This article describes how Republican Senators got some Democratic Senators to  support eliminating dividend taxes in return for $20 billion for state  governments. Soaring Mediciad costs are most states' second highest expense.

What the article fails to mention is that paying states a few years of  additional money for Medicaid rescue is part of the government plan for  "restructuring" Medicaid, so this $20 billion is the down  payment for a long- range program to gut Medicaid as we know it.

Under current Medicaid law, the federal government matches whatever states  spend. The government wants to be able to cap its contribution, in the future  when some 80 million baby boomer start to reach retirement age, and begin  developing expensive diseases.

Since the federal government cannot compel states to accept caps on federal  contribution, the feds are offering the states a deal they cannot refuse. States  that volunteer to restructure will have generous caps on federal contributions  for seven years, and then the caps will be very stringent. Moreover, states will  be allowed to define who they cover and with what benefits, so when they become  strapped for cash in the future they will have flexibility to cut benefits.  States will have the right not to participate, but since their budgets are in  their worst financial crisis in fifty years, it is very difficult to refuse.

So Medicaid is being restructured in front of our very eyes with no visible  debate.

To hear an NPR segment on this, copy this entire link into your browser:  http://audio.pbs.org:8080/ramgen/newshour/expansion/2003/02/25/medicaid.rm?altplay=medicaid.rm

 May 15, 2003

Senate Republicans Gain Crucial Democratic Vote on Tax Cut

By DAVID FIRESTONE

WASHINGTON, May 14 - A bipartisan group of senators reached agreement with  Republican leaders today on a financial aid package for the states, adding a  crucial Democratic vote to President Bush's plan for eliminating taxes on  dividends.

Senator Ben Nelson of Nebraska, a fiscally conservative Democrat, said he would  support the temporary repeal of the dividend tax favored by Mr. Bush's allies,  now that Republican leaders had agreed to give $20 billion to struggling state  governments. With at least three Republican senators balking at supporting the  tax cut, Mr. Nelson's vote, along with that of Senator Zell Miller, Democrat of  Georgia, could give Republicans 50 votes for the cut. Vice President Dick Cheney  could then break the tie.

It is not clear, though, whether Senator George V. Voinovich of Ohio, a pivotal  Republican who has expressed doubts about the president's plan, will support the  dividend proposal when it comes to a final vote on Thursday. Republican leaders  said tonight that their plan would pass if it had Mr. Voinovich's support.

The dividend plan proposed by the president's allies in the Senate, led by  Senator Don Nickles of Oklahoma, differs sharply from the one approved by the  Senate Finance Committee last week. Where the committee voted to limit the  amount of dividends that could be taxed, the new plan would eliminate half of  the dividend tax this year, then eliminate the full tax for the next three  years. To stay within the tax-cut limit of $350 billion adopted by the Senate,  last month, the tax would be reinstated in 2007. Republicans say they would work  to cut it entirely before then.

Mr. Nickels said criticism of the four-year provision as a gimmick was  "hogwash." He said the period would be a good test for the president's plan.

"If I'm wrong, and the stock market doesn't have any positive effect, if this is  not a positive thing for the economy, we'll know it after three years," he said.  "For me, it makes sense to try it."

Republicans said it was important to them to get some form of a repeal of the  dividend tax into the final Senate bill to provide extra leverage for the idea  when the bill is reconciled with the House version, which would cut taxes by  $550 billion, in a joint conference next week. The House dropped the idea of  repealing the tax, preferring instead to reduce the tax on both dividends and  capital gains. House leaders have said the idea of eliminating the tax and then  restoring it is unworkable.

To get the support of centrist senators needed for the dividend plan, Senator  Bill Frist of Tennessee, the Republican leader, and other top officials agreed  today to the $20 billion aid package for states and cities. The plan would give  $10 billion to states to offset higher Medicaid costs, $6 billion in  unrestricted grants to states and $4 billion in unrestricted grants to cities  and counties. Mr. Nelson said that amount was enough to satisfy him.

"We've got states removing kids from the health care rolls, and seniors worried  that they'll lose their nursing homes," he said in an interview. "This  assistance will go a long way to resolving those problems. I made it clear that  I would support the dividend exclusion if we could get that state fiscal relief,  and having done that, I guess I'd better be prepared to take yes for an answer."

With most states struggling with budget gaps and declining tax revenues, the  issue of federal aid has become a subject of passionate debate on Capitol Hill.  Many Republicans who oppose increased federal spending have said that impending  tax increases by state governments could counteract the economic stimulus of the  federal tax cuts they favor. Democrats, seeking to reclaim the issue from the  centrist Republicans, say that a $20 billion aid package is too small to deal  with the financial crisis, and introduced an amendment to the tax bill today  that would double that amount.

Senator Susan Collins, Republican of Maine, said elimination of the dividend  tax, which she supports, would nonetheless add to the financial woes of the  states by depriving them of at least $8 billion in tax revenue. That increases  the responsibility of the federal government to help the states, Ms. Collins  said.

But assisting the states, which has broad support in the Senate, has provoked  little interest from the Republicans who run the House. Representative Bill  Thomas of California, chairman of the Ways and Means Committee, said repeatedly  last week that many states got themselves in trouble by profligate spending  during flush times, and should not expect help from federal taxpayers now. At  the same time, the White House has declined to take a stand on the issue, though  Donald L. Evans, the secretary of commerce, suggested this morning that state  aid might be the price for a tax cut.

"It was not in the president's plan," Mr. Evans said, when asked about the aid  package. "But the administration understands there's a process that takes place  in Congress, which is under way. We'll continue to work with the House and  Senate to make sure the basic elements and goals of the president's plans are in  the final bill."

If House Republicans insist on stripping out the state aid in a joint conference  with the Senate next week, it will be almost impossible to win final approval of  the tax bill in the Senate.

Democrats proposed a variety of amendments today that would mostly have the  effect of reducing or killing the tax cut plan. One amendment, introduced by  Senator Debbie Stabenow of Michigan, would block the reduction of the top tax  rate until seniors have a prescription drug plan equal to that of federal  employees. Senator Edward M. Kennedy of Massachusetts proposed paying for extra  unemployment insurance by stopping a tax cut to the wealthiest taxpayers.

But Republicans said that taxes for the rich must be cut in order to energize  the economy.

"You've got to remember," said Senator Charles E. Grassley of Iowa, chairman of  the Finance Committee, "that it takes people with money to create jobs."