Why States Should Fear the Latest Obama Budget

Press reports surrounding yesterday’s release of the White House budget made news of the fact that the President’s new proposal for states to expand their pre-school programs, funded by a proposed increase in tobacco taxes.  What most stories surrounding the budget did NOT mention, however, is the inherent logic that when you tax an activity, you get less of it.  The numbers buried deep in the budget make that clear: Table S-9 demonstrates that revenue from the higher tobacco tax would decrease almost immediately after its implementation, and fall every year thereafter.  As the chart below shows, revenue would drop from nearly $10 billion in 2015 to just over $6 billion in 2023.  The only reason the pre-school proposal is anywhere near balanced is that the tax increases would begin immediately, while the new programs would take years to get implemented.  But over the long run, the program would be a budget-buster — the White House budget shows revenues falling short of expenses by more than $5 billion per year after 2020.

Besides the obvious fact that this second increase of tobacco taxes in four years would represent another instance of President Obama violating his “firm pledge” not to raise middle-class taxes, the entire program is funded by yet another budget gimmick.  Most importantly, the irresponsible nature of this funding proposal should represent a cautionary tale to state legislators considering Obamacare’s Medicaid expansion.  Either the pre-school proposal will pass its unsustainable costs on to states — creating yet another unfunded mandate — or it will increase the deficit over the long-term — which will force Washington to take steps like cutting the federal Medicaid match rate to close the yawning budget gap.  In either event, it’s another indication of how the federal government’s unsustainable spending will eventually get passed right on to the back of states.

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