As state senators assembled for the second, shorter, 60-working-day session of the 103rd Nebraska Legislature on January 8, 2014, many observers expected that tax reform and Medicaid extension would be high on the list of priorities, as they had been since the body had adjourned the previous June.
And mountain lions. Omaha Senator Ernie Chambers, protector of every threatened species, had declared that he would make State-sanctioned killing of mountain lions everyone’s business.
The Reader kept an intermittent eye on proceedings in Lincoln with these results.
First Day: Back to School
The link between levels of state taxes and economic growth is too weak for tax cuts to be effective economic growth policy. That was the message development economics expert Therese J. McGuire, PhD economist at Northwestern University, brought to members of the Nebraska Legislature on the first day of the current session.
At a seminar-like session, the Open Sky Institute brought together 15 senators, along with staff, candidates and community members, to hear Dr. McGuire lay out evidence to support her assertion. The Institute describes itself as a non-partisan organization focused on fiscal research with a mission “to improve opportunities for every Nebraskan by providing impartial and precise research, analysis, education and leadership.” This was the second such event after one held last year on tax basics.
The TABOR Study
Among highlights from Dr. McGuire’s body of research, accumulated in studies since 1985, were findings from a study in 2006 on the stringent Colorado “Taxpayers’ Bill of Rights” (TABOR). The state constitutional change had been passed by Colorado voters in 1992 to limit state expenditures as a way of expanding the economy. But by measuring economic indicators, McGuire and her associate Kim S. Rueben found the change did not significantly boost Colorado’s economy.
Specifically, they reported no effect on the growth rate of real per capita income from the enactment of TABOR, short term or long term.
In employment, they observed a positive impact in the five years following the passage of TABOR in Colorado but a negative and much stronger effect in the following five years. They concluded that any short term correlation was offset by losses in employment in the long term.
Dr. McGuire admitted that the science of economics did not have “a good model of regional economic growth.” She cautioned that real world studies were not perfect laboratory experiments. If they were, there would have to be random assignment of economic change like the TABOR law to a set of “treatment” states with comparison to a set of neighboring “control” states.
In view of such limitations, her conclusions were tempered. “The jury is still out and may always be out,” she said on absolute proof but with the sum of her research, she pointed in stronger directions than tax reductions to spur economic growth.
Uncertainty and Economic Growth
Dr. McGuire cited recent work done by Nick Bloom of Stanford University quantifying the impact of uncertainty on economic growth. She said he has been measuring the effect of policy uncertainty on the economy. At the federal level, uncertainty has been measured by 1) the number of newspaper references to economic policy uncertainty, 2) the number of federal tax code provisions set to expire, 3) forecaster disagreement over expected inflation and 4) disagreement over expected government purchases.
Bloom and his associates have posited that those four elements alone, independent of other events occurring between 2006 and 2011, were responsible for a 2.3% decrease in the Gross Domestic Product and a drop of 2.3 million jobs.
Traditionally, uncertainty has been seen as working by producing cautiousness in investing and hiring, the “wait and see” effect; increased cost of risk-taking or higher cost of financing; and through precautionary savings that reduce consumption.
But economists are now including “real-options” effects with their emphasis on timing strategies: “If I can make the decision now or six months from now, I will do it in six months and see what develops.”
At the state level
Dr. McGuire further illustrated the effects of uncertainty at the state level, drawing on her own work. She said that in the course of interviews conducted for a 1984 Minnesota Tax Study Commission, she was talking to 3M executives who told her that certainty and predictability in state taxes was much more important in business location and hiring than the level of state taxes.
She said that they also saw company-specific tax breaks as not only unfair but also as a sign of a weak, if not desperate, government.
Dr. McGuire also said that there were two tax conditions that were worrisome to companies in the long term. Taxes that were too high and taxes that were too low. If taxes were too low to sustain good schools or good transportation and communication systems, for instance, that would likely work against economic development in a state. She added that insufficient taxation to maintain reserves for operating the state through periods of stress could work against a state.
After recommending against the tax reduction schemes that have become the mainstays of most states’ economic development plans, Dr. McGuire closed with two things the senators should do:
1. Pointing to her own state of Illinois, she said states should get out and stay out of debt. In Nebraska, state government is prohibited from incurring debt or deficits.
2. Create tax systems that adequately support the functions of government most important to a vibrant economy:
a. Development of human capital through education, health care and public safety
b. Provision of infrastructure such as transportation and protection of the environment
Governor Heineman Speaks
The Open Sky seminar was held in Room 1200 of the Capitol about one block and one story away from the Governor’s suite but its content appeared to be well insulated from Governor Heineman when he self-leaked his “State of the State Address” to the media in a testy after-hours news conference a week later on January 14.
In his prepared remarks, the Governor commented that “high taxes are detrimental to economic growth,” and that “high taxes limit the ability of small businesses to create new jobs.”
In his State of the State Address he would declare, “Tax relief is a major driving force for economic success.”
The Governor announced that he had found a source of money for “up to $500 million for meaningful tax relief.” He pointed to the record-high state cash reserve fund, indicating that, based on his belief that Nebraska’s economy would grow and by continuing to hold the line on spending, the fund could be tapped over the next three years for a total half billion.
According to Nebraska Watchdog, asked by reporters what his plan was for tax rates after three years of relief, the Governor who is in his last year, said, “Whoever’s the governor and the Legislature will have to deal with it.”
The cash reserve is set by the Legislature as one of its budget, spending and tax responsibilities. It is set by a Tax Review Committee made up of the Speaker of the Legislature and the Chairs of the Executive Board and the Revenue and Appropriations Committees, working with a formula specified in the law. The formula, however, is subject to speculation on what the rate of economic growth or contraction of the state will be in coming tax years.
The Governor also ignored the Legislature’s Tax Modernization Committee finding that Nebraska’s “individual and corporation income tax programs are appropriately progressive but our ‘bracket system’ has not kept pace with the rate of inflation in terms of personal income.”
Irony on Irony
On the very same day that the Governor released his plan to pay for tax relief, creating variability in tax rates and proposing to pay for it with lowered cash reserves, the Mercatus Center at George Mason University released “State Fiscal Condition: Ranking the 50 States”.
Here, Nebraska was Number One. It was first among all states in Long-Run Solvency, described as the ability to use incoming revenue to cover all its expenditures, including long term obligations such as pensions and infrastructure maintenance.
The next day, January 15, the Governor would include in his “State of the State Address” in connection with his call for tax reduction, the highly unconventional observation that the State has $1.2 billion in cash in its checking and savings accounts. It is not clear what he had in mind with this comment, although he suggested changing it by lowering taxes.
The Mercatus Center report, however, gave Nebraska a lower ranking in Cash Solvency–still a highly respectable 9th among 50 states. This is a measure of cash the state can easily access to pay its bills in the near term or its operating liquidity, the money the Governor had mentioned.
The Medicaid Gap
Background: Last Spring an unusual organized filibuster by an estimated 17 conservative senators prevented passage of a critical part of the Affordable Care Act in Nebraska that left about 55,000 Nebraskans without health insurance through Medicaid. Health and Human Services Chairwoman Kathy Campbell said she would schedule an interim hearing before the next full session of the Legislature to take testimony on a possible solution. That hearing occurred in Lincoln on December 18, 2013. As the afternoon wore on, there was one dramatic moment that stopped everything.
A woman named Tammy Fiechtner came forward to testify. Speaking plainly, she said she ranched with her husband near Stapleton and was also an insurance sales associate. She said in 2011 she was diagnosed with colon cancer. Fiechtner told the senators she had health insurance but her deductible had just gone from $3,000 to $5,000 a year and her out-of-pocket costs had gone to $12,700 a year.
Feichtner said she looked into whether her family would qualify for help with insurance costs under the Affordable Care Act (ACA) or Obamacare. But she found in Nebraska she fell into the “Medicaid gap.” With an adjusted income of $10,100 she was too poor to qualify for help in the ACA Marketplace and not poor enough to qualify for Medicaid. This was the gap the filibuster had been organized to preserve.
“A lot of my family and my friends are in the same boat,” she said. “It’s a great burden on us.” She told the senators listening in the quiet hearing room. “This is not just my personal story. It’s western Nebraska’s personal story.”
In a matter-of-fact tone Feichtner asked the Committee to help her and others like her. When she finished talking, it seemed the normally talkative senators were at a loss for words. Chairwoman Kathy Campbell thanked her, told her she was not alone and they would do their best. Feichtner walked directly from the room, as though she had given enough time to the matter.
A Whole New Approach
Fast forward to January 14, 2014: The Legislature had convened and was picking up speed. In a small room sometimes used for news conferences, several members of the Legislature stood at Chairwoman Campbell’s side on the fifth working day of the session, at a news conference called for the for the unveiling of a completely new bill. Key senators who had helped draft the bill– Jeremy Nordquist and Sara Howard, both Omaha and Sue Crawford, Bellevue, joined Campbell at the podium to present the bill. Others who had signed on to the bill gathered round—Norm Wallman, Cortland; Danielle Conrad, Lincoln; and Tanya Cook, Omaha.
The measure, called the Wellness in Nebraska (WIN) Act, was in part based on “waiver” designs created in other states. It was drafted to sidestep objections to Medicaid and to overcome the uncertainty that had allowed a small minority of conservative senators to obstruct simple extension of Medicaid in 2013 by filibuster.
But the vote count on passage of this bill will be high since a gubernatorial veto is assumed. That means that 33 (2/3 of the Legislature) yes votes will be needed to make it law.
In order to get waivers to spend money that would otherwise be spent on Medicaid in unique ways, states must offer the federal government a novel or experimental approach that promises improved outcomes over Medicaid.
After touching on highlights at the news conference, senators were asked whether they had any indication there would be increased acceptance among legislators of the new approach. While Campbell diplomatically demurred that senators had not had time to read the bill, Nordquist, often more outspoken, stepped forward to say that “stories are coming in” from uninsured constituents. They were circulating among his legislative colleagues, he said.
In other words, this time it will be Tammy Feichtner and, according to Nordquist, people like the grandparents, both on Medicare, trying to support a working grandchild who is uninsured. Other stories were coming in to many senators, he said, that would make a difference, along with the wholly new approach to filling the gap.
In these matters, everything hangs on the Federal Poverty Line and how far away from it a person is, above or below. The line stands at an annual income of $11,490 for an individual or $23,550 for a family of four.
Right now in Nebraska, some Medicaid clients participate in their care with a copay for services under the State’s managed care approach. One of the proposed experimental features is a change from unpredictable copays to more manageable insurance premium participation. WIN proposes insurance coverage for most newly eligible persons (people from 19 years of age to 64 with incomes from 0 to 138 percent of the federal poverty line). But, in order to combat the habitual use of hospital emergency rooms as the first call in illness, there would be a copay for that.
Positive incentives for meeting “wellness responsibilities” are built in. Premiums will be waived if they are met.
The proposed WIN program provides for keeping employed people in their employer-based insurance groups, where offered, by assisting with the employee portion of premiums. Some of the newly eligible (at 100-138 percent of the poverty line) would share in premium payments in a marketplace.
The bill (LB887) is 32 pages long and is incompletely described here. All legislative bills are available as they are filed at nebraskalegislature.gov at the easy–to-use and richly informative Legislative website.