Uncomfortable budget choices

Some in Augusta seem once again trying to promise the free lunch of lower taxes and no negative effects on services. They criticize the state budget just passed, but have yet to offer a clear alternative.

Last June and last November voters delivered two clear messages to legislators: Voters wanted more state spending on K-12 education, and they did not want the property tax cap because they feared it would cost a loss of K-12 and other local services. This January the Legislature adopted a property tax relief package that promised the largest increase in K-12 support from the state in 30 years and doubling the property tax circuit breaker program.

The property tax bill, supported by almost two-thirds vote in both houses, added about $100 million to the $750 million shortfall of revenues to cover the projected costs of current services over the next two years. This was the problem that the governor and the majority of the Appropriations Committee and the full Legislature tackled in the budget passed at the end of the last month.

Some are now complaining that they cannot have the property tax relief, no broad-based tax increases and a perfectly balanced budget. Some assert that it should be easy to reduce the other functions of the state to take on the new spending they were so happy to support a month before, and go on to complain that Medicaid providers are not being paid enough and we should send even more money to rural schools.

As is the case every year the great majority of budget items adopted in the majority recommendations from the Appropriations Committee were exactly as presented by the governor. Many other items were amended as recommended by other legislative committees, or agreed by all members of the Appropriations Committee. A number of items which remain in dispute are very small in size. The real differences boil down to a few large items, and a lot of rhetoric about the possibility of more unspecified “cuts.”

The finally adopted budget adopted the governor’s recommendations to cut $425 million in current services, including at least $16 million in Mainecare (Medicaid), $13.9 million in mental health and retardation services, $6 million in child welfare, and more in virtually every other area of state government. An additional $53 million in cuts proposed by the governor were rejected by the majority as having consequences too harsh for elderly, children and disabled residents. When the sharp increases in K-12 education are excluded total state government appropriations will grow by less than 2 percent in each of the next two years. While some very real efficiencies and cost savings have been identified, there will also be reductions in service that will be painful.

The largest single item of concern for many people in the budget was the governor’s proposal to sell 10 years of proceeds from the lottery to investors in exchange for about $250 million to fill in the 2006-2007 budget (about the same amount as the increased K-12 spending). The Appropriations Committee appointed a bipartisan subcommittee that came up with an alternative method of borrowing money through “revenue bonds” sold by the Municipal Bond Bank. They also pointed out that if enough was borrowed to prepay money the state owes the Maine State Retirement System, it would save long-term costs to the state.

The majority budget proposal retains the essence of this alternative, and refined it to cover this year’s shortfall and reduce the “structural gap” faced in future years.

It is easy to criticize a proposal to borrow against future revenues to cover current programs. The only alternatives would be to either reduce current programs or to raise additional revenues. Since the state is providing relief of property taxes by at least $250 million, it would be logical and “revenue neutral” to raise state revenues that much. But there has not been support in the Legislature to do so, and the governor believes he has popular support for his firm resistance to such an increase.

Those who argue for more state service cuts have had months to explain how they would do it. They now argue both that they can do it without substantial harm and that they need another three months to figure out how.

University of Southern Maine Economics Professor Charles Colgan took up the exercise in his essay on “Tax Reform and the Search for Free Lunch” more than a year ago. “How much is $200 million?,” he wrote. “We could eliminate the University of Maine and Community Colleges and just about break even. We could eliminate the departments of Conservation, Inland Fisheries, Labor, Public Safety, Economic and Community Development, Agriculture, Marine Protection, Defense, Secretary of State and Executive and still be $20 million short. We could reduce Medicaid by two-thirds. We could eliminate all payments to nursing homes, for child welfare, for supplemental income, and a host of other services, and still be $80 million short.”

The facts are that as uncomfortable as the borrowing plan may be, it saves the state money in the long run, and gradually reduces the “structural deficit.” It avoids more cuts that would be painfully debilitating to the state. And the best alternative – raising state taxes to cover the property tax relief this budget contains – simply does not yet appear to have the votes necessary for passage.

Christopher St. John is executive director of the Maine Center for Economic Policy.