There’s a hole in the state budget. Not a big hole by budgetary standards, but about $329 million or 0.9 percent. Governor Deval Patrick has released a plan to plug the gap before he leaves office. And as final acts go, this commitment to hand Governor-elect Charlie Baker a house without debts has a rather statesmanlike feel.
Unfortunately, whatever Patrick does to fill the $329 million shortfall, it can’t change the fact that Baker will inherit a far more significant budget problem. In any given year, Massachusetts barely takes in enough revenue to cover existing programs, much less to pay for new tax breaks or spending initiatives.
Unless the economy roars back to life — and never stumbles again — this is a problem that the new governor will need to address.
What’s causing this year’s shortfall?
There’s no single explanation for the missing $329 million. Tax revenue is about $30 million below expectations, various fees and reimbursements are also low, and the Legislature’s economic development bill was premised on additional revenue that hasn’t materialized.
All of these are one-off, temporary problems. But there is one other thing eating away at this year’s budget, and it’s something that will keep eating away at future budgets: The income tax rate is going down.
For years, the state income tax rate was stable at 5.3 percent, but there’s a law in Massachusetts designed to gradually bring it down to 5 percent. Whenever the economy is good, the rate shrinks a little. And all signs suggest that the economy is good enough to force another little drop, from 5.2 percent to 5.15 percent. That automatic change is going to cost the state $70 million this year, and $140 million every year after.
What’s causing the long-term problem?
If you want to know why Massachusetts has been plagued with persistent state budget problems, here are the top three reasons:
ª The economy. As the economy goes, so goes state revenue. And since the recession, the Massachusetts economy has ranged between weak and terrible. In his two terms, over eight years, Patrick never enjoyed a period of robust economic growth.
ª Income tax cuts. At the turn of the millennium, when the state budget was flush, Massachusetts voters passed a referendum to lower the income tax rate to 5 percent. That process was delayed, because in the early years the cost to the state proved unmanageable, but we’re still on track to get to 5 percent. And the reductions that have been implemented so far cost the state $2 billion every year. That’s twice what Massachusetts spends on aid to cities and towns and more than enough to cover universal pre-K.
ª Health care. In 2001, health care made up about 20 percent of the state budget. Today’s it’s 30 percent. That surge in health care costs has siphoned money away from other priorities.
Did Patrick try to fix these problems?
Two years ago, Patrick introduced a plan to resolve the long-term budget crisis — while also increasing spending on certain priorities, like transportation and education. At its core was an increase in the income tax rate, which would have made possible nearly $2 billion in new annual revenue. In the end, though, this plan wasn’t embraced by the Legislature, and no changes to the income tax were made.
What could Baker do?
The good news for Baker is that he may get some initial breathing room. If the economy isn’t yet humming, it’s at least making smoother sounds. And health care costs seem to have flatlined in recent years, which should also ease pressure on state finances.
If Baker is interested in a more far-reaching solution, he has a few options. Presumably, a big tax package is not one of them, given his consistent antitax position. But even freezing the income tax rate would save about $400 million per year.
Another possibility is a big, sustainable spending cut. It’s hard to say where that ax might fall, however, since candidate Baker didn’t talk much about programs he wanted to eliminate.
Can’t we solve all of this by cutting waste, fraud, and abuse?
The virtue of calling for cuts to waste, fraud, and abuse is that it sounds painless and promising. But if cutting waste were easy, it would have been done already. Unfortunately, there’s no real consensus on what constitutes “waste” and what constitutes valuable public spending.
Rooting out fraud and abuse may be even less straightforward. Tracking down fraud, after all, requires real resources: people to pore over receipts, software to look for suspicious patterns, and committees to implement new oversight protocols. Even then, there’s no guarantee that these efforts will pay off. Florida, for instance, had a program to prevent drug users from receiving welfare. And while their drug tests did catch some users, they cost the state much more than they would have paid out in benefits.
Doubtless there is waste to cut on Beacon Hill and unacceptable fraud in some state programs. But while eliminating waste, fraud, and abuse may be an essential part of cleaning up government, it’s no silver bullet for the state’s budget problems.
Evan Horowitz can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz.