Fri, Aug 22, 2014 ●
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Policy Wonk: State of the state? Muddled

Opinion

Policy Wonk: State of the state? Muddled

The possibilities for partisan gridlock in Augusta have seldom been greater, but lets begin on a positive note.

Gov. Paul LePage is right when he calls for hospital Medicaid debt to be paid. Historically, each year’s Medicaid obligation was paid in full. The LePage administration has resumed this practice. The Baldacci administration (to balance the budget) adopted the practice of deferring some portion of Medicaid obligations. This practice was inappropriate, and undertaken with no plan to get Maine out of the hole that was being dug.

Before it ended, $186 million in hospital debt accrued. This non-payment of Medicaid debt allowed the federal government to defer matching payments of $298 million.

Gov. LePage has called for the immediate discharge of the state’s $186 million obligation by issuing revenue bonds that would be paid off by a new/better 10-year liquor contract that is in the works. It’s not a bad way forward; the feds would then be obligated to meet their matching commitment.

LePage indicated that if his plan was accepted he would release nearly $100 million in voter-approved bonds currently frozen. This would infuse Maine’s economy with $584 million; hospital, highway, and other infrastructure projects across the state would move forward. The stimulus to Maine’s economy would be significant.

Democratic legislative leaders agree with the governor: the hospital debt must be paid. They offer LD 644, which also contemplates a new 10-year liquor contract. It takes a slightly different approach to liquor sales. It usefully provides an option that avoids the need to issue revenue bonds, but unlike the governor’s bill, it does not explicitly commit contract proceeds to paying off the hospital debt.

The differences between the two pieces of legislation seem bridgeable. Hopefully, the debate will not bog down in partisan wrangling.

That said, Lepage’s State of the State address contained several fiscal inconsistencies and misleading half-truths.

For example, the governor, touting his tax cuts, stated that many low- and middle-income families no longer had to pay state income taxes, or saw their income tax burden reduced. True, but their tax savings are minuscule when laid alongside the much larger tax cuts received by families earning more than $120,000. Maine Revenue Services data shows that 50 percent of LePage’s tax cuts went to the top 10 percent of Maine families; low- and middle-income families, who are 60 percent of all Maine families, received only 11 percent of the tax-cut pie.

LePage also made clear that he would not roll back tax cuts fashioned in his first two years, and further stated that now is not the time for tax increases. With one exception, his bi-annual budget does not increase revenues by reducing tax expenditures (closing loopholes).

Given these policy parameters, simple math suggests it is impossible to bridge this year’s $112 million revenue gap, or the $700-$800 million structural gap in the 2013 bi-annual budget. State revenues (adjusted for inflation) have declined for five years, and LePage’s tax policies continue this decline.

At the same time the governor exacerbates the problem. He has both expanded the number of tax expenditures: seven new sales tax exemptions and eight new income tax credits (reducing state revenue) have been enacted during his administration. And he has proposed new (arguably laudable, but costly) appropriations for charter schools, to prepare students/workers for higher tech jobs, to fast-track natural gas pipelines, and to protect battered women.

The governor proposes to bridge these growing revenue gaps by calling upon the Legislature to find the courage to choose between eliminating municipal revenue sharing or sharply reducing education and/or welfare spending. These new cuts are in addition to cuts made to these programs to balance this year’s budget.

In short, the governor is bent on continually shrinking state revenues. This in turn gives rise to budget crises that he meets by imposing successive cuts to essential state programs. He abdicates traditional state responsibilities and challenges municipalities to pick up the costs of programs they value. But most municipalities have no ability to assume these costs. They are too small, and have limited property tax bases.

An alternative to the governor’s strategy that would increase state revenue is to review and reduce state tax expenditures. Currently, through tax exemptions, credits, loopholes, and giveaways (often to wealthy corporations) we forgo as much revenue as we collect. If the governor will not raise taxes or roll back recent tax cuts, he must at least be made to stop the leakage of tax dollars to one or another special interest.

If decisions as to whether certain tax expenditures should be eliminated are too difficult in the context of the budgeting process, we could at least reduce revenue losses by imposing a cap on the more costly tax expenditure programs – a cap that would be pro-rated among eligible recipients.

This approach has the capacity to raise significant revenue. It avoids the Draconian cuts proposed by the governor, and is more fair than the governor’s proposal.