The GOP Passes Its First Big Tax and Budget Test
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Can Republicans in Congress hang together to pass a budget and extend the 2017 tax cuts? That's the big question of the 119th Congress. And so far, the answer is yes, they're making progress. But the road ahead gets rougher, especially as Democrats pull out their old reliable and target the Republican plans to reform entitlements, specifically this year, Medicaid. So the battle over priorities in Congress continues.

is our subject for today on Potomac Watch. Welcome. I'm Paul Gigot of the Wall Street Journal Opinion Pages, and I'm here with my colleagues Kate Batchelder-Odell and Alicia Finley, who cover these issues for us. So let's start with this week's vote in the House of Representatives on something called a budget resolution. Just to get a little technical for you, this is the bill. It's not a budget itself. It's a bill that...

has an outline of a budget and it allows the Congress to trigger a process by which the Republican Party, the majority, can pass a budget with a lot of details, taxes and spending with 51 Senate votes instead of going through a Senate filibuster of 60 votes, which would be blocked by the Democrats. So this is very important to the whole Republican agenda, the whole Trump agenda.

And, you know, there's real questions about whether they could even pass this in the House with its narrow majority. Now, they did this week, 217 to 215, with only a single Republican, Thomas Massey of Kentucky, in dissent. Of course, he votes no on everything. So that's not a surprise. But, Kate, what's the lesson here of this vote? Yeah.

Well, look, I think we're seeing that Republicans are starting perhaps to understand that they do need to hang together if they want to accomplish any of their policy priorities. This process was notable because while there was some last minute drama and Johnson almost didn't hold the vote and then held it open, ended up getting the budget passed.

This was in some ways less dramatic than previous Republican infightings. There were really only a few remaining holdouts before the vote that I think wanted some perhaps personal attention from Donald Trump or Mike Johnson. And both of them were able to flip those votes and get the bill passed. So I think there is

at least some realization that in a narrow majority, you all have to stick together if you want to pass anything. And it's helpful, of course, that reconciliation and passing this budget shell is the only way that the Trump tax cuts from 2017 will be renewed in any form, because it's the only way to pass some of their priorities with 51 votes through the Senate.

And so I think that political reality is setting in a little bit and is perhaps giving Republicans a little more reason to vote together than they've had in the past. Big business for orthopedic surgeons in Washington with broken bones, broken arms, broken legs among the members to try to get them to vote for this, Alicia. Or do you think that in the end it was, apart from the massaging from Donald Trump, that they had to hang together here or their whole Congress was done?

Right. And I think they were also facing pressure from the Senate, which was advancing their own bill to bill approach to budget reconciliation, which the first that they plan to do some border security with some energy provisions, tie those together and then move on to tax reform because they didn't think the House would be able to pass it, get their act together. And so I think they were actually pleasantly surprised by this. But right to Kate's point, if you don't get a move on and this could, by the way, extend all the tax provisions.

And there also appear to be interest in taking on some Medicaid reforms. This could take several months in itself. And so you really don't want to push this out too far into the future. Then you start the more electoral politics start to come into play. And so there really is a more of an urgency to get it done now. Before we get into the Medicaid fight, which I do want to get into in some detail, just a factual matter here. If you cannot pass this bill.

the tax provisions that expire at the end of 2025 would kick in. It means that the pre-2017 provisions would return. And, Kate, that's a huge tax increase. I think the 10-year dollar number is $4.5 trillion. Specifically, that means the Democrats say, oh, this is just tax cuts on the rich. No, not at all. There's lower tax rates throughout the tax schedule with different levels of income, not merely at the top rate.

You've got a pass-through provision, which has a 20 percent exclusion for income for small businesses that are supposed to equalize the tax treatment of business income with corporations that their tax cuts and rates were permanent in the 2017 bill.

You also have a huge cut in the standard deduction, which the 2017 bill increased almost to $30,000. So this is a huge tax increase that Republicans will end up presiding over if they can't pass this. Right. I mean, I think Republicans were correct in 2017 to focus on making the corporate rate permanent.

because that was really where the growth from the tax reform, a lot of it came from. And so that is locked in. But then the price of that was that some of the individual cuts would expire. And also, you know, that deduction for quote unquote small businesses, I mean, that would create really unequal tax treatment if there's this massively lower corporate tax rate and then the smaller businesses have to pay basically at the individual rate. So it would be a huge mess, huge tax increase.

on the normal middle American families would notice it for sure. You would have returned to the alternative minimum tax, which ensnares a lot of middle income filers. A lot of the structural reforms that Republicans got done would be undone. And that's why I think there will be some ability here to squeeze something through. Because also the other alternative is that you have to do some really ugly deal with Democrats at the end of the year to get 60 votes in the Senate. And the price tag that Chuck Schumer would

extract to renew some to Republican tax cuts would be enormous. And so that is also just a really unenviable alternative to getting this reconciliation bill done. Yeah, I think enormous doesn't quite do justice to the price that Schumer would exact. There'd be certainly an increase in the corporate tax rate. There'd be a huge increase, I think, at the top level in the income tax rate and who knows what spending he would require. So

This is, in my view, kind of do or die or what's the point of electing a Republican House and Senate. All right. We're going to take a break. And when we come back, we're going to talk about the tax implications if the Republicans fail to pass their budget bill when we come back.

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Welcome back. I'm Paul as you go here on Potomac Watch, the daily podcast of The Wall Street Journal Opinion Pages. And I'm here with Alicia Finley and Kate O'Dell. Let's turn to the harder part here now, because having passed this shell in the House, the Senate will move ahead. I think they'll pass a comparable shell, some differences, and then they'll have to go to conference and get a final budget outline, pass the House and Senate again. That'll happen probably the next...

30 days or so. And then they have to actually write a bill, various parts of the bill, including the tax cut bill. Even that language is wrong that I just used. It's really not a tax. It's just a tax extension of current policy. So it's not a big tax cut. It would be a big increase if it doesn't pass.

And I'm not sure that Republicans have driven that message home yet. No. And actually, if you recall under Obama, what they did when the Bush tax cuts were set to expire, Democrats and Republicans extended them without trying to pay for them, except for the very top rate. And they use what's known as the current policy approach in which you don't really have to pay for them rather than the baseline. Built into the Congressional Budget Office. They would project if everything were to expire, SALT

revenues would otherwise increase by 4.5 trillion. So I think they've allowed Democrats to drive the narrative too much on this. But if you were to use this, the current policy approach, that would free Republicans up a little bit. I think the one downside is I think there were actually real important reforms to some programs that need to be made. And maybe this finding savings gives them some kind of a pretext to do that.

For example, in food stamps, Medicaid and other entitlement programs that you're not really cutting these programs, but you're reforming them and you can say that you're using those savings to help pay for the tax cuts. These would be important policy changes. And let's talk about Medicaid because the Democrats...

This is the program that was designed back in the 60s, part of the Great Society, to help poor people or folks down on their luck who couldn't get health care. But it has evolved over the years, Kate, thanks mainly to Democrats. It's been expanded. So it now covers able-bodied adults, particularly after the Obamacare bill expanded Medicaid enormously. And Democrats have decided that they're going to attack any reforms that Republicans try to pass in Medicaid.

as a cut in Medicaid and an assault on the poor. I counted no fewer than four articles in Politico, all saying that if Republicans touch this

Man, they are going to die in real trouble. The New York Times put it up at the top of the page. And there are some folks on the right who say you can't touch Medicaid anymore because, oh, some Republican voters actually are on Medicaid. But on the merits, is it possible to reform this program in a way that actually –

maybe is better for the folks who really need it below the poverty line. Well, right. I mean, one of the core dysfunctions of the Medicaid expansion that happened under the Affordable Care Act is that the federal government reimburses states more for these prime age, working age adults than they do for pregnant women and those who are truly vulnerable under the poverty line. So a state now can draw down, you know, more like 90 cents for these working adults and more like 65 cents for pregnant women. And this is for every dollar.

Right. And so that, I think, is really dysfunctional and an argument where Republicans can win. I mean, Mike Johnson was saying last night on CNN, look, we're not talking about the people the program was intended for, but we are looking, for instance, 29-year-old men who are not working and to get them back to work through a work requirement. That would be one thing that Republicans could do. But I think the program also does need more fundamental reform that they could defend.

And that would include rationalizing the way that the federal government pays for these enrollees. There are so many improper payments going out through Medicaid. For instance, the states have never been very scrupulous about who they're enrolling and whether they're eligible. And for instance, maybe if your income goes up the next year, you're no longer eligible. States are not good about noticing that and dealing with it. So I think there are a number of things that could save real money that Republicans could defend.

if they learn the arguments. There's reason to be less than optimistic about that because a lot of this GOP conference is new and they were not around for the debate over repealing the Affordable Care Act. But there are real popular arguments about work and about protecting the vulnerable that are very potent if Republicans choose to make them. We're going to take another break. And when we come back, we will talk about the prospects for Republicans actually joining this debate and learning something about Medicaid when we come back.

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Welcome back. I'm Paul as you go here on Potomac Watch with Kate O'Dell and Alicia Finley. Just to clarify the point about reimbursement by the federal government, that's 65 cents you talked about. That's the amount the federal government would give to a state, 65 cents on the dollar that spent on Medicaid under the old program. But under Obamacare,

The expansion is $0.90 on the dollar. So there's a real incentive for the states to milk that $0.90 payment because then they can get more money from the feds. Let's listen to Speaker Johnson, Mike Johnson, talk about this, as Kate suggested earlier.

on CNN. There's about $50 billion estimated that are lost every year in Medicaid just in fraud alone. No one's for that. We've got to make sure we eliminate it. We have the algorithms now to do that. We have advanced technology to find it. We need to ID, provide identification for people who are Medicaid recipients to make sure they are not illegal aliens. That's another big carve out that we will make to save a lot of money. There are a lot of places to find efficiencies in these programs and ensure they're going to the people they're intended to help.

If we don't do that, these programs aren't going to remain solvent. And so that's a big part of the equation here. Alicia, you've been tracking the relative payments to states from the federal government, and they're really not all the same in terms of per capita payments. New York and California receive a lot more insurance.

in federal Medicaid dollars per capita than do, say, Texas and Florida. And why is that? Right. Meaning per capita, that's not per beneficiary, that's per resident, though they also receive more per capita because they just spend more and they're less efficient in their care. One reason is because a lot of these Democratic states and some Republican states as well, but to a lesser extent, impose these taxes on hospitals and managed care organizations, insurance plans,

that they use then to draw down more federal funds. I mean, we were just talking about how the government gives $9 to states for every $1 they spend on the Obamacare population expansion. And those are able-bodied, healthy people. And for others, it's usually between $1 to $3. So basically, when you tax hospitals, and then for every dollar in that tax, you may get

three to nine from the federal government that you then pour back into Medicaid. And so this has just become an open-ended buffet for a lot of these states. MARK MIRCHANDANI: Very important point. We're getting into the weeds here in policy. And I know for some folks, it's hard to follow if you don't follow this like we do for a living. But this is crucial stuff because the magnitudes of spending on Medicaid is enormous. It's increased 51%, Alicia, just since 2019.

And as a share of the federal budget, it's up from 7% to 10%. It's been the fastest growing share of the budget. I mean, we talk about entitlements and how that's crowding out other programs. Well, it's actually Medicaid primarily, despite our aging population, which you think Social Security and Medicare. And they are growing, but they actually aren't growing as fast as Medicaid is. And this is one reason a lot of people expect it. Everyone actually expected it.

In terms of the analysts that the growth would slow down because after the pandemic emergency, which ballooned the roles, and that was because the Congress actually barred states from removing people who became ineligible for Medicaid from their roles. So the enrollment increased by about 20 or so million during the pandemic. And while enrollment has actually come down some, spending hasn't. It's continued to increase.

an increase faster than inflation. And one of the reasons is because there's no incentives for states to actually be efficient in their care. And another reason is because states are now tapping Medicaid to pay for other kinds of social spending, like homeless housing, basically food or what they call nutrition support.

So it's just become another pot of money for states. Well, some for sports club membership. Oh, yeah. Music lessons in California for at-risk youth. But that's not in the statute. How can they do this? They do this because they got a permission, a waiver to do this. The states did from...

HHS under Biden. Right. There's a program or it's called a demonstration program and states can apply for flexibility. And generally, the editorial pages have been supportive of these demonstration projects. For instance, I think Rhode Island in the past has used them to apply for a block grant. Right.

And there's actually been a lot of good innovations that have come out of this. But what the Biden HHS did is basically say, well, anything you propose, as long as you say that it will help improve health outcomes, we will approve it.

And note that also that these waivers are supposed to be budget neutral, meaning that they won't increase federal spending. There has been no accountability to ensure that that's actually the case. They've just basically rubber stamped these. And a couple of the things that the states have used through these waivers to spend Medicaid money on include housing for homeless as well as nutrition programs. And then you have to say, well, wait a minute.

we already have food stamps as a nutrition program. You also have low-income housing subsidies. That's another program. So why do we need Medicaid to spend on that? Well, that's exactly it. States just want more money. They want another source of money that they don't have to pay for. So essentially, going back to the hospital taxes is just a way to tap the federal government to pay for more of their own social spending. I mean, it's really interesting to me. It

Your point, I think, is so important about the lack of knowledge among Republicans here because so many of them have just come in since Trump. They don't have the knowledge base about health care in particular or tax policy in

We were used to having members of the Ways and Means Committee that writes the tax bill, for example, and also works with health care. They'd come in. They knew the tax code. They knew tax policy. They knew the relative merits of each thing. They would come in and say, oh, Paul, we have to do this. We don't agree with it, but we have to do this to get X members. So give us a break on the tactical politics of it.

But they understood the program, at least. They knew what was pro-growth tax reform. They knew what was really something just a parochial interest. Now, these guys come in and it's like, oh, really? That's how it works? And in healthcare, it's even worse. So this is an education process that has to go ahead. And before 2017, for example, when Paul Ryan was speaker at the time, but

He had been the budget chairman and then Ways and Means chairman. He used to go around with a slide show and educate members, you know, one on one or one on five to say, all right, here's how this works. Here's what we're doing and here's why. This Republican Congress just got a real tough education roadblock.

road ahead if they don't want to get routed politically when they have this debate. Yeah. I mean, some of that education is ongoing now and trying to get some of that muscle memory back in both the tax and health care space. I think it's harder on health care because the failure to repeal the Affordable Care Act, which has left such a wound in the party. And there's been so much brain drain on that subject from Tom Coburn to Pat Toomey to the people who are making the arguments.

on health care. However, Donald Trump is less beholden than ever to what's written about him. He should be willing to fight back against budget scoring that says this or that terrible thing will happen and get his message out. So, look, there's arguments that he can make, that Republicans can make. For instance,

Medicaid is not very good health insurance. We haven't even touched that here, but if you have Medicaid and you can't get access to an excellent cancer center when you get cancer, that is

is a problem. We should want people to have health insurance that's not just an insurance card, but that gets them actually access to good doctors when they need them. And Medicaid is not good at that. So this is a whole other set of arguments that Republicans should be making. And I know perhaps I'm reaching here because Trump has tried to take entitlements almost entirely off the table on touching them. But we have gone through here some really sensible reforms

that Republicans should be able to get behind, that is not taking insurance away from people, but trying to make it better, trying to get people into better types of insurance, trying to make sure there's not money blatantly going out the door for fraud or ineligible people. This is a debate that Republicans may be poised to win if they want to have it. Yeah, and don't just have the debate on fiscal terms, that dollar and cents, because the Democrats are going to be making a moral argument. You're hurting poor people. Republicans can make an argument on similar moral terms, and I think more than hold their own if Democrats

they're willing to learn, study, and actually know something about the program. All right, Alicia and Kate, thank you. We're going to leave it at that. This is going to be a debate that's going on for some time. We're here every day on Potomac Watch, the opinion page of the Wall Street Journal Daily Podcast. Thank you all for listening.