It’s honeymoon time in Boston. The transition from Governor Deval Patrick to Governor Charlie Baker couldn’t have been much smoother. Baker has talking, and even seems to walking, the bipartisan line. Referring to talks to close the gaping budget hole of FY ’15, House Speaker Bob DeLeo said they were off to a “superb start.” Senate President Stan Rosenberg characterized Baker and as “very substantive” and said they “spent the entire time digging deep in the weeds of policy.”
Baker is not going to govern as a Democrat, but I think it’s safe to say that he will not be Scott Walker or Sam Brownback or Rick Perry or Rick Scott. Management, and to some degree, leadership can be non-partisan. But it is worth noting that Baker is both a Republican and an avowed “fiscal conservative” who has he has pledged not to raise taxes. This ideological stance explains Baker’s recent statement that, “If we’re honest with ourselves, we can’t blame this deficit on a lack of revenue. We have to recognize that this is a spending problem.” At best, this statement is disingenuous.
The word “spending” has a discretionary connotation that rings untrue. The fact is, much of budgetary problems stem from changes to Massachusetts tax code were implemented that caused a $51 billion loss of revenue over the last 17 years. The Massachusetts Budget and Policy Center describes the changes and the cost:
Three of these income tax cuts were particularly costly to the Commonwealth: 1) a cut from 5.95 percent to 5.3 percent in the tax rate applied to wage and salary income, 2) a cut from 12 percent to 5.3 percent in the tax rate applied to dividend and interest income, and 3) a doubling of the value of the personal exemption from $2,200 to $4,400 for single filers and from $4,400 to $8,800 for married couples. The combined effect of these three cuts is now a loss of some $3.0 billion in annual revenue.
Expenditures have increased in some areas, but primarily because costs have increased. Most of these costs are due to spending on healthcare. Medicaid & health reform costs and state-employee health insurance, 98% and 56% respectively since 2001. During this same period, the next highest increase in costs was 9.5%, primarily due to housing and transportation. These increased costs certainly present a problem. But as Paul Krugman likes to say the federal government is basically an insurance company with an army. Massachusetts doesn’t have the army, but we do have the insurance company. Charlie Baker says we have a revenue problem.
Our roads, bridges, and dams are crumbling. Two years ago, the libertarianish Pioneer Institute estimated that we needed $2.6 billion in new investment over six years to deal with them. That doesn’t sound like a revenue problem.
Adjusted for inflation, spending on Massachusetts schools has risen 1.3%. That’s better than most states; overall, state revenues still are 2 percent below the pre-recession peak, according to NASBO Executive Director Scott Pattison. But costs are rising, and municipalities can’t cover them. In my Town of Granby, a 1% tax increase brings in $100,000 dollars. An outside placement for a single student can easily cost that much. I know of one placement that runs $300,000 a year. The Commonwealth reimburses some of these funds, but it’s shouldn’t be hard to see that it’s impossible for my town to raise taxes to pay for the these children. In percentages, the spending increase on special education went from 18.6% of school budgets to 20.9%. The problem is, that increase doesn’t cut it. In many school systems, the job of special education directors has less to do with providing appropriate services for kids and more to do with keeping students out of special education to hold down costs. There’s no question kids need the services.
Governor Baker has the virtue of experience in both the business and government sector, but experience aside, he may not see the differences clearly. Almost no one does. The differences are so fundamental that they go unnoticed. The major difference boils down to objectives. Businesses provide goods and services for profit. Profit provides a limit on what a business does. If a business offers something that is unprofitable, they stop offering it. Government delivers services, but it has no such limiting factor. While not infinite, the need for services could theoretically grow exponentially. But government is not allowed to make a profit, diversify, or make investments to improve the delivery of services. Instead of profits, government has to make due on fees and taxes, which ebb and flow with the business cycle. That lack of profit guarantees that there will be no way to hedge against economic downturns. Business doesn’t have an influential segment of the public telling them they can and should make due with less. There certainly have never been ballot measures forcing business to arbitrarily cut their revenue. Business has two ways to manage its balance sheet: cutting costs and increasing profits. If they fail in this regard, they go eventually go bankrupt. Government is expected to deliver the product, independent of its income, and when it fails to do so, it is called a spending problem.
At best, calling our fiscal deficit a spending problem is oversimplification. We may have spending problems, but if we’re honest with ourselves, we have to recognize that we have a revenue problem. We also have a cost containment problem. Many of our some serious fiscal problems are legacies, decisions and promises that some people would prefer to ignore. I suspect these costs are what Baker means when he says we have a spending problem. It would be, perhaps, more honest to say that as a Commonwealth we have a problem honestly considering what we want and what we are willing to pay for. That’s a conversation we’ve never had. The 1998 tax cuts occurred during the dot.com bubble and obscured the effect of the loss revenue would eventually have when the economy recessed.
The honeymoon on Beacon Hill, like all honeymoons, will eventually end and the marriage of the executive and legislative branches will begin in earnest. And that will be when the real test of their relationship begins. Let’s hope, whatever happens, that like all good partners, they talk openly and honestly about the future.