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Charles Arlinghaus: A $400 million hole was just blown in the state budget

April 15. 2014 11:40PM

A Superior Court ruling just created a $400 million hole in the state's budget. The decision involves a fake tax little understood by most policymakers and almost unknown to the public. The tax started as a scam to leverage more money from the federal government, turned into a clearly unconstitutional real tax, and has created New Hampshire's own fiscal cliff. Lawmakers will deal with it the way they deal with most big problems: put it off until after the next election.

Ironically, the state's Medicaid Enhancement Tax (MET) was created in 1991 to fix a budget hole. Lawmakers learned of and copied other states' efforts to create a pretend hospital tax and, by giving it back to the hospitals, have it matched by the federal government in a way that diverted half of it to the state's general operating budget. Critics on both the right and left called the shell game "Mediscam."

The scheme is best illustrated graphically in a chart Grant Bosse developed for the Josiah Bartlett Center in a paper called "Meet the MET." In the original two decades, hospitals would pay the state let's say $200 million in MET. The state would give $100 million to the general fund for other state expenses and spend $100 million on the same hospitals in an only technically unrelated program called disproportionate share hospital payments (DSH) for unreimbursed Medicaid expenses. Because DSH was "Medicaid spending," the feds would match it with another $100 million for the hospitals.

The hospitals paid $200 million and got $200 million back — usually on the same day. The state, however, got an extra $100 million to balance the rest of the budget.

Hospitals were content to go along with this because the agency that regulated them, the state HHS department, told them they would be doing the state a favor and the tax would never be real. Then-commissioner Harry Bird assured hospitals that if the federal government ever disallowed the arrangement, the "tax" would go away.

In the 2009 budget, some tweaks were made to satisfy federal regulators who insisted on some effort at masking the fiction. Hospitals no longer got back penny for penny what they paid, but for most hospitals it was close. In 2011, legislators went further and completely decoupled MET and DSH. The fake tax became a real tax, and most DSH payments were suspended. Rather than a net zero, hospitals lost $125 million each year.

Under New Hampshire law, taxes can't be discriminatory. It's all right to tax soda if you tax any soda. You can't tax soda bought at the grocery store, but not tax soda bought at the convenience store. The MET is discriminatory. We tax certain procedures if they're done at a hospital, but not if they're done somewhere else. The court, quite rationally, ruled the tax unconstitutional.

The state will appeal the decision, and that appeal will take until after the next election — conveniently. But it's hard to see any hospital come November making its MET payment; why would they pay a tax that has been ruled unconstitutional? The damage isn't just the $72 million used by the general fund, it is much greater.

The MET raises about $175 million from hospitals. In rough terms, about $75 million goes directly to the general fund, about $75 million supports Medicaid payments that used to be made from the general fund, and about $25 million of it is given back to hospitals and matched by the federal government (those numbers are not precise and vary year to year). So, in total the state loses the $175 million and the $25 million match, about $200 million each year.

Each hospital has reserved its right to have its October 2013 payment refunded, and no hospital is likely to pay its October 2014 payment, so we will suddenly see a $400 million budget hole. Given how much fighting happens over $15 million that may or may not be put in the rainy day fund, I would expect the $400 million hole to be like an earthquake.

The preferred solution of most "leaders" in Concord is to appeal the sensible and very obvious lower court decision. The advantage of appeal is that it will take a year so the final decision won't occur until after the next election. Sure, we'll have a cash flow problem at some point, but that too won't occur until after the November election.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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