FY 98 state budget: Drumming up spending

As Governor Weld has observed, there's no such thing as government money, only taxpayer money. Unfortunately, there's a lot of taxpayer money going into state spending these days. The last budget Governor Weld will soon sign spends about $18.3 billion -- 3% more than last year's budget.

This spring, Governor Weld also recommended the adoption of seven tax cuts that would have "cost" the state about $82 million or less than 1/2 of 1% of budgeted expenditures in FY 98. These include a reduction of the 12% tax on certain "unearned" income, an increase in the dependent tax deduction from $600 to $1,600 and the elimination of the telecommunications tax.

Professing concern about slowing tax revenue growth and federal aid cutbacks, the Massachusetts House of Representatives adopted a version of the budget that initially turned down all seven tax cuts. (It later approved an investment tax credit). The Senate Ways and Means Committee submitted a more taxpayer-friendly budget reworking a portion of the tax cuts that the House deleted. The Senate Ways and Means' "tax cuts for ordinary people," which will also "cost" $82 million, include a state earned income tax credit for low income workers, a capital gains cut for senior citizens and a deduction on the interest paid on student loans.

The governor, who is expected to become ambassador to Mexico, has pledged to push for tax relief in his remaining weeks in office. The likelihood, however, is that, unlike other states, there will be no significant across-the-board tax relief for Massachusetts voters this year.

To be sure, the tax climate has grown sunnier during the Weld Administration, thanks to a state legislative leadership forced to steer away from more spendthrift days. A scheduled income tax rate cut was preserved and the tax on services eliminated. The regulatory climate improved and spending on "budget busters" such as Medicaid, the MBTA and state employee health insurance was reigned in. Debt service growth has been held to just 3% since 1993 (compared to annual increases of 15% between 1989 and 1993). And, in turn, the state's bond rating improved dramatically.

Graphic: Howard Wright, BHI Senior Economist

It would be a mistake, however, to dismiss House rejection of the governor's FY 98 proposals as minor. It is significant for the way it demonstrates how government, in this instance, Massachusetts government, makes tax policy.

From 1991 to 1996, Massachusetts government spending grew at an average annual rate of 4.3%. The growth of the Boston consumer price index over the corresponding period was 2.4%. The chart above shows that the growth of state spending was significantly greater than the inflation rate for every year from 1993 to 1996. Even with this expansion in spending, the state has run a budget surplus every year since FY 92. The surplus in FY 96 was about $450 million and is expected to equal about $300 million in FY 97. The result has been the accumulation of some $563 million in the state's "rainy day fund."

Tax policy is not, therefore, a matter of deciding whether we can afford to sacrifice a given amount of revenue. It is about deciding how much in production and jobs we can afford to sacrifice in order to provide for a given level of government spending.

There's more. Earlier this year, the governor agreed to raise the cap on the rainy day fund. According to the latest figures, the state's surplus must now grow to $870 million instead of $543 million before taxpayers get an automatic tax cut. Taxpayers have received only one automatic tax cut since 1986. Under the new cap, it's unlikely they'll see one again.

The pattern of fiscal behavior that has emerged in response to the state's full coffers means spending as rapidly as possible, given expected tax revenue growth. It means creating a growing list of state "needs" that will assure the unaffordability of future tax cuts. It means putting off tax relief, in spite of surpluses or a bulging rainy day fund, on the ground that such relief would be "imprudent."

Building up the rainy day fund sounds like fiscal prudence. It sounds like what sensible households do when they plan for unexpected expenses like a leaky roof, a blown transmission or a new refrigerator. But the invocations of fiscal prudence now being heard amount to a transparent attempt to make hay while the fiscal sun shines. The real agenda is to guarantee enough future tax money now to make sure that the state can continue to feed its spending habits even in the face of predictable declines in tax revenue and federal reimbursements.

The trouble with this agenda is that it ignores the fact that taxes discourage the activities on which they are imposed. A tax on income or sales discourages people from working, saving and otherwise engaging in activities aimed at producing goods for private consumption.

Tax policy is not, therefore, a matter of deciding whether we can afford to sacrifice a given amount of revenue. It is about deciding how much in production and jobs we can afford to sacrifice in order to provide for a given level of government spending.

In light of the growth in spending, the question should not be about whether we can afford tax cuts, but whether we can sustain the current growth in state spending.

To see how "expensive" state spending has become, suppose Massachusetts had limited the growth of spending since 1991 to 3% per year instead of 4.3%, enough to cover inflation and to allow for some "real" growth as well. How much in additional funds would now be available to tide us over future rainy days, if the tax dollars thus saved had been added to the rainy day fund rather than spent?

The answer is $3.5 billion. That's more than the accumulated deficits of 1988-1990.

A few years ago, Massachusetts carried the dreaded label "Taxachusetts," largely because taxpayer money was seen as government money. That mind-set did us no good then and it does us no good now. Massachusetts taxpayers should take note.

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