States' Addiction to Welfare Corrupts Federalist System

By Michael Franc
Friday, March 2, 2007

"Welfare," it has been said, "is mistrusted by those who pay for it and held in contempt by those who receive it." This may be true for those who deplore the loss of dignity and the self-destructive behavior that accompanies welfare dependency. But, sadly, it doesn't ring true for another form of welfare dependency, one that has undermined the dignity of state governments and prompted them to behave in self-destructive ways.

The Founders' notion that the states would be the government closest to the people has been eviscerated by the more than $450 billion that Washington bureaucrats send the states each year to finance such traditionally local responsibilities as education, health care, law enforcement, fire fighting, and even home heating assistance.

To the nation's governors, however, even $450 billion of dependency isn't enough. No program better captures this trend than the State Children's Health Insurance Program (SCHIP) enacted in 1997. Congress intended SCHIP to complement Medicaid by expanding health coverage to children in families with incomes up to twice the poverty level. But one decade and $40 billion later, profligate states have morphed SCHIP into a far more expensive and expansive program that now covers children in families with annual incomes as high as $72,000, their parents, and even some childless adults.

Seven states now permit families with incomes as high as $60,000 to claim this welfare-style benefit. New Jersey leads the pack, having moved its eligibility limit up to $72,000. In January, Maryland Gov. Martin O'Malley (D.) went even further, proposing to cover families with incomes four times the poverty level -- $82,600 per year.

Not surprisingly, these expansions have depleted SCHIP's coffers and prompted the governors of more than a dozen overextended states to petition Washington for a $13-billion bailout to "fully meet each state's healthcare coverage objectives for SCHIP." Translation: The cocktail waitress in Nebraska should happily subsidize the health costs of families in New Jersey or Maryland with three or four times her income.

In an Orwellian twist, lawmakers have used federalist logic to argue for a federal takeover. "These policies are necessary," Rep. Frank Pallone (D.- N.J.) explained, because "the cost of living is significantly higher in New Jersey than in other parts of the country, and so we must extend our eligibility above other states."

With a bipartisan group of lawmakers calling on Congress to guarantee coverage to every uninsured child in America by pouring an additional $60 billion into SCHIP over the next five years, the momentum behind an enormous expansion of the federal role in health care may be insurmountable.

But before lawmakers lure middle-class families into the welfare system, they should contemplate the absurdity at work here. Most of these families pay at least some federal tax. The IRS even considers some of them "rich."

That's right. In 2004, approximately 40,000 households earning $75,000 or less in the states with the most generous SCHIP coverage paid the odious Alternative Minimum Tax (an out-of-control provision enacted in 1969 to require 155 millionaires to pay at least some federal tax, but that now shakes down some three million taxpayers). The $66.6 million in AMT payments these taxpayers have forked over to Uncle Sam could have gone toward private health coverage for their children.

Repeal the AMT

Some of these AMT victims undoubtedly enroll their children in SCHIP. This certainly gives new meaning to the phrase "poor little rich kid."

The solution? Repeal the AMT. After all, Congress never intended it to generate so much revenue or ensnare so many taxpayers. The resulting tax relief (about $13 billion), moreover, would permit these hyperventilating governors to propose their own tax increases and dedicate the resulting revenue to their grandiose schemes. In California, AMT repeal would return $2.9 billion to Gov. Schwarzenegger's constituents. In New York, the relief would exceed $2.1 billion. In New Jersey, $842 million. In Maryland, $360 million. And so on.

If a massive expansion of the government's role is such a good idea, the governors should stop their pathetic bended-knee appeals to Washington for more cash and assert their prerogatives under our federalist system. Let them propose to increase taxes on their own constituents. Of course, Washington can help by cutting taxes and allowing their constituents to keep more of their hard-earned dollars.

If this provokes taxpayers to rebel, fine. These governors would then be motivated to seek out more targeted and cheaper solutions to an admittedly serious policy concern. But that's how our federalist system is supposed to work.