Using liveaturban. We welcome you to ask questions. Well make a point to use these questions and comments in the q and a portion of the program. Im excited to be joining the Tax Policy Center and i thank you for joining us today to grapple with important issues surrounding our states fiscal issues. The panel the examine opportunities governors and legislators will face and the decisions theyll face as they pass new budgets. The budget this year the budget process this year appears to be exceptionally challenging given the understanding of what federal policy will look like in a wide range of areas. As the new Administration Stands up and new policies are shaped, its important to recall that many programs being discussed are implemented at the state and local level. Educating our children, building roads is done by state and local governments with federal funds paying for about onethird of state expenditures. The federal government effects the overall agenda. Independent of expected federal policies, state budgets are going through a long recovery from the Great Recession. Although state revenues have been growing for the past five years, they remain low in real dollars and spending and taxes are below 2008 levels in 32 states. States also face longterm liabilities with unfunded pension liabilities and growing health care costs. States are also entering the current budget cycle with about half of the states reporting unexpected short falls in revenue in part due to Economic Conditions. Governor brown said many of the proposed changes could have serious and detrimental effects on states budget and economy. Concerns arent limited just to democrat governors. Several governors are urging change, especially with respect to health care. Our discussion today will cover the effects of federal policy and whats happening in state capitals and if prior discussions are any indication todays discussion should provide lively commentary. We will examine potential effects of policies and were excited to announce that the spending drivers web tool is going live today and this tool allows users to delve deeper into spending in several states. Were fortunate to have several experts to drive these discussions. Laurie will be the moderator. Its important to know she has broader experiences and began her career in texas. So now let me kick things off by turning the mike over to laurie. Welcome to the state of the states. Its my job to introduce your panel. So immediately to my right we have joe henchman, Vice President at the Tax Foundation. John hicks the National Director of the association of state budget offices. Ken rubin state and local Financial Initiative and nick johnson at the budget on policy priorities. Were going to start off by talking about a survey of the states done by nasbo. Its going to be a very uneasy time i know here in washington. Were having a hard time grappling with the new reality. I think since friday weve had executive orders on aca repeal, building a wall, banning syrian immigrants, reinstating torture, opening cia black sites. We put out the front page in the evening and were ripping it up before we go to bed. I cant imagine what state officers are feeling right now. Can you tell us where things stand . My theme is cloudy with a chance of storms. States revenues and spending have been growing more slowly since the Great Recession than in Previous Post recession periods. We had mark said 32 states are still not spending at the level they were before the Great Recession adjusted for inflation. When you adjust for population, 39 states are spending at a level lower than prior to the Great Recession. For a period of this length of a recovery, thats a surprise. Last year in fiscal 2016 half the states had revenue sho shortfalls. This year half the states are predicting revenue shortfalls. We havent seen numbers like that since the Great Recession. Prior to that, post recession, thats about we average about ten states a year who have reven revenue shortfalls. So this is a combination of things. One is predictability and the other is that Economic Conditions are underlying most of state revenues. States have most of their money come from income and sales taxes that ride along with the economy. So why were they short if hn th last two years . Economic forecasts were overstated. Growth and income and output and other things didnt reach what underpinned the state revenue forecast. So a couple of numbers. Last year state general fund tax revenues grew 1. 8 . Thats low despite the low unemployment. This year states have revised their estimates. Theyre expected to grow 2. 3 . Next year the budgets theyre putting together right now theyre projecting a little sunnier revenue situation at 2. 9 . Those are still historically low numbers. Personal income taxes took a hit last spring. Nonwage income came in lower than everybody estimated. Sales tax revenues are surprisingly weak given the economic recovery. Youre going to see under 2 sales tax growth this year for almost a backtoback year. Economists give an explanation. Things like lower prices on economic goods and a gap between whats being consumed and tax. Online sales tax not being collected for states. Youre going to see Corporate Income tax receipts decline for the second straight year. We dont know yet what the impact of prospective federal tax changes are going to hold for this spring. Did Capital Gains get deferred from december to january and what will we see in april . We dont know yet, even though congress hasnt made any tax changes yet. Energy states are still suffering. Wyoming, west virginia. States have spending pressures. Medicaid has been growing faster than state revenues have grown. Pensions are a more notable issue that states have been dealing with in the last decade. Most states have reformed their Pension System in some form, but investment returns are causing states to have to get out the checkbook. Medicaid has gone from 14 of the states general fund to almost 20 in the last 20 years. That has crowded out other spending. Higher education has declined in terms of the share of the state spending, but one good news is states have stocked up their savings account since the Great Recession. States on average are sitting at about 5 of state revenues which is higher than where they were than before the last two recessions. States have taken their lessons from the Great Recession. So a new report is out. What can you tell us about what the federal government is about to bring in to this cloudy forecast . This is sort of either an exercise in optimism or pessism. I went through some of the things that have been proposed before by both President Trump during the election and speaker ryan and people in congress to try and figure out whether we could forecast what we think is going to go what theyre going to do going forward. We talk a lot about taxes based on stuff that was going on in the Tax Policy Center and health care, aca, medicaid, based on work that was done here by our policy health center, but it is not complete. Its things we felt like we had the best grasp on. For example, theres nothing in this report that talks about the epa. Not on my agenda. The fact that thats where we went first is interesting. What do we do . As mark said before, state tax systems and spending are really reliant on what the federal government does. About onethird of the money comes from federal sources to state and local governments. They set some of the rules and agendas if we think about whats been going on with health care in terms of the expansion and coverage is based on incentives that were put into place by the federal government for state and local governments. For the tax system, states typically use the federal tax system and the terms and definitions to do their own taxes, especially their income taxes. If we think about especially states that are relying on income taxes, often they conform to the federal system. As we change the federal tax system, its going to trickle through and effect what states do. If i go through broadly some of these areas and we can get into details as we go along. On the tax system, we think there is going to be a lowering of rates. Theres some discussion of getting rid of some of the deductions like the state and local tax deduction. Theres some talk, although not a lot of detail about broadening the base. So if we change rates, thats not going to directly effect states. If we broaden the base, that could help states. However, it could also the uncertainty is whats kind of killing states right now. I think part of the reason states revenues are below where they thought they were going to be is because people are waiting to see whats going to happen, especially for taxes on Capital Gains and corporate taxes as theyre expecting those to go down. If youre a highincome person and you have the option of realizing Capital Gains now or waiting a few months and doing it in 2017 when the tax law and the tax rates might be different, you actually have an incentive to wait. I think partly weve seen that in some of the weak state budget forecasts. If we think about health care, there are two things. If we basically repeal without replacement of aca, that means if states do nothing, theyll actually save a little bit of money, but millions of people will be uninsured. If they decide its unacceptable to have that many more people be uninsured, their costs are going to go up. If things had stayed the same, states were already seeing their costs go up because that 100 pick up on the federal government was going to start declining. So they already thought that their aca costs were going to go up. Irrespective of that, we also think that depending on independent of whether they keep the expansion or not with medica medicaid, its pretty likely theyre going to change sort of what the rules are. Theres a lot of discussion about block granting it, on the the amount of federal money going for medicaid, which would mean that states would actually have to figure out ways of replacing that money or cutting the services that they offer. Ill stop there. Okay. So nick and joe, i would guess that there might be some opportunities for states here, but it sounds like there are many more challenges for states here. Do you want to start, nick, to talk about how the states might be looking at this . I would say cloudy with a chance of storms, thats an optimistic forecast. I think its going to be stormy. Thank you for having this session. A great turnout here, which i think really testifies to a recognition that in this era in the trump era, states may matter now more than ever before. What happens in state capitals, what happens to states is going to have a big impact on everything that happens in this country over the next several years. The reason i think we dont have to be uncertain in our forecast that its going to be stormy is that in every presidency the first year of the Administration Big things happen. Theres a lot of uncertainty about which of the many big things that are on the table will happen, but if you think about the first year of the Obama Administration, the recovery act and the first year of the Bush Administration, the tax cuts that year, think about the first year of the clinton and reagan administration, big stuff happens. Particularly when were talking about stuff that involves dollars, budget stuff, stuff can get through senate with a 51 vote majority. You dont need 60 votes. A lot of this stuff on medicaid and other stuff can be done through the reconciliation process. Its going to be challenging. Heres what im concerned about in terms of the federal state relationship. One of the most important roles that states play in our federal system is reducing poverty and expanding the Economic Opportunity for families for so many families who are having trouble making ends meet. For the last half century this has been a partnership between the federal government and the states. The federal government provides much of the funding and structure and structures it in a way to meet changing needs. So if needs in a lock calty or theres a national recession, these programs adapt. The federal government is providing the funding and structure. The states have some ability to do things differently. This partnership has turned out to be very effective. The best available data show that the percentage of people having a hard time making ends meet as measured by our best approximation of the poverty rate, the number of folks living below poverty, has declined by 41 over the last 51 years largely thanks to this partnership. Its gone from one in four to one in seven americans living with incomes below the poverty line. Heres whats at risk of happening right now. The proposal that we have seen or expect to see from this administration and this Congress Based on what has come out of the House Republican caucus in previous years, what is in trumps own plans, what his nominees have put forward, these proposals would cripple this Effective Partnership with damaging impacts on states and on families. Basically we would shift this responsibility to help families make ends meet and help them get ahead, we would shift it from the federal government to the states at a time when states really cannot afford to take on this big new responsibility. As john said, states are already facing budget shortfalls. Things will be tight in coming years. Rainy day funds are at 5 . Thats great, but thats nowhere near what it would take for them to get through a recession, particularly if these federal programs, these stabilizing programs arent there anymore. If you think about medicaid block grants, the chance that its not just 10 or 12 years out. In a very few years states would start to get under the proposal for instance that the House Republicans put out in two or three years states would start to get much less money than they would under current law to the point where ten years from now they might get 33 of what we might expect them to get. Another key program for families is the s. N. A. P. Program. Right now its 100 federal dollars. States administer it, but they dont pay for it. A block grant would shift that responsibility on to the states and give states this new area of responsibility for funding. Again, without any additional dollars to pay for it. In fact, less money. This isnt theoretical about what would happen because we did this 20 years. 20 years ago we took a program which was an Important Partnership and we turned that into a block grant. It was 16. 5. 20 years. Because its a block grant and states can pull money out of it to fund other things, the money going into assistance for low income families has dropped sharper. Its dropped about 73 . The number of 20 years ago the program was helping about twothirds of the families who were living in poverty. Now its helping about one in four. Weve seen what happens when you alter the structure of these partnerships. Thats my fear. From a state perspective, from a state policy perspective, theyre getting this new responsibility, no new revenue, uncertainty on the tax side, uncertainty with other parts of the budget and we should talk about all the way states get federal money it adds up to a dangerous time for state governments. What do you think states are taking away from this moment . First i want to thank you for hosting this. Theres a lot of panels and events in washington, d. C. All the time, but this one i know for a fact has real impact, real Decision Makers watch these and have takeaways from these and they lead to real results. As nick mentioned, its a full room here. Its not a small room, but every seat is filled and we have people in the back too. Its certainly a hot issue in washington, d. C. Right now. I think im going to disagree with a lot of what nick said. Let me start off with an area of agreement and that being he and i certainly walk the talk in terms of states mattering. Weve dedicated our professional careers to state policy. Its something i think a lot of people give lip service to. His organization and ours are certainly out there trying to make the states truly equal partners in the federal stu structure we have in the United States. That said im going to disagree with his characterization of it as a partnership. No disrespect to any Congressional Staff or federal workers who may be in the audience, but for the most part federal employees view the states as an administrative arm for spending money they give to them with lots of conditions. When this money comes when it does the round trip to washington to go back to the states, it picks up all of these mandates and conditions and ive had plenty of democratic legislators and governors in the states complain about these, let alone republican ones. Usually the democrats behind closed doors, but certainly its not any partisan divide its not so much a partnership, but the feds set the rules and give the money and if you dont do what the feds say, they take the money away. Weve talked about medicaid. Medicaid, ive seen some numbers recently and youll correct me if im wrong on it, but its growing at about 4 to 5 a year and its crowding out everything else. Maybe more evidence of how the aca has not bent the cost curve. Something that hasnt been mentioned which i think is the fundamental thing. If youre going to take anything away from what i say, let it be this. Economic growth is the underlying issue here. If the economy continues to grow at 1 , 2 , 3 a year, you can complain all you want how the feds arent giving 7 a year or the revenues arent growing or the feds are not providing more money and all of that, because if incomes and sales and Property Values and everything are only growing at the pace of