Closing Maine’s budget shortfall

Legislators in Augusta face a daunting challenge in closing a nearly $200 million budget shortfall. Like the governor, most seem inalterably committed to resolving this problem without tax increases. Yet locking Maine into the no-new-taxes mantra may not make even good business sense, let alone humane politics.

Maine did not spend its way into this mess. The state is the victim of a national slowdown likely to become a serious recession. Federal policies that many Maine business lobbies advocate – deregulation and tax cuts targeted to the wealthy – played a major role in the downturn.

The housing market bubble was fueled not merely by deceptive lending practices but also by complete deregulation of a whole new shadow banking system of mortgage lenders and security brokers. The Federal Reserve looked on as housing prices reached levels utterly unrelated to homeowner incomes. Even during the height of the Bush II economy, working and middle class incomes consistently lagged behind. Economic growth depended on borrowing against inflated housing values. Even after the imminent recession has been acknowledged by most Republicans in D.C., government enacted a mislabeled “stimulus package” that neglects the desperate unemployment and state governments most likely to spend any funds from the feds.

Should Maine follow suit by further slashing major social programs? Many Maine residents argue that Maine is already too heavily taxed and business organizations claim that any tax increase always destroys jobs. These assertions can be assessed in large macro terms as well as by examining the economics of particular program cuts.

State spending as a percentage of overall state income has been trending down. Kurt Wise, a fiscal policy analyst at the Maine Center for Economic Policy, points out that even though Maine has “the inherent disadvantage of being a northern, rural, more-elderly state,” it still spends only $129 more per person than the average U.S. state. In addition, numerous studies of business location decisions reveal that tax burden plays a smaller role than does the quality of the educational system and the physical and increasingly digital infrastructure.

Political leaders should also apply conventional business cost-benefit analysis to the options currently under consideration. Reducing home care funding for seniors, support services for victims of abuse and aid to foster parents may yield immediate expenditure reductions. Nonetheless, these cuts entail rapid cost increases to residents or governments.

Home care for seniors keeps them out of expensive nursing homes longer, reducing burdens that someone must soon share. Withdrawing support and protection services from victims of abuse or for foster parents will soon increase the number of residents the state must institutionalize or even imprison, steps less effective, humane or efficient. Private businesses that operate with such a short-time horizon aren’t with us long.

The most obviously shortsighted idea is to make dramatic cuts in Medicaid spending. This program supports the health of thousands of Maine’s sick and elderly. The $470 million in “savings” proposed by some conservatives would not reduce Maine citizens’ federal tax obligations. It would, as Wise points out, “represent a $315 million loss of federal funds, much of which purchases goods and pays wages here in Maine.” Maine hospitals would need to shift more unreimbursed costs onto those businesses that still have insurance. Higher insurance premiums are hardly good for the business climate.

In light of the severe and immediate impact some of these cuts entail, the Legislature and governor must consider selective tax increases. The state might increase its meal and lodging taxes to match that of its neighbors. Tourists and longtime summer residents won’t stop eating in our restaurants or staying in our hotels if our lodging tax matches Massachusetts’. They are more likely to be deterred by deterioration in the quality of our community life as evidenced by impoverished residents and crumbling infrastructure.

Maine could also broaden the sales tax to include a range of business services. A local attorney with extensive experience providing tax minimization strategies to banks and other corporate interests points out to me that Connecticut taxes bank profits as well as services provided by investment advisers and private wealth managers. The Nutmeg State has experienced a thriving economy and has no shortage of highly paid finance professionals.

Of course, Maine could pursue a low-road strategy to its ultimate conclusion. Cost shifting to businesses and taxpayers could be avoided if hospitals refuse to treat any patient without insurance. Poor elderly who are unsupported by family members or personal charity could be allowed to die. Such a strategy might be enough to make Maine attractive to the most conservative and aggressive business interests. But before Maine takes this path, I hope our leaders will contemplate the possibility that fairer and more broad-based taxes might be both more cost-effective as well as a path toward a more humane future, one of the reasons many choose Maine as a place to live and work.

John Buell is a political economist who lives in Southwest Harbor. Readers may contact him at jbuell@acadia.net.