THE CASINO gambling debate has dominated discussion on Beacon Hill, while the state's real house of cards - its budget - stands vulnerable to the winds of recession. Revenue growth, one-time expenditures and the rainy-day reserve fund have papered over the budget's structural imbalance for years. These sources and stop-gap measures will prove inadequate in the face of dramatically falling revenues.
It's time again for reform.
Recessions offer a constructive opportunity for policymakers to take a serious look at how and why we spend. They provide an incentive to scrutinize the system. According to a new MassINC policy brief, "Point of Reckoning: Two Decades of State Budget Trends," policymakers this time around will find a budget reliant on volatile funding sources; they'll see a spending pie chart dominated by one color - healthcare; and they'll learn that an increasing percentage of state spending is off budget and out of their control.
How did we get here?
On the revenue side, we have become dependent on the volatile capital gains tax for more than half of all revenue growth in recent years. This tax acts in concert with Wall Street's boom and bust cycles. The highs are high: $1.7 billion in revenue in 2006. But the lows are sobering: Capital gains tax revenue plummeted by $800 million in 2002, or roughly two-thirds. We are likely to see similar drops in this recession.
On the spending side, choices are increasingly constrained by the demands of providing healthcare through Medicaid. Today, overall healthcare spending consumes 30 percent of the state budget, up from 16 percent in 1987. That jump doesn't include the costs associated with our new universal healthcare law.
On the one hand, decisions to expand coverage and offer more generous benefits reflect admirable values and priorities. But they also speak to the fact that healthcare as a policy issue is sometimes beyond the political establishment's ability to say no.
There are individuals working hard to balance our best intentions with practical reform. Administration and Finance Secretary Leslie Kirwan tells anyone who will listen that required spending, especially on healthcare, has created impossible choices for state budget writers. No one understands that better than Senate President Therese Murray, who exercised bold leadership by focusing on cost savings in her Health Reform II legislation.
Cost savings can also be found by introducing outcome measurements into the state budgeting process. End programs that have outlived their usefulness. Eliminate duplication. Increase transparency so that taxpayers understand what dollars are being spent where. Each year, more spending is taking place outside the budget process - 33 percent of all state spending in 2006, up from 20 percent in 1987.
On the revenue side, it's time to get serious about how we discuss taxes, a subject that's become the third rail of Massachusetts politics. Broadening the state's tax structure could help us move away from a dependency on capital gains or any one source for that matter. Increasing a particular tax and decreasing another can achieve a revenue-neutral outcome, but it's clear that any tinkering will demand political courage.
Massachusetts isn't alone in facing these challenges. But unlike other parts of the country, the Bay State is at a virtual standstill in terms of population growth. Absent foreign immigration, we consistently lose people to locations with more jobs and a lower cost of living.
As a result, the state's ability to weather recessions is becoming tougher. We don't have the advantage of relying on increased revenues from new workers and new businesses. At the same time, we can't over tax an aging population and a specialized economy.
In the 1980s, the Pioneer Institute published a landmark study of government expenditures that posed an important question: Had the evolution in public spending in the previous decade been "by choice or by chance?" The answer then was both. MassINC's new analysis, which covers the more recent past, comes to a similar conclusion.
As we look ahead, however, policymaking over the next decade must be dominated by thoughtful choice. Whether gambling ever becomes a reality in Massachusetts is a debate for another day.
What's clear now is that the state's dynamics leave little room for chance.
Greg Torres is the president of MassINC and was chief of staff for the Senate Committee on Ways and Means from 1985 to 1992.
