Why doesn’t Massachusetts have a budget surplus by now?
On Wednesday, Governor Baker unveiled his $40.9 billion budget plan for the coming year, and once again Massachusetts is facing a deficit. Make it 12 in a row. And while it’s true that the initial deficit for fiscal year 2019 is much smaller than previous shortfalls — tens of millions instead of a cool billion — that isn’t nearly good enough.
At this stage of an economic recovery — with statewide unemployment under 4 percent and tax collections beating expectations — Massachusetts should be running a significant budget surplus. That’s the most fundamental rule of sound budgeting, going back to the biblical story of Joseph: Build surpluses in fat times to prepare for the rising need that comes with lean days.
Right now, the state has about $1.3 billion in its rainy day savings account, a number that has actually fallen in recent years once you adjust for inflation. While the governor has proposed making deposits of about $150 million over the next 18 months, that would still leave the account relatively underfunded. By comparison, when the Great Recession hit, the state used over $2 billion in rainy day funds. Even the milder recession of 2001-2002 required a $1.5 billion drawdown.
Responsibility for this limited savings — and the ongoing budget deficits — reaches beyond the current administration to include previous governors, Democratic legislators, and voter-supported referendums. But looking forward, what really matters is whether we can identify and fix the problem, not how we apportion blame.
Ever-rising health care costs have certainly played a role. Across the country and around the world, medical expenses have been rising faster than incomes, which means that every year people have to devote a larger share of their earnings to health spending. And what’s true for individuals is also true of state governments, whose budgets have increasingly been cannibalized by health care costs.
In 2001, state-level spending on health care amounted to about 22 percent of the budget. Today, it’s more like 30 percent. That amounts to about $2 billion in additional health spending each year.
But the rising cost of health care isn’t the only issue afflicting the Massachusetts budget. Sinking tax revenues have played an even bigger role.
Around the turn of the millennium, Massachusetts voters endorsed a plan that dramatically cut income taxes, and the budget has never recovered. Up until that time, state revenue had been growing in line with the economy. But when the tax cuts took effect, revenues dropped and then fell even further behind during the recession.
Had tax revenues continued to track economic growth, the state would have an additional $4 billion each year — more than enough to cover the increase in health spending.
And while you could argue that the state should have offset this $4 billion revenue loss with equivalent spending cuts, in fact, we have already cut most major areas of spending (health care aside). Regardless, the deficits are still with us.
A lot will still change in the coming year. By law, the budget deficit must be closed by the time the Legislature and the governor agree on a final bill, whether that involves permanent cuts, new taxes, or accounting maneuvers.
Voters will then decide this November whether to introduce a surtax on households earning over $1 million — a change that would raise roughly $2 billion in new revenue annually. At the same time, however, they could partially offset that by approving a ballot question that would cut the sales tax.
The Trump tax cuts are another unknown — they have the potential to temporarily boost state tax collections but also come with long-term implications that are harder to predict.
With so much uncertainty ahead, prudent preparation would seem essential. The fact that we continue to run budget deficits and underfund our rainy day account is a reminder that if the next recession comes soon, we may not be ready.