Opinion: Daily Journal

Setting the Stage for Medicaid Reform

RALEIGH – Sen. Dan Clodfelter, Democrat from Charlotte, is a main advocate in the North Carolina General Assembly of giving all counties the authority to impose a new 1 percent tax on the sale of real estate. I disagree with him. However, Sen. Clodfelter is also a main advocate of a proposal to transfer the fiscal responsibility for North Carolina’s Medicaid program from the counties to the state. I find myself in agreement on this one.

For years, county commissioners and others have entreated the state legislature to alleviate the crushing burden of paying for Medicaid, which is growing faster than most property-tax bases and cannot meaningfully be restrained or reformed by the counties. For years, state lawmakers have done little more than express sympathy. After all, the county’s share of Medicaid is about a half-billion-dollar annual liability. Legislators have been loath either to accept the liability and offset it with budget savings – as the John Locke Foundation has long recommended – or approve a state tax increase to pay for it.

Last year, Fayetteville Democrat Tony Rand, majority leader of the Senate, began floating the notion of a complex swap that would finance the counties’ Medicaid liability, as well as other expenditures, through higher taxes – though the hike would technically be enacted at the county level instead of the state. The swap wore a Medicaid mask, but it was really just a $1 billion sales-tax hike.

Once the fiscal and political implications of Rand’s plan became better known, its prospects worsened. Here’s where Clodfelter enters the picture. Rather than use the Medicaid swap as an excuse for a tax hike, Clodfelter is proposing simply that the state pick up the county share effective January 1, 2008 while also gaining several streams of tax revenue currently collected by localities:

• 1/4 cent of the retail sales tax.
• Half of local sales-tax collections on food.
• Corporate-tax revenue currently devoted to local school construction.
• Proceeds from beer and wine taxes.

In the short run, Clodfelter’s plan is close to revenue neutral for the state. In the long run, however, the cost of the county share of Medicaid would rise faster than the state’s newly gained revenue streams – creating an estimated $117 million gap in FY 2009-10, a $169 million hole in FY 2010-11, and $219 million in FY 2011-12. This is really nothing more than a numerical restatement of the fundamental problem, that Medicaid costs are growing too fast, far faster than revenues at current tax rates can finance. The plan assumes a staggering 70 percent growth rate during the period.

The flip side is that counties would come out far ahead. Losing their Medicaid liability is far more valuable than the tax revenues they’d be giving up. Municipalities, interestingly, are not so lucky. They just lose, starting in the second year (2008-09), though the numbers aren’t very big (topping out at $22 million in 2011-12). For the deal to work, lawmakers will probably have to tweak the amount of revenue devoted to holding municipalities harmless.

My initial reaction to Clodfelter’s plan was wary, but I’ve come around. The current cost-sharing arrangement is intolerable. Counties are forced to pay but don’t make any substantive decisions about Medicaid. Meanwhile, Raleigh makes the policy decisions and the exports some of the resulting costs to the localities. If the state is ever going to get its arms around the problem of Medicaid reform, it will first have to carry the full fiscal weight of the non-federal share.

Rebuilding Medicaid from block to bumper is inevitably a job for the state. Clodfelter’s proposal basically tows the jalopy entirely into the state garage and gives its policy mechanics a due date – 2009.

Hood is president of the John Locke Foundation.