Politics

Evan Horowitz | Quick Study

The next recession could make the state budget deficit explode

Boston, MA - 2/21/2017 - Massachusetts Governor Charlie Baker speaks during a news conference to announce the state's criminal justice system's review findings at the Massachusetts State House in Boston, MA, February 21, 2017. (Keith Bedford/Globe Staff)

Keith Bedford/Globe Staff

Governor Charlie Baker is racing to plug a hole in the current state budget.

Massachusetts has a serious budget problem. Year after year, the state struggles to cover the cost of public services — roads and schools, health care and child protection, law enforcement and the courts.

It’s happening now, with Governor Charlie Baker racing to fill a hole in the current budget with just a few months left in the fiscal year. And while the troubles are partly about lower-than-expected tax revenue recently, the real problem goes a lot deeper.

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Deficits are supposed to come and go. When times are tough, it’s fine to end up a bit in the red, raiding emergency savings to cover essentials. But when the economy rebounds, the coffers should be flush, so you can replenish your savings and prepare for the next storm.

This isn’t happening in Massachusetts. Despite rising wages and historically low unemployment — even after an uptick in the jobless rate for March that was reported Thursday — we face perennial deficits. That’s proof the state suffers from what’s called a “structural” budget deficit, the kind that doesn’t go away even in good times.

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What brought us to this budgetary low? Here’s the short version: Since the late 1990s, the state has reduced taxes substantially, yet we’ve never cut spending to match.

This is not meant to imply that tax cuts “caused” the budget problem. Both sides matter here: the costly tax cuts and the inability to offset them with spending cuts. But somehow the full impact of these tax cuts is rarely appreciated, even though they have contributed more to the deficit than even the explosion in health care costs.

Central to these tax cuts was a successful 2000 referendum to drop the income tax rate from 5.85 percent to 5 percent. The phase-in has taken longer than expected; the income tax is still at 5.1 percent and descending slowly. But a before-and-after snapshot gives a sense of the budgetary effect.

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During the 1990s, state taxes amounted to roughly 6.7 cents of every dollar earned in Massachusetts. These days, it’s more like 5.9 cents. And if that doesn’t sound like a big change, it adds up to something like 3.5 billion no-longer-collected dollars every year — more than enough to resolve the budget woes.

Compare that with the big driver on the other side of the ledger: the rise in health care spending, particularly on Medicaid. This, too, is a very big and very real fiscal challenge. In the late 1990s, less than 20 percent of the state budget went to Medicaid (known here as MassHealth); these days, it’s over 35 percent. And while about half of those expenses are reimbursed by the federal government, the state’s share is swelling, too.

Had these health care costs not exploded — but merely grown at the same rate as the rest of the Massachusetts economy — it would have freed up about $2.5 billion every year. That’s a big number, by any metric, but a good deal smaller than the $3.5 billion cost of tax reductions.

So that’s the big picture. Tax cuts drained away money, health care spending absorbed a growing portion of the remaining funds, and the result is a budget that’s been out of balance for over a decade.

What to do about it? There are efforts to tackle the problem from both sides. The push for a “millionaires’ tax” would be one way to increase revenues; Massachusetts has a new mechanism to stabilize the growth in health care costs; and the governor has proposed penalties for companies that shift employees onto state health plans.

But the clock is ticking. Nearly eight years have passed since we escaped the last recession, and if we find ourselves in an economic free fall anytime soon, we won’t have a lot of good options.

The “rainy day” fund has $1.3 billion, far below the level during the economic expansions of the late 1990s and mid-2000s. What’s more, the state withdrew more than that, over $1.6 billion, to maintain services during the financial crisis.

Without that protection, there’s a real risk a recession could open a deficit too large to fill. Lawmakers would have little choice but to cut programs hastily, precisely when the need for help is greatest and the time for careful deliberation is short.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts
and the United States.
He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.
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