Debt and taxes

Lawmakers are fond of using homey examples to describe complex budget issues, so in the spirit of oversimplification, here’s one: If you knew your salary was about to be cut, would you use money in your savings account to pay down your mortgage or would you be more likely to try to refinance the mortgage to lower your monthly payments and protect that savings account for things like, for instance, food?

Some legislators want the savings for the mortgage; Gov. Angus King is opting to save it for food. The debate has been going on since the governor released his budget, but took on new meaning with a recent forecast that leaves projected revenues $46 million lower than previously thought for the biennium, threatening essential programs and making the state’s Rainy Day Fund a tempting source to pay part of the debt on the state retirement account.

Gov. King proposed to extend the payments on the debt from 19 to 22 years when it seemed state revenues for the next biennium would be $253 million behind earlier projections. The added time provided $17 million a year to the General Fund budget. Lawmakers, particularly Senate President Michael Michaud, didn’t like the idea because it meant the state would eventually pay out an added $788 million in interest. Sen. Michaud suggested looking to the Rainy Day Fund to keep the current debt-payment schedule.

Now, with revenue forecasts predicting a total shortfall of approximately $300 million, the Rainy Day Fund clearly needs to be protected for true emergencies that could be headed Maine’s way. Besides, that money is good for covering either relatively small ongoing expenses or one-time expenses. Asking it to cover a major, ongoing expense like this portion of the retirement-fund debt is asking to chop the account down to levels seen a decade ago, during the last recession. If lawmakers are truly committed to paying down the debt at the current rate, they will take the responsible but unpopular step of proposing a broad-based tax increase to pay for it. Don’t expect a broad-based tax increase.

The larger point in this debate is that no one – not even the sainted Alan Greenspan – knows how much the U.S. economy is going to slow down. Maine’s choice is to enter this slowdown in the utterly flummoxed way it did in 1990, or to start planning for harder times now by protecting essential programs and deferring new ones. The volatility of Maine’s narrow sales tax defied reasonable forecasts in good times by coming in higher than expected and is defying expectations now by coming in lower. With the state’s new, more sophisticated computer models, this might be the year for lawmakers not only to think about reforming this tax, but actually reforming it.

Sen. Michaud says he has enough support to override a King veto on the question of paying off the retirement debt, and lawmaker reluctance to enter into an agreement that will add significant cost to future budgets is understandable, even commendable. But as the governor has pointed out, extended payback time doesn’t have to be permanent – it has been reduced several times in the last few years – and many economists are talking about this being a quick downturn, leaving open the possibility of returning to the faster payment schedule in the near future. But for now, Maine needs to take prudent steps to prepare for a downturn everyone hopes will not happen.