To Rescue the States, Let’s Federalize Medicaid

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This morning California released its estimate of how badly the COVID-19 pandemic is going to blow a hole in its budget:

California’s government faces a $54.3-billion budget deficit through next summer according to an analysis released Thursday by advisors to Gov. Gavin Newsom, the deepest projected fiscal hole in state history.

….Newsom’s budget team forecasts a $41.2-billion drop in tax revenues compared to their estimates from just four months ago….Expenses are also projected to skyrocket. The fiscal report released Thursday assumes some $13 billion in higher state costs due to the pandemic.

You can expect to hear 50 different versions of this story before long. The California budget is a little over $200 billion, which means the shortfall is about 25 percent of the total. My guess is that this estimate will rise over time, perhaps ending at about 35 percent or so. Total state and local spending across the country comes to roughly $2 trillion, so if California turns out to be average it means a total shortfall across the nation of about $650 billion.

So that’s roughly our target in the next coronavirus rescue bill: approximately $650 billion in aid to state and local governments. Which makes this a perfect opportunity to do something we should have done long ago: federalize Medicaid. There’s never been a good reason that states should share this cost, which will probably come to at least $250 billion this year and next thanks to a surge in coronavirus spending. And since federalizing Medicaid would be a permanent reduction in state spending, no other bailout would be necessary. It would amount to $750 billion over three years, more than enough to cover this year’s shortfall. A 2-3 year bridge loan is all that would be necessary.

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