The state's Chicken Little economics
'IF IT BLEEDS, it leads." Or so we see from headlines prompted by a recent hearing on state revenues conducted by the Senate Committee on Ways and Means. "Worst fiscal crisis in state's history," said one headline. Declining revenues pose a "catastrophe" for the state, according to one expert. We're in for "the worst single year in the state's history," he said.
The fiscal frenzy has grown so strong that members of Governor Patrick's own party have turned against him for refusing to go along with a tax increase aimed at closing the supposed budget "gap." Senate President Therese Murray calls him "disingenuous."
So, does the current situation justify this kind of invective?
One way to gain some perspective is to look back to how a different governor faced the same problem. According to a Globe article of Oct. 15, 1994, the budget "was a chronic source of anxiety for taxpayers" and "a ticking time bomb on the verge of wrecking havoc with Massachusetts's economy" during most of Governor William F. Weld's first term in office. That period of fiscal anxiety came to an end, however, with the FY 1995 budget, which was, according to the article, "in vintage ways, a vital Weld achievement," aided by "original thinking" and "good fortune." Members of both parties praised the governor, who went on to easy reelection, for this fiscal accomplishment.
Now fast-forward to the 2010 budget. How much, we might ask, would the state have to spend in 2010 in order to achieve what was seen as sound budgeting just 15 years ago? The answer, after adjusting for inflation and population growth, is $26.78 billion.
Next let's ask how much the state could budget for 2010, given the existing revenue outlook. If we take the average of the highest and the lowest forecasts offered at the Senate hearing, we get $18.35 billion in state tax revenue. Combining this revenue with various non-tax revenues already figured on by Governor Patrick in crafting his budget, the state could spend $26.79 billion in 2010, $10 million more than it would need in order to match what Weld accomplished with his vaunted 1995 budget.
True, the state has come to spend more generously in recent years, but a return to the standards of 1995 can hardly be seen as "catastrophic." To argue otherwise is to engage in Chicken Little economics. Patrick, who has been faulted for not practicing this kind of economics, opposes a bill that would raise the state sales tax from 5 to 6.25 percent. Supporters claim that the tax increase would yield $900 million in badly needed new revenue.
On this matter, it is the governor who is right and the bill's sponsors who are being "disingenuous." For one thing, the $900 million estimate apparently ignores the fact that sales taxes drive business to other states and to the Internet. Under the new law, a TV set that could be bought for $1,000 in New Hampshire will cost $1,062.50 in Massachusetts, just another reason to drive an hour to make a big purchase and to stock up, along the way, on liquor, cigarettes, and other items.
The proposed tax hike will have negative consequences for the state economy. We predict a loss of 12,666 private-sector jobs, as stores in Lawrence and Lowell lose business to stores in Salem and Nashua. And because unemployed workers stop paying income taxes, the state will lose revenue from that source even as it gains revenue from the sales tax. In fact, the higher sales tax can be expected to yield only about $674 million in new revenue when losses in other revenues are accounted for.
Before the Legislature decides to inflict a new burden on state taxpayers, retailers, and workers, it would do well to ask just why it wants to enact a broad-based tax increase in the first place. A 25 percent increase in the sales tax would be a panicky response to what was seen just a few years ago as an exercise not in fiscal ruin but in fiscal dexterity.
David G. Tuerck is executive director of the Beacon Hill Institute and chairman and professor of economics at Suffolk University. 