IF 40 PAGES of statistics, tables, graphs, and economic analysis could generate any buzz at all, the state’s release of its report on long-term fiscal policy would have garnered front-page headlines. Indeed, it should have, for this may be the first time ever a governor has asked for a five-year budget plan anticipating future revenues and expenditures. We can be proud of the fact that the leaders of the state have been excellent fiscal stewards through the most difficult economic period since the Great Depression, implementing difficult budget cuts and improving our bond ratings to their highest levels in history. But we are hardly out of the fiscal woods.
The good news, according to the report, is that the Great Recession will be over and the economy will be growing at a healthy clip. This will mean that the “cyclical” deficits the state has faced due to a weak national economy will be behind us. The report also makes a persuasive case that the Commonwealth has successfully eliminated “structural” budget deficits for the first time since before the boom years leading up to the recession. A structural deficit occurs when a government “spends beyond sustainable levels of revenue.”
The bad news is that sometime over the next five years, the state will once again face an escalating structural deficit in that the projected growth in revenues at current tax rates will be insufficient to maintain existing state programs. This is the result of two trends: health care cost inflation plus state tax cuts implemented during past administrations. By next year, health care spending by the Commonwealth will account for 41 percent of state budgetary spending, up from 23 percent in 2000.
The state has had some success in containing health care cost growth since reform was implemented: Costs in Massachusetts are now growing at less than the national average; Medicaid spending is projected to grow by less than 3 percent this year, and state employee insurance premiums are projected to grow by less than 2 percent, the lowest rate of growth in 10 years. But cost containment will not be sustainable without system reform, something the governor and the Legislature are currently trying to do.
The state has also wisely generated a stabilization fund, a “rainy day” piggy bank to be used when bad economic times diminish tax revenues. Some of these funds were used during the past few years to cushion what would otherwise have been even more devastating cuts in state programs and in local aid to cities and towns. The state also used some revenue to replenish the fund during the recent, albeit modest, economic recovery. But according to the new report, if nothing is done to reduce health care spending, the state would have to make another billion dollars in budget cuts by 2017 to prevent depleting the rainy day fund — even if the economy continues to improve.
What is more, if the Commonwealth can come up with reasonable ways to reduce the expected rise in health care costs, there will still be only enough money left in state coffers to maintain level spending of existing state services.
Nothing will be available for needed investments in transportation infrastructure, education, or the restoration of past budget cuts including more local aid to reverse the pounding municipal governments have taken.
Mind you, this all occurs if the economy remains strong. If it doesn’t, we can expect to pile a cyclical deficit on top of the structural one. In this case and with no cuts in escalating health care spending, the state could run a $1.6 billion deficit in 2017 even if we used all of the stabilization fund. That would induce massive cuts in virtually all public services and a threat to the state’s stellar bond rating.
What the report does not mention is what this all means for tax policy. We will likely need more tax revenue unless everything goes exactly right on economic growth and health care cost containment.
As a society, we also need to decide whether the current level of investments in transportation and education are consistent with our long-term aspirations for the Commonwealth.
Fortunately, we have the capacity to raise tax rates without once again becoming Taxachusetts.
Overall, 32 states pay a higher percentage of their personal income in state and local taxes. Of the 34 states with a state income tax, 28 have a higher maximum rate. In more than half of all states (28) motorists pay higher gasoline taxes.
No one wants to pay more taxes, but it will soon be time that to think about how to raise some additional revenue in an equitable manner just in case all of our fiscal efforts and hopes for the economy do not come true.