The looming budget question: Will Medicaid cuts fund tax cuts?

The challenge of restoring fiscal responsibility will be on full display in the months ahead following the passage of the House of Representatives budget resolution for the 2025 fiscal year on Feb. 25.

It set the stage for legislation that can circumvent the Senate’s 60-vote threshold and pass with a simple majority. While it does not include specific changes to spending and taxes, it specifies which House committees should finance deficits in reconciliation legislation and by how much.

The FY2025 House Budget Reconciliation Instructions call for decreases in mandatory spending of $2 trillion over 10 years. Of this total, $880 billion is slated to come from the Energy and Commerce Committee that oversees Medicaid, a joint federal and state health insurance program for 72 million low-income and disabled Americans. The benefits include nursing home care, personal care services and assistance paying for premiums and other costs.

Congressional Republicans are willing to tackle Medicaid because they believe the program has moved far past its original design of aiding the poor and disabled into one that assists able-bodied, working adults with lower incomes. However, President Trump has sent mixed signals about whether he is on board to cut Medicaid. House Speaker Michael Johnson (R-La.) has stated that any cuts in the program would deal with “fraud, waste and abuse.”

Medicaid outlays have increased by more than 200 percent since the Affordable Care Act was enacted in 2010 and by 50 percent since the COVID-19 pandemic struck in 2020. The Affordable Care Act permitted states to expand Medicaid coverage to adults with incomes up to 138 percent of the poverty level.

Subsequently, Medicaid’s expansion during the COVID-19 pandemic occurred as workers who lost their jobs and employer-sponsored health insurance became eligible for Medicaid. The federal government enacted the Families First Coronavirus Response Act that increased federal Medicaid match funding in exchange for states guaranteeing continuous coverage during the public health emergency period.

The amount and nature of the Medicaid cuts are currently being reviewed by House Republicans. The proposals include lowering the 90 percent federal match rates for new Medicaid enrollees in the Affordable Care Act and implementing per capita limits for what will match state programs. There is also consideration that Medicaid recipients should have work requirements, although this is expected to save only about $100 million over 10 years.

According to the Wall Street Journal’s editorial board, press claims that Republicans want to gut Medicaid are false. It points out that Medicaid outlays are on track to increase by $2.4 trillion through 2035 under Congressional Budget Office baseline projections. Consequently, even if $880 billion were shaved from this tally, Medicaid spending should still increase by $1.5 trillion over the coming decade or 2 percent annually.

Many observers believe that Congress needs to set boundaries on Medicaid and other mandatory programs because they constitute an ever-growing share of total outlays. Fifty years ago, mandatory programs and net interest expense accounted for about 50 percent of total federal outlays, whereas these items represent nearly 75 percent today and are on a steadily rising trajectory.

That said, even if Republicans achieve their targeted spending cuts, federal debt outstanding is still projected to rise by $2.8 trillion over the next 10 years. The principal reason is that tax revenues are projected to decrease by $4.5 trillion if key provisions of the Tax Cut and Jobs Act are extended.

When the act was enacted at the end of 2017, the bill was complex and contained both positive and negative elements.

The case for lowering the U.S. corporate tax rate from 35 percent to 21 percent was that it brought them in line with the major industrial economies. One of the main benefits is that it lessened incentives for U.S. corporations to outsource production abroad, while it also created incentives for U.S. businesses to invest in plant and equipment. The lower corporate tax rate is a permanent feature of the Tax Cuts and Jobs Act and does not require an extension.

By comparison, the reduction in personal income tax rates requires an extension by the end of this year. They were sold as a tax cut for middle-income workers, but the assessment of the Center on Budget and Policy Priorities is that the act was “skewed to the rich, expensive and failed to deliver on its promises.” It argues that policymakers should work for a tax code that raises more revenues, and which is also more progressive and equitable.

The Tax Policy Center estimates that households with incomes in the top 1 percent will receive an average tax cut of more than $60,000 compared to less than $500 for households in the bottom 60 percent. However, it also points out that specific provisions of the act, such as expanding the standard deduction and the child care credit, had different distributional effects.

It concludes that the individual provisions of the Tax Cuts and Jobs Act “involve a combination of give and takes that affect households differently depending on their income and other characteristics.”

Republicans and Democrats have not addressed the provisions of the tax cuts that will be maintained or modified thus far, but one thing is clear. The Democratic campaign for the 2026 midterms will portray the extension of the act and any cutbacks for Medicate as evidence that Republicans are seeking to benefit the rich at the expense of the middle-income and poor.

This strategy was successful in helping Democrats win a decisive victory in the 2018 midterms. To counter it, Republicans should focus tax cuts on middle-income and lower-income households that would provide greater support to the economy than tax cuts for the wealthy would.

“Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden Business School. He has authored three books, including "Investing in the Trump Era: How Economic Policies Impact Financial Markets."

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