Holes in their story about deficits

The citizens of Massachusetts are about to become the victims of a fraudulent claim that the state is on the brink of running "huge" deficits that will, barring tax hikes, necessitate equally "huge" spending cuts. To bolster this claim, the usual special pleaders are besieging Beacon Hill and the airwaaves with demands for tax hikes.

Students, the disabled, and school teachers descend on Beacon Hill, warning about blood in the streets. The newspapers bolster their cause with headlines about cutbacks in school spending and human services. But let's take a look at the numbers.

In Fiscal Year 1991, the state managed to conduct its business by spending $13.7 billion. By the end of FY 2002, it will have spent $22.8 billion, an increase of 67 percent or, in inflation-adjusted dollars, of 26 percent over what it spent in FY 1991.

Now what about FY 2003? We are told that the state has to fill a $2.3 billion deficit and that, in order to fill that deficit without raising taxes, it would have to cut spending by $1 billion. "Wow," you are supposed to say. "That's a lot to cut out of the budget!"

But look again. Even with this "cut," the state will spend about $22.6 billion in FY 2003. The difference between that $22.6 billion and the $22.8 billion it will spend this year is only $200 million. That is a cut of less than 1 percent in spending.

Where does the tax-and-spend lobby get a $1 billion cut? Well, by inventing a budget that they say is needed in order to provide services at a level that they say we need. They never explain the fine print, though. They just tell you to trust their claim that these are real cuts.

Why claim a $1 billion cut in spending when the actual number is one-fifth that amount?

The answer is that, in 2000, the voters approved by an 18-point margin a ballot measure that cut the state income tax in steps from 5.85 percent to 5 percent. By taking a billion dollars off the table, voters made things tough for the folks who want to see the state budget rise at twice the rate of inflation.

Now, with the economy faltering and revenues temporarily on the decline, voila! A golden opportunity to raise rates and permanently retrieve that missing billion dollars. That means raising the personal income tax in direct contravention of what the voters mandated two years ago. Hence, the trumped up budget crisis.

We do not have a crisis but a number of budget-busting spending items that the state put on automatic pilot years ago and that make 5 to 10 percent spending increases the norm.

In 1997, the state talked itself into believing that it could "reform" medical assistance to the poor without raising costs to the state. Since then, state Medicaid expenditures have grown at an annual average rate of 9.7 percent and now run about $6 billion per year, with almost a million people receiving coverage. State taxpayers would save around $600 million per year if the Legislature was willing to rein in Medicaid spending.

Then there's education spending. After 1993, the state spent $5.6 billion to bring school budgets to a "foundation" level of support by FY 2000.

In order to maintain this level of support, the state has to increase aid to the schools in line with growth in enrollments and inflation. But since FY 2000, state aid has grown by 7 percent, while inflation and enrollments have grown by 4 percent. It's time to trim the growth of this program.

The state spends $476 million annually on "additional assistance" to municipalities under a program that was created back in 1985 when local spending was almost entirely a local responsibility. Things have changed. Now the state pays for more than 40 percent of local spending on schools. Overall, state assistance to municipalities has grown to the point that Additional Assistance represents only 9 percent of the total. This program needs to go.

Another issue has to do with state salaries. Everywhere around us there are layoffs and earnings cuts in response to Sept. 11 and the slowdown. By FY 2003, the state will be paying some $5 billion in salaries to its employees. Reducing this spending by a modest 3 percent, through furloughs or wage cuts, would save the state another $150 million.

The unwillingness of our leaders to regain control over the budget is matched by their head-in-the-sand approach to the economic effects of tax increases. Never do they ask the question, "What would raising taxes do to the economy?" They don't ask because they don't want to know the answer. At the Beacon Hill Institute, however, we know the answer: Raising the tax rate next year from 5 to 5.6 percent would destroy 63,000 jobs, $2.8 billion in payrolls, and $487 million in capital spending. All that so that the Legislature can get back its billion dollars and avoid coming to grips with a budget monster that it created.

Will the Legislature and the lobbyists to whom it answers be able to pull off this scam? Perhaps so. But perhaps as the economy recovers and the budget balloons and the shabbiness of this episode sinks in, voters will find a way to send a message to Beacon Hill. For that we can only wait in eager anticipation.

David G. Tuerck is executive director of the Beacon Hill Institute and chairman and professor of economics and at Suffolk University.

This article appeared in the Boston Globe on Saturday, May 4 2002.