EXPLAINING THE FEDERAL BUDGET What Does It Mean for California and Children and Youth with Special Health Care Needs? Edwin Park Senior Fellow Center on Budget and Policy Priorities March 2, 2010

2 Impact of Federal Budget and Tax Policy The Federal budget is the blueprint for our national priorities. It has a direct impact on income equality throughout the nation and sets the “rules of the game” for key federal policy decisions. Federal budget and tax policies also significantly and directly affect states like California. Nationwide, more than one-quarter of state general revenues come from the federal government. More in California. Much of it is provided through Medicaid.

Critical State Programs Depend on Federal Funding Federal funding levels determine whether vital state programs, like those serving children and youth with special health care needs, will be adequately funded over the long-term. –Medi-Cal, Healthy Families, and other health programs –Food stamps and child nutrition –Cash assistance –Social services and supports –Housing –Education 3

Where Do Federal Tax Dollars Go? 4 Source: Congressional Budget Office, Note: Percentages may not total 100 due to rounding.

5 States Depend on Federal Funding State General Revenue Other sources, 74% Federal funding, 26% Source: CBPP calculations based on Census data

6 I. The Federal Fiscal Outlook Federal fiscal outlook over near- and long-term is bleak. Key factors have been past policies: enactment of tax cuts skewed towards the wealthy and failure to address rising health care costs. Contributions of last year’s economic recovery legislation vastly exaggerated. Restoring budget balance over the long-run is essential to preserve and strengthen existing federal programs serving low- income and other vulnerable populations including children and youth with special health care needs.

Key Contributions to Deficits Over Next 10 Years 7

8 Long-Term Budget Projections

Rapidly Expanding Federal Debt Levels 9

Effects of Recovery Legislation on the Long- Term Fiscal Outlook 10

11 Long-Term Deficits Damage the Economy Deficits reduce national savings (we spend more than we bring in). Depress investment and productivity gains. Weaken the economy and drag down growth. Likely harm to many low- and moderate- income individuals and families in a slow or weakened economy.

II. Rising Income Inequality 12

Long-Term Growth in Income for Top 1% 13

14 Effects of the Bush Tax Cuts Skewed to Wealthy Source: Tax Policy Center Percent Increase in After-Tax Income From 2001 & 2003 Tax Cuts When Tax Cuts Are Fully in Effect

III. This Year’s Federal Budget (FFY 2011) Context: growing public and media concern about budget deficits. Intense criticism from conservatives. Slow economic recovery and continued unemployment. Pressures to deal with budget deficits over short- and long-term. Need to further support economic recovery and shore up programs serving families hit by recession. Begin addressing long-term deficit problems. Finally enacting comprehensive health reform is critical. 15

16 Primer on the Federal Budget Process Winter The President sends his budget request to Congress by the first week in February. Congress considers the President’s proposal and then begins crafting its own budget resolution. Spring Congress finalizes its budget resolution, which is like a blueprint for the year. Summer Congress begins consideration of individual appropriations, entitlement, and tax bills. Fall Congress finalizes appropriations and other bills, as the President begins formulating his budget request for the following year.

A. Supporting Economic Recovery 17

Tracking Job Losses 18

State Budget Deficits Continue and Resulting Budget Decisions Could Cost 900,000 Jobs 19

Obama Budget Includes More Economic Recovery Provisions Focus on short-term recovery and job creation. 1. Temporarily extend: Making Work Pay tax credit extension Unemployment Insurance and COBRA benefits Fiscal relief for the states (FMAP) to avert Medicaid and other budget cuts. TANF Emergency Fund 2. $100 billion for other jobs initiatives. 20

Prospects for “Jobs” Bill Extended unemployment benefits and COBRA assistance are expiring. Republican opposition to fiscal relief. Tax cuts of varying value being added that dilute jobs bill and divert resources away from effective “bang for the buck” stimulus. House has already passed jobs bill. Difficulty to get 60 Senate votes to break filibuster. Latest developments. 21

B. Addressing Long-Term Deficits Steps to improve fiscal balance. Comprehensive health reform. Letting high-income tax cuts expire. Increase government efficiency and accountability. Discretionary freeze. Deficit reduction commission. 22

1. Prospects for Health Reform Covers at least 31 million uninsured, reduces deficits by $132 billion over 10 years and thereafter, and takes steps to slow rate of growth in health care costs. Effect of the Massachusetts election. Senate bill + “reconciliation” bill. Key issues that needs to be addressed to ensure House passage include affordability, Medicaid and financing. 23

What Will Health Reform Mean for States Like California? Large gains in coverage in state with large numbers of uninsured. Ending insurer discrimination against people who are sick or have special health care needs. Eliminating annual and lifetime limits. Set minimum benefit standards. New state responsibilities for implementation depending on structure of bill which will be critical to success of health reform. Enrollment and outreach for those eligible for Medicaid expansion and new subsidies are critical. 24

2. Administration Proposal on the Expiring Bush Tax Cuts 25 Cuts to the top two marginal income tax rates would expire for families with incomes above $250,000 A portion of the current 33% bracket would be absorbed into the 28% bracket

Increase in Revenues if Tax Cuts for Highest Income Expire 26

Who Is Subject to the Estate Tax? 27

3. Discretionary Funding Levels Non-security discretionary freeze Consistent with the need to fund crucial investments and to ensure that the economic recovery is sustained. Allows for increase investment in high-priority areas. Part of a budget that sets priorities and takes steps to bring deficits under control. 28

Reallocating Discretionary Spending Across Programs Domestic spending freeze allows high-priority investment Increased funding for high-priority discretionary areas. Education, including Head Start, child care Clean energy Infrastructure Research and development Reduced funding for lower-priority programs. NASA’s program to return astronauts to the moon Redundant projects of the Army Corp of Engineers 29

Deficit Reduction Commission Bipartisan commission set up by executive order. Deficit reduction commission must, however, take balanced approach More deficit reduction will eventually be needed. Commission’s role will be to propose and build bipartisan support for steps to reduce the deficit. Balanced approach: both revenues and spending must be on the table. No overall entitlement problem (i.e. don’t just cut Medicare, Medicaid and Social Security). 30

Investment in Families Reforms to promote work, productivity, and savings. Strengthens tax credits and programs to help low- and middle-income families with child care costs. Strengthens the EITC, and continues other refundable tax credits that help low-income working families. Strengthens financial assistance so more students can afford college. Helps low- and middle-income families save for retirement. 31

Deficit Projections under the Obama Budget 32

Deficits as Percentage of Economy under Obama Budget 33

IV. Alternative Approaches Example is the Ryan “Roadmap”. –Huge tax cuts for high-income. –Undermines employer-sponsored health insurance without reasonable alternative. –Ending Medicare for everyone now under age 55 who is not yet eligible. –Eliminate Medicaid and CHIP except for long-term care for seniors and people with disabilities. But long-term care funding would be capped. –Privatize Social Security. –Substantially worsens fiscal outlook. 34