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Letter from Peter R. Orszag, Director Congressional Budget Office to John D. Rockefeller IV re: assessment of the economic stimulus 1 (April 2008)

handle is hein.congrec/cbo9977 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Peter R. Orszag, Director U.S. Congress Washington, DC 20515 April 17, 2008 Honorable John D. Rockefeller IV Chairman Subcommittee on Health Care Committee on Finance United States Senate Washington, DC 20510 Dear Mr. Chairman: This letter responds to your request for an assessment of the economic stimulus that would result from providing fiscal relief to states through either an increase in federal Medicaid assistance and general grants to states, or through an increase in funding for infrastructure projects. (CBO discussed a variety of options aimed at economic stimulus in its recent paper, Options for Responding to Short-Term Economic Weakness.) Fiscal Relief to States During economic downturns, state and local governments experience a reduction in revenues resulting from the effect of lower economic activity on sales, income, and other tax bases. Unlike the federal government, which faces no statutory or constitutional requirement to balance its annual budget, almost all states have some version of a balanced budget requirement, although the stringency varies. As a result, when state revenues decline sufficiently to create a budget deficit, most states reduce spending or increase taxes (or do some combination of both) to address the resulting fiscal problem. Such reductions in spending or increases in taxes constrain aggregate demand in the economy, which tends to worsen the decline in economic activity. Some proposals would provide financial assistance to certain states through higher federal Medicaid matching rates and through general grants outside of the Medicaid program. Under current law, Medicaid matching rates vary across states, but range from 50 percent to 76 percent, and average about 57 percent. You asked about the effect of a proposal that would target the financial assistance to states in greater economic stress-as determined by a www.cbo.gov

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