In summary: Medicaid inflation, short-term thinking, and anti-tax dogma.
In the late 1990s, Mississippi led the national crusade that brought Big Tobacco to account. Those were the halcyon days when lead litigator Dickie Scruggs ruled the legal profession, state Attorney General Mike Moore seemed a lock for higher office, and Mississippi looked forward to billions of dollars that might finally improve the health of the country’s most beleaguered state.
That optimism is better remembered today as confirmation of the Delta writer David Cohn’s tragic observation: “With heaven in sight, we insist on perversely marching into hell.”
Dickie Scruggs is now serving a federal prison sentence for attempted bribery of a judge. Mike Moore never sought higher office, in part because of his toxic association with Scruggs. And the trust fund that could have contained billions dedicated to improving health and healthcare is virtually empty.
Mississippi’s tale may be more sordid than others, but very few of the states that reaped the tobacco windfall fifteen years ago have fulfilled their original hopes. NPR’s All Things Considered produced a segment over the weekend about the disappointment in Mississippi and elsewhere:
The best-laid plans of mice and men…
The story started auspiciously in 1998 when State of Mississippi deposited the first $280 million installment of its $4.1 billion settlement with the tobacco companies. Checks were supposed to roll in for the next 25 years, and the Legislature dutifully established the Health Care Trust Fund to endow critical health and healthcare programs. The principal was deemed “inviolate” so that the interest could accrue into a sizable, perpetual source of funding.
But it only took the Legislature two years before they diverted part of an installment headed for the trust fund. Two years later, they spent the whole installment, and again the next year.The Legislature didn’t necessarily want to dip into the fund. They blamed extenuating circumstances and promised to repay the fund for the borrowed money the next year, when they usually went through the whole charade again.
The balance had grown to roughly $600 million by 2001, but it was never allowed to get any larger. In 2004, the Legislature began drawing upon the fund’s principal. State leaders were still committed — at least in public — to the preservation of the trust fund and deposited IOUs in lieu of the redirected millions. However, after years of delinquency, many gave up the illusion of ever seeing the fund to maturity. Gov. Barbour called for the gradual exhaustion of the fund in his 2010 State of the State address.
Once another $23 million is taken out in FY 2014 — plus the installment and interest payments — the tobacco trust fund will sit virtually empty. Had the state not interfered, it would contain approximately $2.5 billion with the promise of at least another billion in the next decade.
The potential interest and investment revenue would net the state well over $100 million a year — and probably closer to $200 million during the stock market boom of the past four years. That’s as much as Mississippi is cashing from the tobacco companies now, but unlike the foregone interest from the trust, that revenue stream will be gone for good once the terms of the settlement are up.
Rising poverty + Healthcare inflation = Medicaid trouble
It’s important to note that the trouble began in the good years. Between 2002 and 2007, when the Mississippi economy grew nominally by 37%, the Legislature spent over $1 billion that was intended for the trust fund.
Most of the tobacco money went to pay for rising Medicaid costs. Theoretically, strong economic growth should have decreased eligibility for Medicaid, the federal-state health insurance program primarily for the poor. But growth during the mid 2000s was illusory for most people. Median household income did not keep pace with GDP, and Mississippi’s poverty rate ticked upward from 18% in 2002 to 21% in 2008.
Medicaid enrollment rose by 30,000 from 2002-2004 but declined by 60,000 from 2004-2007. The decrease is directly attributable to changes in eligibility led by Gov. Barbour that kicked 65,000 senior and disabled citizens off the program. Even that radical — and, by many counts, cruel — effort failed to halt the state’s rising cost burden.
Mississippi’s total Medicaid expenses grew by nearly 50% during the 2000s. Even though the federal government picked up most of the tab (and even more after the 2009 stimulus package), state expenditures grew from $626 million in 2003 to $869 million in 2008.
The state simply didn’t have enough revenue to cover its share of the rising Medicaid costs. Every additional dollar spent on Medicaid meant a dollar less for schools, infrastructure, or public safety — most of which were already shaved to the bone. Members of both parties were complicit in withdrawing money from the trust fund. Republicans, who controlled most state offices, saw it as a way to avoid raising taxes. Democrats, who nominally controlled the Legislature, used it to avoid deeper cuts education. (More incentive for the Dems was that the Mississippi governor has the power to unilaterally cut the budget up to 5% to offset revenue shortfalls that occur after the FY appropriations. Democrats supported using the trust fund as a backstop for Medicaid to keep that power out of the hands of Gov. Barbour.)
Want to preserve the remaining tobacco funds? Raise cigarette taxes
Try as we might, Mississippi hasn’t squandered the entire tobacco windfall. Over one billion dollars is still due to the state in the coming decade. That money is worth saving.
First, we have to figure out another way to pay for Medicaid. The change in Medicaid’s year-over-year cost depends on too many factors to predict with precision, but there are two things we know for sure: 1) it will not get any cheaper (though there may be signs costs are leveling off); and 2) Mississippi doesn’t generate enough revenue to pay for it as is.
The primary response has been to cut other government expenditures, education in particular. Mississippi has underfunded its adequate education formula by over a billion dollars in the past decade. Even with those cuts, Mississippi’s revenue consistently falls short of outlays. We have been filling this long-term hole with short-term money from the tobacco settlement as well as the federal stimulus package and state rainy day fund. That’s unsustainable and incredibly wasteful. Mississippians may not realize it now, but we are paying dearly for the Legislature’s refusal to maintain sufficient tax levels.
Too much of our debate is constructed around the narrow economic costs of raising taxes. The billions in lost investment revenue from trust fund should start to focus our attention on the costs of not raising them. It would be far cheaper to raise taxes to match spending and deposit the one-time tobacco money into the trust fund for perpetuity.
Where would we look for new revenue? Why not start with the most obvious source: tobacco. While nearly every other state in the country followed the tobacco settlement by raising taxes on cigarettes, Mississippi stubbornly maintained its $0.18 per pack levy until 2009, when Gov. Barbour finally signed legislation raising the tax to $0.68. That still roughly half of the national per-pack average of $1.24 and far less than nearby states Texas ($1.41), Florida ($1.40), and Arkansas ($1.15). Even so, the 50-cent increase boosted state tax collections by $90 million a year and helped reduce cigarette sales to their lowest point on record.
It’s time to raise the cigarette tax again. The Robert Wood Johnson Foundation estimated in 2010 that raising the per-pack tax to just $1 could generate another $118 million a year for Mississippi. It would also reduce long-term health costs by $630 million. What they don’t factor in are the benefits from supplanting the use of one-time trust fund payments to patch budget deficits with the new recurring revenues from cigarette taxes.
If the tobacco trust fund is endowed with the remaining funds from the tobacco settlement, the interest and investment income could produce another $50-100 million in revenues annually as far as the eye can see. But unless Mississippi acts soon, that money will go up in smoke like all the rest.