As we absorb the proposals for tax cuts, military spending and Medicaid reductions in President Trump’s proposed budget, a look back at mythical Camelot may be instructive.

In his kingdom, Arthur’s support was always eroded by a range of trifles. However, when it came to war, he had to be ready. At the same time, he had to be mindful of his people, not just the inner circle at the Round Table. Today, shifting budgetary priorities to the military away from domestic programs will require approval from Congress. There is great consternation among state and local officials, and on the part of part of the public, as to how the newly configured world will function.

The comparison to another Camelot is also instructive. The Kennedy administration gained a lot of credibility by cutting taxes and stoking growth. It was a magical time in some respects with moments of greatness. Given we are coming up on the 100th birthday of John F. Kennedy, it is good to look back at the achievements of that period. However, the tax cut from an extremely high tax rate to a relatively high tax rate is not quite as dramatic as the one being proposed at present, especially for the corporate side. Of course the heady growth was also supported by the preparations for entering into the Vietnam War. That is around the time we first learned the meaning of the word “quagmire.”

Increasing military funding at the expense of domestic programs is likely to have a profound impact on states and localities. If Medicaid is really cut to the extent being discussed, it is questionable how much the states would be able to backfill the amounts from other sources.

Now that CBO has weighed in with their estimate that 23 million will lose coverage in the House version of health care legislation, versus the estimate of 24 million for the earlier plan, the debate will ratchet up a few more levels. That the proposed healthcare changes will reduce the deficit by $119 billion provides little appeasement to other interests. In the culture of federal budget machinations such an amount could easily be offset elsewhere by other spending or tax reductions. The savings are not stand alone in a vacuum.

Even if the package of tax cuts is approved, any resulting economic activity increase would take some time to build. We would not reach Trump’s 3% target for several quarters. In turn, the states and localities that are already in slow revenue growth mode will be hard pressed to counter the transition period at a minimum. Supply side economics has not always led to greater spending and increased economic activity, and it has often contributed to higher federal debt levels. China was just downgraded by Moody’s for among other reasons a debt burden over 250% of GDP. We are at approximately the 100% mark, and it is not difficult to envision that the level could go much higher before the turbocharged growth is attained.

Some in Congress have promised it will be different this time in regards to issuing more debt. But it remains to be seen if the states may need to do more short term borrowing until each state’s legislature and executive reach a consensus on how they will cope with the federal cuts as proposed. Such borrowing may be a tad more difficult for a state such as Illinois. In mythical Camelot, the King had to make certain the populace was at least behind him, so he could go about empire building. A sharply divided electorate in our nation will continue to exert influences in unanticipated and not necessarily positive directions.

The deductibility of state and local taxes is another important consideration. Would a provision to eliminate it lead to greater migration and a decline in housing values? For those who have been in their homes for some time and have built equity, the property tax burden can be greater than the ongoing mortgage payments. Deductibility softens the effect. Younger potential buyers including first time buyers will want an adjustment of some kind if they will not see direct benefits from the change. This adjustment is more likely to be in the area of declining housing prices that would in turn put more pressure on local real property taxes. This discussion, of course, holds interest rates constant though we know they are widely anticipated to increase.

How much these policy shifts will influence the direction of the federal deficit and the debt burden of the U.S. remains to be seen, but they are both poised to expand. Some would say given the low level of rates and the appetite for Treasury paper that we should not be concerned. The debt ceiling must be raised for the government to function. The Treasurer has said as much. Yet, the underlying consideration is that deficits should be combated and debt has to be repaid. The trimming of the deficit in the 1990’s did contribute to years of positive growth.

No one knows for certain where the consideration of the Muni Tax Exemption will take its place in the overall plan. As time goes on the level of alert in the municipal market continues to increase. We have heard about some conviction to keeping the tax exemption in place, but words do not always match actions in the present context.
We would like to witness faster progress with the infrastructure plan given the greater degree of bipartisan support. How infrastructure will fare in the trade off wars is yet to be seen. Can the bottlenecks in activity afford to wait? There still appears to be a high degree of conviction towards the $200 billion funding. That would build a significant number of bridges, roads, and other infrastructure if it is approved unaltered, especially with the leverage factor. Tax credits and more user fees are probably on the horizon.

At the end of the mythical Camelot, the King empowers a young admirer to spread his legacy in case he is destined to perish in battle. We are a long way from concerns about legacy. But it is always a good reminder that history will judge what does or does not get accomplished in this cycle. Cuts to critical programs will detract. Maintaining some integrity behind the system of healthcare in the nation not just for retirees remains of paramount importance. More funding for infrastructure in a sea of other priorities would be directly applied to sound legacy building. In the end, it is a balancing act not counting if we wage war on the domestic or international fronts.