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A Project of State Budget Solutions

No. 4 November 13, 2014

Expanding Medicaid Will Hurt Tennessee Families,


Lower Income, and Reduce Jobs
By J. Scott Moody, Chief Executive Officer and Chief Economist
Introduction

the private sector. Chart 1 reveals this crowd-out


over time with Tennessees private sector already
diminished from 92.1% in 1929 to 68.6% in 2013.
Thats an astounding 25.5% drop. Tennessees private
sector is now only the 33rd largest in the county.

One might believe that expanding Tennessees


Medicaid program will not cost the state a dime,
since the federal government has promised to pay for
the expanded program for the first three years.
Perhaps that is why some of Tennessees
policymakers are considering Medicaid expansion
under the provisions of the Affordable Care Act,
commonly referred to as Obamacare.
Unfortunately, this could not be further from the
truth.

In this report, the third in a series, we will show how


Medicaid expansion will reverse the recent post-
recession growth in Tennessees private sector, and
how that will directly affect the pocketbooks of
Tennessees families via lower income and fewer
jobs. The economic cost will range from $1,148 less
personal income for all households or the loss of
67,433 private sector jobs.

The old adage, Theres no such thing as a free


lunch, certainly applies here. Tennessee would
become increasingly dependent on Medicaid and pay
a steep economic price as public sector spending, via
transfers and government compensation, crowds out
94%

Tennessee, unlike the majority of its neighboring


states, would become increasingly dependent on
Medicaid and pay a steep economic price.

Chart 1
Tennessee's Projected Private Sector Shrinks
under Obamacare's Medicaid Expansion
Calendar Years 1929 to 2013

89%

Percent of Personal Income

84%
79%
74%
69%
64%
1929

1938

1947

1956

1965

Source: U.S. Department of Commerce: Bureau of Economic


and Federalism in Action
Analysis

1974

Calendar Years

1983

1992

2001

2010

Private Sector with Medicaid Expansion


Private Sector

No. 4

November 13, 2014

Chart 2
Interest Payments Exceed
Budget Deficit in 2024
2013 to 2024

900
800
$
700
B
i 600
l
l
500
i
o
n 400
s
300
200
2013

2014

2015

2016

Source: Congressional Budget Office and


Federalism in Action

2017

2018

2019

Calendar Year

2020

2021

2022

2023

2024

Net Interest (Nominal)


Budget Deficit (Nominal)

The Economic Principles In Play


The appropriate size and role of government depend

More public sector spending, as prescribed by
on the deadweight burden caused by incremental
Medicaid expansion, will ultimately make Tennessee
transfers of funds from the private sector. The
less competitive. This new spending is not really
magnitude of that burden depends on the increases
new at all. Expansion funding
in tax rates required to raise
would come via transfers (Social
incremental revenue and on the
Security, Medicare, and
deadweight loss that results
Since only the private sector
Medicaid) and government
from higher tax rates recent
can create new income and
compensation and result in
econometric work implies that
crowding out the private sector
the deadweight burden caused
wealth in an economy,
(see Appendix for details).
by incremental taxation (the
Obamacares expansion of

marginal excess burden) may
Contrary to so-called Keynesian
exceed one dollar per one
Medicaid will come at the
multiplier analysis, only the
dollar of revenue raised, making
expense of long-run economic
private sector can generate new
the cost of incremental
income and wealth in an
government spending more
growth.
economy. Government
than two dollars for each dollar
spending, on the other, is the
of government spending.
redistribution income first
[emphasis added]1
extracted by taxes. Yet, the very process of
redistribution comes at a very high economic cost.

1
Prominent Harvard economist Martin Feldstein
Feldstein, Martin, How Big Should Government Be? National
states:
Tax Journal, Vol. 50, No. 2 (June 1997), pp. 197-213.
http://www.ntanet.org/tax-resources/ntj-full-text-articles.html

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No. 4

November 13, 2014

Chart 3
Medicaid Spending Soars
Under Obamacare's Medicaid Expansion
2013 to 2022

950
900
$

850
800

B
i
l
l
i
o
n
s

750
700
650
600
550
500
450
2013

2014

2015

2016

2017

Source: Centers for Medicare & Medicaid Services


and Federalism in Action

Calendar Year

2019

2020

2021

2022

No Expansion
Full Expansion

Though estimates vary, Obamacares expansion of


Medicaid costs a significant amount of money. As the
bill increases, we can expect to see higher taxes and
borrowing at the federal level. This leaves less money
in the pockets of Tennesseans and businesses, and
reduces their ability to invest for the future.

What is more troubling is the projected growth of the


federal budget deficit over the next 10 years: an
expected 34% increase from $537 billion in 2014 to
$722 billion in 2024 (Chart 2). This growing deficit is
unsustainable. In 2024 the interest payment on the
national debt ($799 billion) is projected to exceed the
budget deficit ($722 billion). Simply put, this means
that the federal government will have to borrow
money just to pay the interest on the debt.2

This is an unsustainable federal situation that could


have been delayed if more states had the fortitude to

2
Congressional Budget Office, An Update to the Budget and
Economic Outlook: 2014 to 2024, August, 2014.
http://www.cbo.gov/sites/default/files/cbofiles/attachments/45
653-OutlookUpdate_2014_Aug.pdf

2018

resist Obamacares Medicaid expansion. If every state


expands Medicaid, the federal deficit will be $813
billion larger by 2022, relative to no Medicaid
expansion (Chart 3).3 Of course, since this money is all
borrowed, the federal government will also pay an
additional $76 billion in interest payments (at an
interest rate of 2.8%).

What This Means For Tennessee


Medicaid expansion will have a large, negative


economic impact in Tennessee. According to
estimates from Governor Haslam, the expansion of
Medicaid will boost transfer spending, mostly from
the federal government, by $1.4 billion. If this
occurred in 2013, that additional public spending
would have crowded out and permanently reduced
the private sector by up to 0.4 percentage points.


3

Centers for Medicare and Medicaid Services, 2013 Actuarial


Report on the Financial Outlook for Medicaid, 2013.
http://medicaid.gov/Medicaid-CHIP-Program-Information/By-
Topics/Financing-and-Reimbursement/Downloads/medicaid-
actuarial-report-2013.pdf

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No. 4

November 13, 2014

Table 1
Tennessees Private Sector Ranking Falls 2 Spots Due to
Obamacares Medicaid Expansion
Private Sector Share of Personal Income by State and Rank
2013
2013 Rank
2013 Rank
State
State
70.7%
-- Virginia
69.9% 26
United States
1 Georgia
69.6% 27
New Hampshire 76.9%
76.9%
2 Rhode Island
68.9% 28
Connecticut
75.3%
3 Missouri
68.9% 29
Massachusetts
75.2%
4 Ohio
68.9% 30
North Dakota
75.1%
5 Oklahoma
68.7% 31
New Jersey
75.0%
6 Louisiana
68.6% 32
Colorado
74.7%
7 Tennessee (Current)
68.6% 33
Texas
74.4%
8
68.2% 34
Minnesota
Oregon
74.3%
9 Tennessee (with Expansion) 68.2% 35
South Dakota
74.2% 10 Montana
67.9% 35
Nebraska
73.9% 11 Michigan
67.9% 36
Illinois
72.8% 12 Arizona
67.9% 37
Iowa
72.7% 13 Delaware
67.7% 38
Utah
72.3% 14 Vermont
66.9% 39
Nevada
72.3% 15 North Carolina
66.0% 40
California
72.3% 16 Arkansas
65.9% 41
Wyoming
Kansas
72.1% 17 Maine
65.3% 42
71.7% 18 South Carolina
63.6% 43
Wisconsin
71.1% 19 Alabama
63.5% 44
Pennsylvania
71.0%
20
62.4% 45
Indiana
Kentucky
70.7% 21 Hawaii
62.3% 46
Washington
70.5% 22 Mississippi
60.8% 47
Maryland
70.2% 23 Alaska
60.6% 48
Florida
70.0% 24 New Mexico
60.1% 49
New York
69.9% 25 West Virginia
59.8% 50
Idaho
Source: U.S. Department of Commerce: Bureau of Economic Analysis and
Federalism in Action

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No. 4

November 13, 2014

Chart 1 displays the crowd-out over time. First note


that Tennessees private sector has shrunk by 25.5%,
from 92.1% in 1929 to 68.6% in 2013. Because of this,
Tennessees private sector is now only the 33rd
largest in the county (Table 1). More troubling, as
shown in Chart 1, Medicaid expansion will reverse the
growth in the private sector following the Great
Recession and put the Volunteer State back on a
downward trajectory.

$1,148 less personal income for all


households with no private sector job loss;
or

No change in personal income but the loss of


67,433 private sector jobs.

Table 1 and Chart 4 reveal how Tennessees private


sector would lose ground relative to the other states.

The Volunteer States ranking would fall from having
Tennessees policymakers should pause for several
the 33rd largest private sector in the country to the
reasons. First, there are
35th largestall else being
plenty of citizens who can
Table 2
equal.
recall the shortcomings of

Estimated Economic Loss Due to
TennCare, a precursor to
Conclusion
todays Medicaid
Obamacare's Expansion of Medicaid

expansion that is part of
Personal Income
Job Loss
Obamacares expansion
Area
or
Obamacare. Those same
Loss per Household
Equivalent of Medicaid is not without
policymakers should be
significant cost to the
Tennessee
-$1,148
or
-67,433
very concerned about this
Volunteer State. It is not
Source: U.S. Department of Commerce: Bureau of Economic
crowding out of the
Analysis, Census Bureau and Federalism in Action
free at all, as there will
private sector by
be serious economic
government spending. As Chart 4 reveals, there is a
repercussions to the long-term health of Tennessees
significant correlation between the size of the private
economy, and all residents will be poorer as a result.
sector and household income. As a consequence of
Policymakers should carefully reconsider expanding
Obamacares expansion of Medicaid, Tennessees
Medicaid.
taxpayers will pay a steep economic price with lower

incomes and fewer jobs.
As our research shows, the answer to helping more

Tennessee families is to stay the course, focusing on


Table 2 displays the negative economic impact of
local solutions to fix healthcare, not on a federal one-
Obamacares expansion of
size-fits-all approach. Instead of
Medicaid on the average
looking for more federal funding,
Tennessee household. Overall,
Overall, Tennessees long-run
Tennessee should find ways to
the Volunteer States long-run
reduce government programs
economic growth will suffer;
economic growth will suffer.
instead of programs that leave
The result is a downshifting in
the result is a downshifting in
the state more dependent on a
personal income growth of
federal government that is
personal income growth of
$3.6 billion. This downshifting
already broke. In fact, the future
will manifest itself in one of two
$3.6 billion.
of Tennessees citizens and
wayslower household income
economy depends on it.
across the state or a reduction

in jobs, though reality will lie somewhere in between.

The economic cost can be calculated in two ways:

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No. 4

November 13, 2014

$150,000

Chart 4
Larger Private Sector Leads to Higher Income

Per Household Personal Income

$140,000

Relationship Between Private Sector Share


and Per Household Personal Income
Calendar Year 2013

$130,000
$120,000
$110,000

$100,000

Tennessee

$90,000

y = 320767x - 111646
R = 0.5556

$80,000
$70,000
60%

62%

64%

66%

68%

70%

Source: U.S. Department of Commerce: Bureau of Economic Analysis, Census


Bureau and Federalism in Action. Excludes AK and HI.

72%

74%

76%

78%

Private Sector Share of Personal Income

Appendix

of the private sector yields a decrease in per


household income of approximately $3,208.4

Personal income comes from two sources: the private


sector and the public sector. The distinction between
the two sectors is important because only the private
sector creates new income. The public sector, in
contrast, can only redistribute income through taxes
and spending. More specifically, public sector
spending consists of personal current transfer
receipts (Medicare, Medicaid, Social Security, etc.)
and government employee compensation (federal,
state, and local).

The economic loss estimates in this study are derived


from the significant positive correlation between per
household personal income with the private sector
share of personal income for 2013 as shown in Chart
4. Put simply, the bigger the private sector, the
greater per household personal income. When
examining the lower 48 states, the analysis finds that,
on average, a 1 percentage point decrease in the size

Expanding Medicaid in Tennessee by $1.4 billion


would change the composition of Tennessees
personal income toward public sector spending and
permanently shrink the private sector by up to 0.4
percentage points. That means in the next few years,
the average household in Tennessee would see their
income drop by up to $1,418, or the number of jobs
in the state will be reduced by 67,433. The overall
loss in personal income would be up to $3.6 billion
($1,418 multiplied by 2,571,718 households).

This analysis estimates a reduction in the long-term
growth in the economy and does not necessarily
mean the elimination of existing household income
or jobs. It does mean that future income increases
and job creation will be lower than they would be in
the absence of higher taxes and spending. Also, the

4

Alaska and Hawaii are excluded, as is common practice in state


analysis, due to their unique economic characteristics.

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No. 4

November 13, 2014

95%

Maine
Income Tax
Enacted,
1969

85%
80%
75%
70%
65%

Calendar Years
1929 to 2013

$100,000
$80,000
$60,000

$40,000

Source: U.S. Department of Commerce: Bureau of Economic Analysis and Federalism in Action

ME (Private Sector Share)

NH (Private Sector Share)

analysis underestimates the long-term decline in the


private sector that will occur because of a slower
private sector growth rate.

Of course, correlation does not equal causation.
Fortunately, there are two states that allow for a very
strong natural experiment to better show
causationNew Hampshire versus Maine. These two
states are alike in many waysgeography,
climatically, demographics, and culture. Yet, there is
one area where the two states diverge greatly
public policy.

As shown in Chart 5, between 1929 and 1950, Maine
and New Hampshire had similar per household
incomes (adjusted for inflation) and private sectors
(as a percent of personal income). In 1951 Maine
enacted the sales tax, which led to increased public
sector spending and crowded-out the private sector.
Consequently, New Hampshires per household
income began to steadily pull away from Maine.

2013

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

1953

1950

1947

1944

1941

1938

1935


1932

60%

$120,000

By taking the bait in


Obamacares Medicaid
expansion scheme, Tennessee
will be following Maines
downshifted economic path
rather than New Hampshires
and all Tennesseans will be
poorer as a result.
1929

Percent of Personal Income

90%

Chart 5
New Hampshire's Larger
Private Sector Leads to
Higher Income vs. Maine

Real, Per Household Personal Income

Maine
Sales Tax
Enacted,
1951

$20,000

Calendar Years

ME (Personal Income)

NH (Personal Income)

This trend accelerated in 1969 when Maine enacted


their income taxa few years after the federal
government enacted Medicaid. With this new source
of revenue, Maine was able to dramatically expand
its welfare system, especially Medicaid. In fact, as of
FY 2010, Maine had the third highest percentage of
population on Medicaid at 31%%.5

This difference in public policy has resulted in
dramatic differences in the size of each states private
sector. Between 1929 and 2013, Maines private
sector shrunk by 29% to 65.3% from 92% and is now
only the 42nd largest private sector in the country.
New Hampshire, on the other hand, has seen its
private sector shrink by a much smaller 14.9% to
76.9% from 90.4% and is now the largest private

5
The Henry J Kaiser Family Foundation, State Health Facts,
Medicaid Enrollment as a Percent of Total Population.
http://kff.org/medicaid/state-indicator/medicaid-enrollment-as-
a-of-pop/

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No. 4

November 13, 2014

sector in the country.



Overall, New Hampshires private sector in 2013 is
17.8% larger than Maines76.9% and 65.3%
respectively. Consequently, New Hampshires per
household income is now 33% higher than Maines
$126,865 and $95,537, respectively. By taking the
bait in Obamacares Medicaid expansion scheme,
Tennessee will be following Maines downshifted
economic path rather than New Hampshiresand all
residents will be poorer as a result.

This negative economic impact due to Obamacares
Medicaid expansion is not unique to Utah. This
analysis has also examined expansion in Utah
(proposed), Indiana (proposed), New Hampshire
(enacted) and in Maine (defeated).

Utahs long-run economic growth will suffer a drop in
personal income of $749 million.6 The economic costs
range from:
$805 reduction in personal income for all
households with no private sector job loss


New Hampshires long-run economic growth will
suffer a drop in personal income of $593 million
under Medicaid expansion.8 The economic cost
ranges from:

$1,123 less personal income for all


households with no private sector job loss;
or,

No change in personal income but the loss of


10,180 private sector jobs.


Maines long-run economic growth would suffer a
drop in personal income of $1.5 billion.9 The
economic costs range from:

2,638 less personal income for all households


with no private sector job loss; or,

No change in personal income but the loss of


176,928 private sector jobs.

The loss of 14,125 private sector jobs but no


change in personal income.

No change in personal income but the loss of


30,988 private sector jobs.


Indianas long-run economic growth will suffer a drop
in personal income of $9.5 billion.7 The economic
costs range from:

$3,721 less personal income for all


households with no private sector job loss;
or,

Moody, J. Scott, Negative Impact of Medicaid Expansion on

Utahs Families and Private Sector, Federalism In Action,


September 10, 2014.
http://www.federalisminaction.com/resources/studies/study-2

7
Moody, J. Scott, Expanding Medicaid Will Hurt Indianas
Families, Lower Income and Reduce Jobs, Federalism In Action,
August 5, 2014.
http://www.federalisminaction.com/resources/studies/study-2

Warcholik, Wendy, Expanding Medicaid Will Hurt New


Hampshires Families with Lower Income and Fewer Jobs, New
Hampshire Center for Economic Policy, February 17, 2014.
http://nheconomics.org/publications/volume-2-issue-1/

9
Moody, J. Scott, Expanding Medicaid Will Hurt Maines Families
with Lower Income and Fewer Jobs, The Maine Heritage Policy
Center, February 20, 2014.
http://www.mainepolicy.org/2014/02/expanding-medicaid-will-
hurt-maines-families-with-lower-incomes-and-fewer-jobs/

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No. 4

November 13, 2014

State Budget Solutions

J. Scott Moody is the Chief Executive Officer and Chief Economist at State Budget Solutions. He may be reached at
jsmoody@statebudgetsolutions.org

Scott has over 17 years as a public policy economist. He is the author, co-author and editor of over 170 studies and books.
He has testified twice before the House Ways and Means Committee of the U.S. Congress as well as various state
legislatures. His work has appeared in Bloomberg, Forbes, CNN Money, State Tax Notes, The New York Post, Portland Press
Herald, Bangor Daily News and others.

His professional experience includes positions as CEO of The Maine Heritage Policy Center, Senior Economist at The Tax
Foundation and Senior Economist at The Heritage Foundation. Scott received his Bachelor of Arts in Economics from
Wingate University (Wingate, N.C.). He received his Master of A rts in Economics from George Mason University (Fairfax,
VA).

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