OBBBA’s Small Step to Federalism

Late last year, when there was (unwarranted) optimism that DOGE could deliver big savings for taxpayers, I recommended that Elon Musk and his team promote fiscal federalism.

My argument was that it is wasteful and foolish to have Uncle Sam grab about $1.3 trillion from taxpayers at the state and local level and then (using a leaky bucket) send that money back to politicians at the state and local level.

Instead, just let the state and local politicians (and their voters) decide whether to collect and spend money on the various programs funded by federal grants.

The good news is that Trump’s Big Beautiful Budget. takes a modest step in that direction.

Here are some excerpts from a story in the New York Times by David Chen and Pooja Salhotra.

…state governments are bracing for impact as Washington shifts much of the burden for health care, food assistance and other programs onto them. …they will be expected to…decide how much they can do to keep their citizens insured and fed once they start losing federal assistance. …Mr. Trump’s law includes nearly $1 trillion in cuts to Medicaid by 2034, scaling back the program that pays for the health care of roughly 78 million adults and children. It also sharply curtails federal spending on the Supplemental Nutrition Assistance Program, or SNAP, which provides monthly food assistance payments to about 42 million people. …For the 40 states that expanded Medicaid to lower-income workers under the Affordable Care Act, the fate of that extra coverage has loomed particularly large. …Among the states that could lose more than 7.5 percent of their total federal Medicaid funding are Arizona, New Hampshire, Nevada, Iowa, Vermont, Michigan and Oregon… In California, state officials said the law would most likely cause 3.4 million people to lose health insurance and at least 735,000 people to lose food benefits.

I have three incidental comments and one big response to the NYT story.

The three small comments are:

1. There are not “$1 trillion in cuts to Medicaid.” Instead, the legislation merely takes the long-overdue step of slowing the growth of Medicaid funding.
2. The Medicaid expansions from the so-called Affordable Care Act (Obamacare) basically bribed states to expand the program.
3. The OBBBA curtails the ability of state governments to use odious budget gimmicks to fleece federal taxpayers for more Medicaid funding.

My main response to the story deals with the part about states having to “decide how much they can do to keep their citizens insured and fed.”

Exactly. That’s what should be happening. We have a massive and unaffordable federal government that is squandering well above $1 trillion per year on programs that should be entirely the responsibility of state or local governments.

Indeed, my complaint with Trump’s budget bill is that it only takes a small step in the right direction.

The entire Medicaid program should be turned into a block grant that is gradually phased out. The same is true for food stamps and many other programs.

If states like California want to waste money on various programs, it should not be the responsibility of taxpayers in other states to pick up the tab.