Recent arguments against cutting federal health care spending — and letting states handle insurance regulation — reveal just how unaffordable the Affordable Care Act (Obamacare) is.

Law professor and Incidental Economist contributor Nicholas Bagley, reconstructing the arguments of the moderate Republican Tuesday Group, says that “it’s fine to give the states more authority to oversee their insurance markets,” but the states “don’t have the fiscal capacity to finance massive coverage expansions on their own.”

They’re required to balance their budgets every year, so any commitment to covering the uninsured will throttle their budgets when the next downturn comes.…

The states thus need federal money; it’s the lifeblood of health reform. And the real cleavage among Republicans is over how much money the federal government is willing to shell out. The Freedom Caucus wants to repeal the ACA’s taxes on industry and the wealthy, financing them with savage cuts to Medicaid and slightly less savage cuts to individual-market subsidies. The Tuesday Group likes the tax relief, but worries about the coverage losses associated with all the cuts.

State Budget Requirements

The case against letting the states fund Medicaid expansion on their own is that they have to run balanced budgets. But wait, I thought the Affordable Care Act actually reduced the deficit! That was, after all, the assertion of the Congressional Budget Office and the Joint Committee on Taxation in 2013.

So if federal ACA spending were cut or even zeroed out, why couldn’t states that like the legislation simply reinstate the same taxes and spending that the federal government currently uses under the law? If the net budgetary impact of the health care law really is zero, there is no inconsistency with state balanced-budget requirements.

What’s more, most states don’t have strong constitutional requirements that they actually run balanced budgets at the end of the fiscal year. More often, they just have statutory requirements that balanced budgets must be enacted — or even merely proposed — at the beginning of the fiscal year. Most states run balanced budgets because they want to, not because they are required to by law.

Federal and State Spending Constraints

Having the federal government pay states to run programs is just a complicated shell game — the states aren’t really winning if the federal government pays for the programs, because the federal government ultimately gets that money from taxpayers living in the states.

Now, perhaps Bagley’s response would be something like this: The ACA generally reduces the deficit, but there might be some years when its taxes bring in less than expected, and states would be tempted to cut spending in those years. The federal government doesn’t face the same constraint.

To this possible response, there are two counterarguments.

First, the federal government faces a stricter constraint than the states in one crucial respect: its total debt burden is much larger. Federal debt is already greater than 100% of GDP, leading to higher interest costs and crowding out private investment. Expanding the debt even further would only exacerbate these serious problems.

State and local debt is much lower, at about 16% of GDP. State and local governments are much more fiscally responsible than the federal government, and that’s precisely what gives them room to spend if there’s a good reason for it.

Second, states have a ready mechanism to deal with economic downturns and sudden revenue shortfalls: rainy day funds. States accumulate surpluses in good years and then use the saved funds to smooth out spending in bad years. Spending out of a rainy day fund violates no balanced-budget rules.

Desire vs. Ability

In short, state balanced-budget rules provide no good reason why states couldn’t fund health care spending on their own. Perhaps ACA supporters truly worry that states wouldn’t want to fund massive health-care programs, because states want to keep taxes low. (Even Vermont realized that it didn’t really want single-payer health care when it recognized the price tag.)

But isn’t this demand for hiding the costs of the ACA almost tantamount to admitting that the ACA isn’t good policy?