Study warns Maine, other states on budget policies

AUGUSTA – A Washington-based think tank is warning that most states, including Maine, could face serious budget problems in the future as a result of budget decisions made earlier this year at both the state and federal levels.

“Many states have turned to ways to solve their budget problems that could create more serious problems in the future,” said Kevin Carey, a policy analyst with the Center on Budget and Policy Priorities and lead author of the report.

He said many states used short term “fixes” to address such basic problems as current expenditures exceeding revenues. Maine was among the states that used reserve funds to pay for current program costs.

Carey said Maine was not one of the four states the center reviewed in depth, but he opined the state would face serious budget decisions if the economy continues to worsen.

“I think the chickens may come home to roost,” said Sen. Richard Bennett, R-Norway, the Senate president pro tem. “We should have been cutting more taxes when the times were good instead of spending more.”

Bennett said he is concerned the state has continued to have spending growth that has far outpaced the inflation rate. He said the last two state budgets have reminded him of the late 1980s before the recession hit in the early 1990s.

“Yes, I am worried,” he said.

Maine, like many states, used cash reserves in its Rainy Day Fund to help balance the two-year state budget. It also took $20 million from the school technology fund, better known as the governor’s laptop fund, to finance state programs.

“We proposed a budget that did not take anything from the Rainy Day Fund because I am concerned about the economy,” said Gov. Angus King. “We still have $110 million in the fund and I think that’s pretty good, not as good as I would like, but it puts us in better shape to handle a downturn than many others.”

King said so far state revenues this fiscal year are running a little ahead of projections. He noted those estimates were based on a “softer” economy than last year. He said the real question is if the state was correct in its projection of how the economy would fare.

“Another major concern is action at the federal level and its impact on the states,” Carey said.

Maine, like several other states, will lose revenue from the federal tax cut legislation. The phaseout of the estate tax is estimated to cost $9.4 million in fiscal year 2002, $18.8 million in 2003 and $29.5 million in 2004.

The state inheritance tax is a complicated formula that has a credit against federal tax liability, said Tony Neves, executive director of Maine Revenue Services, so the state will be faced with some tough decisions.

“Maine could conform, which means a loss of revenue that must be made up from other sources somehow,” he said, “or we could change the credit language, but that only works until the tax is totally repealed and the issue would then be, do we adopt our own tax or come up with a lot of money, all at once, to pay for conformity.”

The federal law reduces estate tax rates and raises the amount of an estate exempt from taxation over several years. Estates of less than $675,000 are not now subject to estate taxes. Next year that goes to $1 million and increases to $3.5 million in 2009.

King said he hopes there will be enough extra revenue to offset the expected loss of revenue. House Majority Leader Pat Colwell, D-Gardiner, said lawmakers wrote into the current budget that one of the first priorities for extra revenue is to pay for making Maine tax laws conform to the federal changes.

“I think there is a realization that the tax cuts could have an impact on our budget in the future,” he said, “but we can’t tell Congress what to do. Unfortunately, with unfunded mandates like special education, they can tell us what to do.”

The study indicates it is not just the revenue side of the equation that states need to worry about. The federal tax cuts have reduced the amount of money congress has for discretionary spending, and that could lead to reduced federal funding for some programs. Maine state government relies on federal funds to a far higher degree than most states.

“If you look at some of the big programs, the federal funds pay half or more of the cost of those services,” said University of Southern Maine economics professor Charles Colgan. “Medicaid is the biggest, but it is not the only example.”

Last year, the federal portion of the Medicaid tab was $893 million. In contrast, all state spending for programs and services last year was about $2.7 billion.

State economist Laurie LaChance said it’s not just state agencies that depend on federal funds. She said local governments get grants, and federal purchases of goods and services have an impact.

“And that could affect our overall economy,” she said, “and that affects state revenues.”

LaChance said while defense spending is not as significant a part of Maine’s economy as it once was, it still is very important. She said other federal purchases of such commodities as lumber and foodstuffs also have an impact on the state economy.

The study found relatively few states had significantly raised revenues to balance their budgets. Only six other states joined Maine in significantly raising taxes to close the gap between revenues and expenditures. The study defined significant as tax increases that raised more than 1 percent of total state spending.

Maine raised taxes on cigarettes from 74 cents to 94 cents a pack and increased the sales tax on prepared foods from 5 percent to 7 percent.

The study noted that Maine sales tax revenues for the first three-quarters of fiscal year 2001 were below the amounts actually collected for the comparable period in fiscal year 2000. The sales tax is the second-largest source of revenues in Maine, just behind the income tax. Five other states have a similar problem.