medicaid savings
higher average outlay
benefit levels lower than
to Minnesota residents
would be reduced, lessening the net benefit of the Medicaid/Food Stamp-
AFDC Swap. The burden of reduced Medicaid benefits would fall either on
state and local taxpayers (if the state chose to supplement federal funds
in order to maintain benefit levels) or on Medicaid recipients (if there
were no state supplement). The potential burden on state and local tax-
payers or Medicaid recipients is substantial. In 1980, the gap between
average
totaled
Medicaid benefits in the nation and benefit levels in Minnesota
$218 million.
8. WHAT PROGRAMS DOES THE PRESIDENT PROPOSE TO TURN BACK TO THE STATES?
The Turnback component of New Federalism would give states full
responsibility for administering and funding 44 existing federal programs.5
The Administration has suggested that the Turnback programs come from a
variety of areas -- including social services, health and nutrition services,
transportation, education and training> community development, income
assistance, and revenue sharing. Projected FY 1984 federal expenditures
for the Turnback programs total $30.2 billion. Based on Administration
projections of total federal grant-in-aid outlays to states and localities
of $82 billion in FY 1984, the Turnback programs account for about 37 per-
cent of anticipated intergovernmental grants from the federal level.
9. HOW ARE STATES EXPECTED TO FINANCE PROGRAMS TURNED BACK TO THEM?
Revenue to support the programs transferred to the states would come
from two sources -- the net savings to the states from the federal take-
over of Medicaid and from a state takeover of certain federal excise taxes.
After a transition period, federal excise taxes on alcohol and tobacco
would be phased out completely, and the federal gasoline tax would be
cut in half. These taxes, along with the federal telephone excise tax
scheduled to expire in 1988, could then be levied by the states without
increasing the total (federal and state) tax bill.
10, WHEN WOULD THIS TRANSFER OF RESPONSIBILITIES TAKE PLACE?
Since the Turnback program represents a major realignment of
responsibilities between federal and state government, a transition period
is proposed in order to ease the change. During fiscal years 1984 to 1987,
all revenues from the federal alcohol, tobacco, and telephone excise taxes;
half of the federal gasoline tax; and a major portion of the federal wind-
fall profits tax would go into a Turnback trust fund. These funds would6
be distributed among the states according to their percentage share of
receipts “from the 44 Turnback programs during 1979-81. Each state’s
share of the fund would, however, be reduced or increased to balance out
any gain or loss due to the Medicaid/Food Stamp-AXDC Swap.
11 l HOW WOULD THIS WORK FOR MINNESOTA?
White House estimates for FY 1984 indicate that Minnesota would save
$501 million from the federal takeover of Medicaid. State takeover of
Food Stamps and AFDC would cost Minnesota $202 million, leaving Minnesota
a net gain of $299 million. Minnesota’s share of the 44 programs to be
turned back to the states is estimated to be $535 million. Minnesota’s
payment from the Turnback trust fund would be $535 million minus the
state’s net gain of $299 million from the Swap program, or $236 million.
During the initial phase of the transition -- the
the trust fund is a balancing device that ensures
or loses from the Swap program.
12. HOW LONG DOES THE HOLD HARMLESS PERIOD LAST?
“hold harmless period” --
that no state gains
The hold harmless period runs from FY 1984 through FY 1987. During
this time the trust fund would be fully funded from federal taxes. After
FY 1987, states would still share in the trust fund, but the size of the
trust fund would decline as federal excise taxes are phased out or
reduced over a four-year period. Trust fund revenue from the windfall
profits tax would also be reduced during this time. After FY 1991, the
trust fund would no longer exist.7
13. DURING THE TRANSITION PERIOD, WOULD STATES BE REQUIRED TO CONTINUE
FEDERAL PROGRAMS TURNED OVER TO THEM?
No. States could elect to take their share of trust fund revenue
in the form of “Super Revenue Sharing.” Except for a requirement to pass
through certain funds to local governments, states would be free to use
the funds in any way they want. States would also have the option of
continuing to apply for grants under the 44 Turnback programs, complying
with federal administrative regulations just as they had in the past.
After N 1987, the 44 Turnback programs would be eliminated from the
federal budget. States would be free to continue, modify, or drop any of
the 44 Turnback programs. However , after the trust fund is phased out,
there would be no federal funding to help support these activities.
14. WHAT WILL THE OVERALL FISCAL IMPACT OF NEW
Initially, there would
FY 1987, the outcome depends
programs, rates of increases
growth of the federal excise
be little gain or
on future funding
FEDERALISM BE ON MINNESOTA?
loss for Minnesota. After
levels for individual
for certain expenditures, and the rate of
tax base freed for use by the states.
Under White House assumptions, Minnesota begins to gain more from
the takeover of federal excise taxes and the savings from the Swap program
than it would cost to maintain the 44 Turnback programs. The net gain to
State government in Minnesota is estimated to increase from $17 million
in N 1988 (the beginning of the trust fund phaseout) to $563 million in
FK 1993. Of course, estimates so far in the future are tenuous.
Projections based on other assumptions show less favorable results
for Minnesota, however. One indicates that Minnesota would experience anet loss of $291 million for the period FY 1988 to FY 1990. Even under
this scenario, however, Minnesota would have a net gain beginning in FY
1991.
If Medicaid is not funded at a level consistent with current benefits
within the state, Minnesota’s projected net gain may be largely an illusion.
State government costs would increase if it were necessary to supplement
federal Medicaid benefits or, if no supplement were provided, Medicaid
recipients would lose. It is important to distinguish between the potential
impact of New Federalism on state and local governments and its impact on
residents of the state.
15. HOW WOULD NEW FEDERALISM AFFECT LOCAL GOVERNMENTS?
New Federalism could create hardships for some local governments.
There are two potential difficulties. First, local governments in Minnesota
help fund both Medicaid and AFDC. If the state were to take over AFDC, the
state legislature could force local governments to increase their share of
AFDC costs by more than they would save from the federal takeover of
Medicaid.
A second potential problem is that a number of programs to be turned
back to the states are programs that send funds directly from the federal
government to local
ment to localities.
opt out of programs
units or that channel funds through the state govern-
The President’s proposal requires that states which
designed solely for localities must pass the entire
amount saved on to local governments. In addition, 15 percent of all
trust fund money received by the state is to be passed through to localities.
In both cases, the passthrough is based on the federal general revenue sharing9
—
formula. Any distribution of funds based on the revenue sharing formula
is likely to be quite different from the current distribution of federal
grants. Consequently, some local governments may gain from the passthrough
requirements while others lose.
16. IS THE NEW FEDERALISM PROPOSAL LIKELY TO BE ADOPTED BY CONGRESS?
No one expects the President:s program to be adopted without change.
The Administration is now attempting to forge an agreement with the states
concerning the proposal. It appears likely that the Administration will
drop its proposal for state takeover of Food Stamps. Many details have
yet to be worked out, including what would
under a federal takeover of that program.
The President’s proposal has created
Federal-state fiscal relations are already
transformation, and more changes are bound
happen to Medicaid benefits
widespread discussion and debate.
in a period of significant
to come. At the heart of the
issues raised by New Federalism are some fundamental questions concerning
the appropriate division of responsibilities between the federal government
and the states. How we answer these questions is apt to have a far-reaching
effect on the nation.
A NOTE TO THE READER
Additional information about the potential impact of New Federalism
on Minnesota is available from the Department of Agricultural and Applied
Economics, University of Minnesota, St. Paul, MN 55108. Ask for The New
Federalism: What It Means for Minnesotans (Staff Paper P92-4).

THE NEW FEDERALISM: HOW WOULD IT AFFECT MINNESOTA?

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