NOTE: This post was updated on Aug. 21 to clarify language about the option for using TSET funds, and updated Nov. 19 to reflect changes following the defeat of SQ 814.
Oklahomans on June 30 approved State Question 802, which amended the Oklahoma Constitution to expand Medicaid to low-income adults. Voters also expressed interest in more health funding in the state when on Nov. 3 they didn’t approve the Legislature-suggested State Question 814, which would have drawn funds away from the Tobacco Settlement Endowment Trust (TSET) to pay for a portion of Medicaid expansion. The recent votes strongly suggest that Oklahomans want the state to make investments in both TSET programs and Medicaid expansion. As a result, health care funding will be a key issue for the Legislature to tackle this spring as Oklahoma takes the next steps in implementing the promise of Medicaid expansion.
When thinking about expansion costs in an economic downturn, it’s easy to lose sight of what we’ll be getting for our investment: better health and lives for hundreds of thousands of our friends, families, and neighbors. Expansion will improve access to regular health care and reduce the use of emergency departments. New Medicaid members will see reduced out-of-pocket costs and greater financial stability. Medicaid expansion also empowers participants to better look for work and to keep work once they find it.
Expansion is an effective, low-cost investment in our economy
Beyond the improvements Medicaid expansion will provide for individual Oklahomans, expansion also will make the state’s economy healthier as well. Because the federal government pays 90 percent of the cost, Oklahoma will see an additional $1.3 billion in direct federal spending and $2.3 billion in new economic activity, according to an analysis by Families USA. All told, this economic growth will add 26,000 new Oklahoma jobs.
Expansion is a bargain when considering the benefits both to Oklahomans and the state’s budget as a whole. Estimates of the first-year costs range from $125 million (according to Families USA) to $164 million (according to the Oklahoma Health Care Authority), with either figure representing about two percent of the current state budget. The $2.3 billion economic boost means that each state dollar spent on expansion will generate a return on investment of $14-$18. This economic growth, along with health care cost savings elsewhere in the state budget, explains why states have experienced budget savings, revenue gains, and overall economic growth after the first year of expansion.
Our economy will improve if we pay for SQ 802 by ending ineffective tax breaks
Since 2016, Oklahoma’s Incentive Evaluation Commission (IEC) has evaluated the costs, impacts, and effectiveness of tax expenditures. While some expenditures promote investment or create jobs, many don’t meet their policy goals. Additionally, each dollar spent on tax incentives is one dollar less spent on health, education, and basic services. The Legislature has not acted on several of the recommendations of the IEC’s experts, such as their suggestion to repeal the Capital Gains Deduction. This expenditure cost the state $115 million in 2018 and supported just 515 total jobs. Additionally, the program only benefits about 16,000 taxpayers, most of whom make more than $200,000 a year. For a similar price tag, Medicaid expansion will benefit up to 279,000 lower-income Oklahomans and support up to 51 times as many jobs.
Similarly, the Five-Year Ad Valorem Manufacturing Exemption cost the state $161 million in 2020, and this exemption has significantly increased in recent years. In 2020, Google alone received $40 million in incentives through that exemption. In 2015, IEC found this program helped support just 4,494 direct new jobs at a total cost of nearly $250 million. Medicaid expansion will likely create 26,000 jobs, more than five times as many. While this exemption is embedded in the state Constitution, legislators could narrow the definition of qualifying facilities, cap the total cost and cost per job, and prevent companies from combining this incentive with others.
The IEC also found that the tax credit for Zero Emission Facilities has ballooned from $1.5 million in 2008 to $81.1 million by 2018. The Legislature repealed this tax credit during the 2020 legislative session, however the credits can be claimed for 10 years. In 2016, the IEC estimated this program will cost the state more than $400 million between 2021 and 2031. It described the program as “a significant threat to the state budget.” In 2022, the annual cost for this incentive will drop by $17 million. Subsequent years will bring more savings until 2030 when all credits have been paid out. These annual savings will be available for redirection to Medicaid expansion. After that, the Legislature can save tax dollars by ending the remaining payouts for this program which had created fewer than 150 direct jobs by 2015.
Expansion funding can come from multiple sources
Medicaid expansion does not require one large funding source. With strategic revisions to several ineffective state incentive programs, we can capture savings that will fund a healthier Oklahoma. Using the IEC’s recommendations regarding inefficient incentive programs, the following are programs that could be modified to provide cost savings that could be used to fund Medicaid expansion:
- Saving $39 million from the Investment/New Jobs Tax Credit by awarding credits only in the year of the new investment or job creation, reducing the credit amount, and limiting the period for carrying credits forward.
- Saving up to $14.6 million by capping projects receiving the Historic Rehabilitation Tax Credit, which funded only 13 projects in 2015.
- Lowering the annual cap on the Affordable Housing Tax Credit. In the 2020 session, the Legislature passed a bill that would have lowered the cap to $2 million, but it was then vetoed by Gov. Stitt. If left uncapped, this credit will cost $40 million annually by 2024, because the credit is awarded for 10 years even though the investment is made only in the first year or two.
- Revising the Clean Burning Fuel Credit by sunsetting the vehicle portion of the credit. Opinions differ on the exact savings this could achieve, but $1 million in annual savings is a conservative estimate.
In addition to placing caps and revisions on expenditures, the IEC identified at least two that should be outright repealed, including:
- The Ethanol Fuel Retailer Tax Credit, which cost the state $1.1 million in 2015 and created just 10 new jobs; and
- Coal tax credits, which cost $3.1 million in 2018 with little economic benefit.
Non-tax options to pay for expansion are available as well
In addition to capturing tax savings mentioned above, the state has many other funding options available, including increasing a charge paid by hospitals, replacing a sunsetting federal-level insurance plan fee with a similar state-level fee, or budgeting the new tax revenue that will result from expansion.
The Supplemental Hospital Offset Payment Program (SHOPP) is a fee charged on health care providers. As of 2017, every state but Alaska had a provider fee similar to SHOPP for at least some providers; many states had multiple fees, with 17 states having significantly higher rates than Oklahoma. Some states, such as Colorado, have tied fee increases to an eligibility expansion. In 2020, the Oklahoma Legislature passed a bill that would have increased the fee from 2.3 percent to 4 percent to pay for expansion, but Gov. Stitt vetoed the bill. If passed, this fee increase would generate an estimated $134 million for expansion.
Another option is to retain a fee on insurance plans that is currently collected by the federal government. Nationwide, the Health Insurance Assessment (HIA) generates $14 billion annually, but will be repealed in January 2021. If the Legislature moves quickly, this fee could be maintained in Oklahoma and expressly directed toward the state’s share of funding Medicaid expansion. This approach would not increase existing patient/provider costs. With estimates projecting that maintaining this fee would generate $116.5 million starting in 2022, this is a common-sense way to fund expansion without a single raise in taxes.
Finally and most simply, Medicaid expansion’s economic impact will generate so much new state tax revenue that it will virtually pay for itself. A Families USA analysis estimates that the new spending and jobs will generate $123 million in new state tax revenue over the next year. States that expanded Medicaid met or exceeded expected economic gains from expansion. This new state revenue would be included in the Oklahoma State Board of Equalization revenue certification of the upcoming year’s budget. The Board’s estimate must reflect how the economy will look next year, and so must include the new revenues from expansion in the certification. From there, the Legislature can then budget for expansion costs.
The Governor and Legislature should act quickly to fund better health care and health outcomes
Together, these options would pay for expansion more than three times over, providing nearly $600 million in savings, more than enough to cover the $125-164 million estimated expansion costs. Oklahomans have declared we will expand Medicaid, and our elected officials have a number of easily achievable options that could fund Medicaid expansion while also shoring up the state’s overall budget. They should expeditiously select one or more of these options early in the 2021 session.