Call it the end-of-summer spending
spree. With our attention on Labor Day and the death of
Princess Diana, we failed to notice that the state had
spent or stashed away millions of our tax dollars in a
way that would have embarrassed Imelda Marcos.
How did this happen? Like most businesses and households,
Massachusetts has a budget, the purpose of which is to
set spending priorities and limit spending overall. But
when the state projects its budget for a particular fiscal
year, it can only guess how much it will collect in taxes
during that year. If, as has been the case in recent years,
the state collects more in taxes than it budgets for spending,
it faces the problem of what to do with the surplus tax
Since those surplus dollars come
from taxpayers to begin with, we might think we'd be in
store for a refund of all or at least part of the surplus.
Not necessarily so. Massachusetts doesn't have to return
the money. There are a lot of places where it can stash
windfall tax revenue.
One place is the state's stabilization
or "rainy day" fund. The state puts money in
this fund in case future revenues fall short of expectations.
In and of itself, the existence of a rainy-day fund needn'
t be cause for worry.
Indeed, the state should put some
money aside for a rainy day. Assuming there is a reasonable
cap on the amount of revenue allowed to flow into the
rainy-day fund, we could still look forward to a tax refund
when surplus revenues are large enough.
The current cap on the rainy day
fund is $890 million. Early this year, the fund was up
to $565 million. An additional $325 million would fill
State officials knew by midsummer
that Massachusetts had collected a lot more in tax revenue
than it had budgeted for expenditure in the 1997 fiscal
year, which ended on June 30. That amount, still to be
determined in a final closing of the books, will be between
$700 million and $800 million.
When you have at least $700 million
in revenue and a rainy day fund that will hold only $325
million more, what do you do? A taxpayer refund is one
option. Another option is to practice creative budgeting.
Find other uses for the funds.
The state developed a laundry list
of other uses. The Legislature passed and the governor
signed a bill allocating about $117 million to pay for
"deficiency" items that include unpaid and unexpected
bills from last fiscal year as well as some new outlays
for the current fiscal year. Then it took another $378
million and applied it to various funds and capital projects
begging for attention. Finally, it deposited $230 million
into the rainy-day fund, thus using up $725 million in
surplus revenue without any give-back to the taxpayers.
The list of end-of-the-year projects
makes interesting reading. You might not know, for example,
that the state's 1997 revenue windfall made it possible
to put $20 million into the "water pollution abatement
trust" and to use $128 million for "caseload
increase mitigation." You may have missed the news
that, thanks to your taxes, the state was able to make
an unbudgeted contribution of $13 million to "MDC
rinks and pools" and of $5 million to "dams
and flood control."
Are these worthy uses of taxpayer
money? There is, no doubt, a case to be made for each
one. But if the state budget means anything, it should
reflect spending plans for the year to come. Like any
other entity subject to financial controls, the state
should pay each year's bills out of that year's revenue.
It should pay for capital projects from the capital budget,
not the operating budget.
Otherwise, the budget becomes a
sham. Its purpose is to limit spending to those projects
that are deemed worthy of funds. But, as the budget has
come to work now, the state expands spending to absorb
all the funds it is able to collect.
One way to put an end to this sham
is to deny the state access to some of the revenue it
has been collecting. The best way to do this is to cut
There is currently a signature
drive under way for an initiative on the November 1998
ballot to cut the tax on earned income from 5.95 percent
to 5.00 percent by the year 2001. If the signature drive
is successful, state voters may have their first opportunity
in eight years to enact a major, across-the-board tax
The state Legislature could render
this citizen initiative unnecessary by simply cutting
taxes now. According to an analysis performed at the Beacon
Hill Institute, an immediate reduction in the tax rate
would produce about 96,000 new jobs in Massachusetts and
$13 billion in new capital spending that could be used
for new plants and equipment. Annual state payrolls would
rise by about $5.6 billion. In other words, more jobs
at higher wages.
When the economic effects are considered,
the state would give up about $790 million in tax revenues.
This is, interestingly, within the range of estimates
being offered for the surplus revenues collected this
last fiscal year.
If legislators cut taxes now they'd
avoid the temptation of future spending sprees. If they
wait, voters may seize the initiative and prune the state
money tree for them.
David Tuerck is Executive Director
of the Beacon Hill Institute at Suffolk University in
Boston where he also serves as Chairman and Professor
This article first appeared in the Worcester Telegram
& Gazette on October 14, 1997.
Format revised on 18 August, 2004