Muddling Along, Makeshift Fixes and Misdirection: Analysis of Gov. Baker's FY2016 Budget Proposal

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Analysis by Robert Fitzpatrick, Progressive Newton

On March 4, Governor Charlie Baker released his proposed state budget for Fiscal Year 2016, which starts this July 1. The new Governor’s first budget proposal – and the reaction of some Democratic legislators to it – contains some positive developments but a lot more to be concerned about.

 


 


Earned Income Tax Credit Increase

Perhaps the best news, at least in the short term, for struggling Bay State families in the Governor’s proposal is his plan to expand – in some cases even double – the Earned Income Tax Credit (EITC), upon which over 400,000 Massachusetts taxpayers rely. The Governor proposes to offset the lost revenue by eliminating a tax credit for the film industry that amounts to a permanent and unnecessary subsidy to an already-wealthy industry that will always go wherever it gets the best deal.

Even the EITC increase, however, is cause for concern. Expanding the EITC is a tacit admission that many of our fellow working citizens are not paid enough to get by on their own. Although the expanded EITC would put real dollars in their hands, the EITC remains, in effect, a public subsidy to employers paying substandard wages. By providing an “escape hatch” that helps hard-working families afford basics, the cost is borne by taxpayers, rather than by those (many of them residing far out of state) who are enjoying record corporate profits and returns on investment on the backs of these low-wage workers. The EITC effectively socializes the cost of ensuring low-wage Bay Staters a decent living.

In the long run, the better approach would be to raise the minimum wage to a living wage -- well beyond the increases adopted by Legislature in June 2014 -- and to promote economic policies likely to boost stagnant wages more generally. Such policies would do as much, and probably more, to increase working families’ bottom lines, without asking all Bay State taxpayers either to pick up the tab or to forgoing needed public services.

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Proposed Increases in Funding for Transportation, Education, and Local Aid

The Governor, seeking to burnish his credentials as a moderate problem-solver, told MassLive, “By making key investments in education, transportation and our cities and towns, this budget helps us create the dynamic, competitive environment we need to continue our economic growth.” This is a worthwhile sentiment, but unfortunately, the “investments” don’t come near to meeting the need.

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Transportation Funding

In a case of “good news at first glance,” Governor Baker’s proposed increase in state funding for transportation would raise state aid to the embattled MBTA by 53% to $179 million for FY 2016. That extra $64 million or so would help an agency that, despite five fare increases and numerous cost cutting measures since 2001, has been too strapped to perform basic maintenance, let alone expand into the public transportation system Greater Boston needs.

But, lest anyone think the Governor’s proposed increase represents a good faith first step on the path to full investment in public transportation, the Baker Administration wants to set the record straight. Transportation Secretary Stephanie Pollock told theBoston Herald, “We’re giving them this money this year because there’s a problem to be fixed, not because we believe the general fund has an obligation to fill in the operating deficit at the T.” In other words, the increased funding is just another stopgap measure, kicking the can down the road another year.

Even worse, House Majority Leader Ron Mariano (D-Quincy) doesn’t even seem to want that stopgap measure. Yesterday Rep. Mariano said it would be “crazy” to give the T more money, while simultaneously complaining that “no one’s looking at long-term maintenance or any maintenance.” Does the Majority Leader think the best way to fix an organization that can’t afford basic maintenance is to refuse to give it any more money?

Neither Baker nor Mariano acknowledges that the T has operated under a structural deficit ever since the legislature adopted a “forward funding” scheme in 2000 (wherein state funding levels were based on wildly unrealistic projections of what the T’s revenues and operating expenses would be). Neither concedes that that significant contributions from the general fund are necessary because the dedicated revenue stream adopted in 2000 (20% of sales tax revenue) has turned out to be inadequate.

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A Stitch in Time Saves Nine

All of this is extremely short-sighted. Failing to invest in the public transportation network and our roads and bridges harms the quality of life of every resident who must get from A to B in our crowded metropolitan areas -- both drivers and transit riders. Our densely populated state needs a systemic approach to transportation. Every rider who stays away from the T because it’s unreliable (or doesn’t go to where they need to go) is another car adding to our ever-growing traffic woes, congesting roadways and parking spaces. Sitting in traffic and waiting for an hour in the cold for a train or bus are detrimental to our quality of life affecting broad majority of Massachusetts residents.

Even in pure dollar terms, failing to invest is costing us more than investment would cost. The American Society of Civil Engineers calculated that in 2013, Massachusetts drivers spent a total of $2.3 billion on operating costs or repairs that would be unnecessary if our roads were properly maintained. The same year, Governor Patrick’s Department of Transportation concluded that additional public spending of $1 billion per year would get both our roads and our mass transit systems to where they need to be.

The cost of maintenance and investment is, on balance, a much better deal for all of us. Unfortunately, in 2013 when Governor Patrick asked the overwhelmingly Democratic legislature for $2 billion in additional revenue, to address our transportation shortfall and increase our investment in education, the legislature gave him only a quarter loaf. Instead of a robust revenue package, the Legislature approved only about $500 million, relying primarily on the regressive increases in the gas tax, without any progressive income tax changes, which were sought by Governor Patrick and supported by the grassroots (Progressive Mass organized heavily around the “Our Communities” campaign in 2013).

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Education and Local Aid Funding

Likewise, in the area of education, the headlines will say that that Governor’s proposal boosts spending while, in reality, the proposed increase is very modest. Moreover, as Noah Berger of the Massachusetts Budget and Policy Center (Mass. Budget) told WBUR radio last Wednesday, “There's no increased investments in early education, nothing that will make public higher education more affordable.” Similarly, the media is touting the Governor’s budget boosts in local aid funding of 3.6 percent--which sounds good until you learn that, adjusted for inflation, local aid was cut by 44 percent between FY 2001 and FY 2015.

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A Cut By Any Other Name: “Level Funding”

What’s going on with the other budget items, however, is more distressing. For many agencies the Governor proposes “level funding.” There are two main problems with this. First, inflation alone makes “level funding” an effective cut (in December the Federal Reserve predicted inflation between 1 and 1.6 percent for 2015). So, keeping “level funding” from one budget to the next is not a victory for delayed investments and strapped services.

In this case, however, there’s a bigger problem: Charlie Baker’s professed “level funding” is not level funding at all. Just three weeks ago the legislature – with some expression of reluctance but virtually no opposing votes – agreed to emergency mid-year cuts, to close a $768 million FY 2015 budget gap. These cuts came after Governor Baker made across-the-board “9C” cuts, for which legislative approval is not required, in January and an earlier round of “9C” cuts by Governor Patrick in November 2014. In the course of these three rounds of cuts, virtually every state agency’s budget was reduced by a few percentage points.

When Governor Baker tells us his new budget proposal maintains “FY 2015 spending levels” for many departments, he’s using the phrase to mask what’s really happening. His budget proposal, in fact does not maintain not the funding levels in the actual FY2015 budget, passed last spring -- what “level funding” is usually understood to mean. Rather, his budget preserves the funding levels put into place after three separate rounds of cuts. The Governor’s budget would make these “emergency” cuts permanent. In effect, the Governor would transform the midyear cuts, expected to last only until June 30 and made with virtually no debate or public scrutiny, into the “new normal.” This is rhetorical disguise of calling it “level” is highly disingenuous.

Using crisis-driven cutbacks to establish permanent austerity is a time-tested strategy used often by Congressional Republicans in Washington. Governor Baker, however, is taking pains to present himself as a rational moderate, veiling his cuts by rhetorical sleight-of-hand, calling  these cuts “level” when they are not. And so far, the press on the whole is letting it slide (examples abound -- any write-up that speaks of level-funding without reference to “level” after the cuts. For example, on WBUR: “Baker said many state programs will be level-funded, meaning they would receive the same amount of money as in the current fiscal year”).

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Paying For It All: A Rube Goldberg Contraption

Perhaps even more distressing than the pseudo-investments, the sleight-of-hand “level funding,” and the outright cuts is how the Governor plans to “pay” for his budget proposal: about $500 million would come from one-time budget gimmicks. For example, although Governor Baker says (and many news outlets repeat) that the budget proposal would not tap into the state’s rainy day fund, in reality it calls for spending $300 million in capital gains tax revenue that otherwise would be put into the rainy day fund.

The Governor also hopes to save some money by enticing long-time state employees into early retirement by offering buyouts or sweetening their pensions. But the state workers in question pay income and sales taxes, and spend their income in Massachusetts. In short, their consumer demand helps fuel our economy and replacing them with cheaper workers or no workers – which would be the only way to achieve savings for the state – does our economy no good. It only reduces the total amount of money in workers’ hands, the opposite of the virtuous cycle in which people earn more money and spend more money, which makes other people earn more money and spend more money, which...well, you get it.

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It Doesn’t Have To Be This Way: Restoring Lost State Revenue

Diverting $300 million away from the rainy day fund and having to hope enough senior state employees decide to retire are not funding mechanisms that we can rely on going forward. But none of this should be surprising. These are the kind of tricks a Governor must resort to when he flat-out refuses to consider tax increases of any kind--as both Baker and Democratic Speaker of the House DeLeo have repeatedly reaffirmed--without even considering undoing any of the ill-advised tax cuts passed between 1998 and 2002.

Legislative and executive commitment to tax-cutting ideology, when our systems are falling apart around us is the definition of penny wise, pound foolish.

This refusal to consider responsible reforms on the revenue side of the ledger is not just unfortunate -- it’s irresponsible. We could not only eliminate any hint of a budget deficit without any cuts – ahem, “level funding” -- we could actually expand investment in our infrastructure and in our people. Just by simply returning to the tax structure we had in the 1990s, an economic time most Bay Staters thought was pretty good.

As Mass. Budget has found, in the years before FY 1998 Massachusetts state taxes routinely equaled about 6.3% of aggregate state personal income. Between FY 2002 and FY 2014, after a series of tax cuts, state taxes averaged only 5.3% of aggregate Massachusetts personal income. That drop from 6.3% to 5.3% represents about a 15% decline in revenues available to the state, which in FY 2015 is about $3.3 billion in revenue that cannot be invested in our communities.

Recapturing even a fraction of that money given away in tax breaks would have eliminated the need for any “9C” cuts at all this year, let alone semi-permanent 9C funding levels.

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Automatic Tax Cut Follies

Instead, we’re going in the opposite direction. On January 1, 2015 the state income tax rate automatically decreased from 5.20% to 5.15%, which will cost the state $70 million in FY 2015 and twice that in FY 2016. Combined with the effects of previous automatic tax cuts (this year’s was the third automatic income tax rate decrease in the past four fiscal years), the total cost of automatic tax cuts in FY 2016 will approach $400 million.

How is it possible that the state is showing a large deficit for the fiscal year in progress, yet we’re decreasing the personal income tax rate?  These tax cuts were in fact enacted 12 years ago:  in 2002, the Legislature voted to allow automatic income tax rate decreases of 0.05% to take effect each time revenues rose by a certain amount, without factoring in any other budget/revenue forces.  So it is that this year’s automatic reduction comes when we have a $1.5 billion deficit. Yet the Legislature  has made no moves to undo this ill-considered policy, and instead, we have the incongruous picture of automatic pre-Romney tax cuts voted taking effect in the midst of a yawning budget deficit.

The Governor, for his part, spoke out loudly during his campaign against automatic gas tax “increases” (which were really adjustments for inflation), but has nary a word against automatic tax decreases which are busting the budget.  If your goal is to cut discretionary state spending to the bone, automatic decreases are a convenient piece of that puzzle.  The irony is that Governor Baker has persistently tried to market himself as a practical, fiscal moderate. Yet, just like his more brazenly ideological GOP counterparts in Congress, his commitment to balancing the budget inexplicably excludes any revenue increases, no matter how big the structural deficit.

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The Sector That’s Eating the Budget: Healthcare

With the Governor’s projected self-image as a great fiscal manager, however, one might be forgiven for imagining that he’s successfully “cutting spending.” But, actually, the Governor’s budget increases overall spending by about 3%, $1.1 billion over FY 2015. This despite funding just about everything at lower levels than the FY 2015 budget (before the legislature’s February 2015 cuts and the two rounds of “9C” cuts).

So what is driving the increase, when so much has already been cut? It’s not the relatively modest bumps in local aid, or transportation or education spending -- it’s the increase in healthcare spending. Even with Baker’s deep proposed cuts relative to projected spending (some of which are justified), the state’s healthcare costs would rise by almost twice as much as spending overall under Governor Baker’s budget.

The ever-rising share of healthcare costs as a share of the state’s budget simply underscores the need for a better way to meet the healthcare needs of the people in our state – and our nation. Otherwise our continued ability to provide any other public services will be at risk, as ballooning health care costs take up more and more of our revenue.

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How Will the Legislature Respond? 

All in all, Governor Baker’s budget proposal is about what you’d expect from a new, tax-averse Republican governor. The Governor astutely has tried to win the media war, offering some funding increases in areas like education (a perennial concern of swing voters) and transportation (a huge story these past few weeks), while disguising cuts as “level funding” and framing the narrative as “slowing growth” in state spending.

What remains to be seen is how our overwhelmingly Democratic legislature responds. If individual members follow the Speaker’s lead, we may be looking at a rhetorical rubber stamp on the “no new revenue” rhetoric, and the continued underfunding of our resources that comes with it. On the other hand, Baker’s budget presents an opportunity for true progressive leaders to make an argument for sensible and fair tax and revenue reforms, to bring needed needed dollars into the budget to invest in the MBTA, education, community services, the judicial system and all manner of infrastructure.

So far, what’s been missing in this budget discussion is any sense of perspective. For all the (accurate or misleading) comparisons to last year’s budget, there has been little to no mention in the media coverage of how this budget proposal compares to budgets from those not-very-long ago days before our ill-advised tax cuts became etched in stone.  More importantly, there’s been little to no discussion of what we want our Commonwealth to be, much less an honest accounting of how much it will cost to get there.

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FURTHER READING

  • Senate Prez: Charlie Baker budget plan ‘fails to invest in future’ - 3/10/2015 -  Boston Herald - http://go.shr.lc/1E3yqmv
  • 7 questions about the state budget you were too embarrassed to ask - Metro - The Boston Globe - 3/5/2015 - http://bit.ly/1NqNO42

  • Here’s what is in Baker’s budget - Metro - The Boston Globe - 3/4/2015 - http://bit.ly/1H7MvTd

  • Charlie Baker: Massachusetts budget proposal 'right-sizes' government while investing in priorities like transportation 3/4/2015 | masslive.com -http://bit.ly/1HdocU0 

  • Baker proposes T funding hike - CommonWealth Magazine - 3/3/2015 - http://bit.ly/1wdLXdf

  • DeLeo says no to taxes - 2/11/2015 - CommonWealth Magazine - http://bit.ly/1HjBbn2
  • Charlie Baker set to unveil nearly $190M rescue plan for MBTA 3/3/2015 | Boston Herald - http://bit.ly/1NtYyP7

  • What to look for in Baker’s first budget - Metro - The Boston Globe - 3/2/2015 - http://bit.ly/1HcTJp5

  • Know the Lingo and You Can Follow the Budget Process  - Politics - 2/27/2015 - The Boston Globe - http://bit.ly/18qvMxW

  • Budget Browser - MassHealth (Medicaid) & Health Reform - MassBudget - http://bit.ly/1NuAWty

  • How to raise taxes — and get away with it - George Donnelly - Opinion - The Boston Globe - 3/5/2015 - http://bit.ly/1EUmnMh

  • Let’s Occupy the Film Tax Credit | HesterPrynne - 5/7/2013 - http://bit.ly/1DT3rt7

  • Report: Massachusetts Health Reform in Practice | Mass-Care - http://bit.ly/1DWlRct

  • Income Tax Cuts and the Budget Deficit in Massachusetts - MassBudget - http://bit.ly/1FXrMUo

  • Automatic Income Tax Rate Cuts: Frequently Asked Questions - MassBudget - http://bit.ly/18039I1

  • Rewarding Work: The Minimum Wage and Tax Credits - MassBudget - http://bit.ly/18qKuFm

  • Understanding the Actual Cost of Masshealth to the State - MassBudget.org - Nov 2014 http://bit.ly/1DWkURt

  • Baker aims to control health spending by shifting payments - 3/5/2015 - Metro - The Boston Globe - http://bit.ly/1weoeKf

  • Analyzing the Governor's Budget for FY 2016 - 3/6/2015 - MassBudget.org - http://bit.ly/1weDLth [PDF]

  • Obama is talking tax fairness. How does Massachusetts fare? - 1/23/2015 - Politics - The Boston Globe - http://bit.ly/18SFKbQ

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