Here’s the tension that will help define the rest of Governor Charlie Baker’s first term — and the question that will likely frame the 2018 gubernatorial election. Should Massachusetts limit expenditures to live within available tax dollars, or raise taxes to allow for more spending on programs important to the state’s future?
The budget lawmakers recently sent to Baker foreshadows that choice. With revenues soft even as the state economy remains healthy, legislators cut Baker’s proposed bottom line of $39.6 billion by hundreds of millions.
Mind you, the sky hasn’t fallen. Spending should still be up by at least 2 percent in the next fiscal year. It’s a matter of tighter-than-expected times, not fiscal calamity.
Still, it highlights a coming fiscal tug-of-war that has thus far been mostly dormant under Baker.
Among some Democratic legislators and constituency groups, there’s a growing feeling that the state should be more ambitious about spending on education (from early education to K-12 to the University of Massachusetts and other public colleges), infrastructure, transportation, housing, and preventing homelessness.
We know where Baker comes down, certainly. He made his chops in the firmly no-new-taxes Weld administration, and ran for office himself as a budget-within-your-means man. That’s worked in his first two years, though not without some bumps. But weak revenue growth may be the reality for the foreseeable future. Slow growth is what prompted the recent late-stage budgetary revision. Budgeteers were initially expecting an additional $1.1 billion in new revenue from growth. They have now reduced their revenue assumptions by some $750 million — and adjusted the budget accordingly.
Further, the Massachusetts Taxpayers Foundation notes that revenue growth since the Great Recession hasn’t matched the bounce-back after the much milder recession of 2001. A back-of-envelope comparison: From fiscal year 2004 to 2008, state revenue grew by an average of 6.9 percent a year; by contrast, from FY 2012 to 2016, the average annual rate of increase was 4.3 percent. The difference equals about $650 million a year.
State spending, meanwhile, has gone up by about 4.6 percent annually. Given that much of the spending is driven by eligibility — think, for example, MassHealth, the state’s Medicaid program — such programs often absorb a disproportionate share of the new revenue growth, leaving less for new initiatives.
As the fiscal debate unfolds over the next two years, expect members of the more liberal Senate to stress the need for more revenue, Baker to resist that notion, and the tax-cautious House to look for an escape hatch.
And there is one: Leave the matter up to the voters. Citizens may well have a chance to decide in November of 2018, when a proposed constitutional amendment to tack an extra 4 percent tax on income above $1 million a year will likely be on the ballot. Under the terms of that proposal, the money would be intended for education and transportation.
Baker, of course, will be against it — but he wouldn’t be the first Republican governor to benefit from a tax hike he opposed. Indeed, he could even benefit from the political dynamic if voters decide that they (1) do indeed want to see the state spend more on select programs but (2) also want a fiscally prudent governor to oversee that spending.
Unless it motivates millionaires to call the moving vans, that plan would raise an estimated $2 billion a year. Progressives are already salivating at the prospect of those new dollars. But even such a taxpayer-bestowed windfall wouldn’t be a cure-all. If all those new dollars get baked into the budget — rather than having significant shares used for one-time capital projects or put in reserve — it won’t prevent budget problems when the next economic slowdown comes.
It will just mean those problems occur in a budget with a bigger bottom line.Scot Lehigh can be reached at email@example.com. Follow him on Twitter @GlobeScotLehigh.