NEW YORK--(BUSINESS WIRE)--President-elect Donald Trump's Medicaid and trade policy proposals would significantly lower federal transfers to US state budgets and could negatively affect economic growth and revenues if they are implemented, Fitch Ratings says.
Trump's proposal to convert Medicaid funding into a block grant program would lead to much lower federal funding to states. A Congressional Budget Office assessment of earlier Medicaid block grant proposals projected declines of between 4% and 23% in federal funding over 10 years. Reductions of this magnitude would have a significant effect on states' budgets. In fiscal 2014 federal Medicaid aid represented approximately 15% of total state expenditures according to the National Association of State Budget Officers.
Reduced federal Medicaid aid could lead states to tighten overall spending and reduce transfers to local governments. However, the actual implications are impossible to define without assessing the fiscal benefits that states would receive from the autonomy granted by a block grant program. Depending on the specifics of the program, states could lower their Medicaid costs with that flexibility.
Trump's trade policy proposals would have significant adverse implications for US investment and growth and push up prices, particularly in the event of foreign counter measures or "currency wars."
Independent economic analyses suggest they could disrupt supply the chains of US manufacturers. This could be most challenging for businesses in southeastern states that have benefitted from recent job growth in the automotive and aerospace industries. If economic growth slowed, or reversed, state and local tax revenues would follow suit. However, the direct implications of the President-elect's trade plans are difficult to assess as the US has never left an international trade agreement and has not implemented tariffs of this suggested magnitude since the Great Depression.
Trump's infrastructure spending proposals could benefit state and local governments, but details remain unclear. The most detailed infrastructure policy plan from Trump's campaign relies on federal tax credits to encourage private investments in revenue-generating projects. More clarity will be needed on how non-revenue-generating projects will be financed as the opportunities for investment in user-fee-supported infrastructure will be only a limited subset of the overall need.
Benefits from increased federal infrastructure support would be offset with tax policy changes that could negatively affect state and local governments. Trump's planned tax cuts would lower the benefit of buying tax-exempt municipal bonds for many individual investors. This could result in a modest increase in the cost of capital for local government issuers.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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