High Tax Salt States Also Subsidized By Medicaid

Important debates on the reconciliation bill have centered around the deduction for state and local taxes (SALT) and Medicaid waste and abuse.

It turns out that the high tax states that benefit most from the SALT deduction also tend to be subsidized by harmful Medicaid policies. Many of these SALT states use the $9-to-$1 match for Medicaid expansion to discriminate against the vulnerable Medicaid recipients that qualify for an average $1.33-to-$1 match. The SALT states also disproportionately benefit from the Medicaid funding floor.

Of the 14 states where 10% or more taxpayers took a SALT deduction in 2022, 13 draw on the $9-to-$1 Medicaid funding for able-bodied adults and nine are subsidized by the Medicaid funding floor.

State and Local Tax (SALT) Deduction

Under the 2017 Tax Cuts and Jobs Act (TCJA), taxpayers who itemize can deduct no more than $10,000 from their federal taxes for SALT.

The SALT deduction provides a federal subsidy to states, which incentivizes higher taxes and bigger state and local governments. At the same time, the deduction forces federal tax rates to be higher across the board to raise the same amount of revenue. The SALT deduction disproportionately benefits high income individuals in high tax states.

Medicaid Expansion Discriminates Against the Most Vulnerable

The costs of care for beneficiaries are split between states and the federal government. The federal share of the spending is based on a formula called the Federal Medical Assistance Percentage (FMAP). The average FMAP for the traditional Medicare population (the disabled, pregnant women, children, and low-income seniors) is about 57%.

Obamacare expanded Medicaid eligibility to able-bodied, working age adults. To encourage states to participate in Medicaid expansion, the FMAP for the expansion population was set at 90%.

For every $1 of state Medicaid spending on the vulnerable, the federal government contributes about $1.33. Meanwhile, the federal government pays $9 for every $1 of state spending on work-capable adults.

Medicaid FMAP Floor

The federal share of Medicaid funding for the traditional Medicaid population is set by a formula based on the state’s per-capita income.

However, there is also a statutory minimum FMAP that sets a 50% floor of the federal share of Medicaid spending, even if the formula would produce a lower rate. Ten high-income states benefit from the FMAP floor.

Washington, D.C. is also subsidized by an FMAP floor, in a unique way. While every other state’s FMAP is determined by a formula, D.C.’s FMAP is statutorily set at 70%. If the normal formula was followed, D.C.’s FMAP would fall to the 50% floor. This special subsidy for D.C. costs American taxpayers about $1 billion per year.

If the 50% FMAP floor was not in place and the programmatic formula was used, the federal share of D.C.’s Medicaid spending would fall to practically 0%.