The story tells the tale of the budget struggle in Massachusetts. State tax revenues are down, led by a sharp fall-off in capital gains tax receipts. The governor proposes a variety of tax increases in an attempt to close a looming budget deficit.
It's all too familiar. But the story in The New York Times is from 1988 and the governor is Michael S. Dukakis.
Twenty-one years later, Massachusetts, New Hampshire and most of the other states are replaying this scenario as a new recession slashes tax receipts, leaving legislators and governors struggling to fill the gaping holes in their budgets.
How is it that we find ourselves in this cycle of fiscal boom and bust? Were there no lessons learned from past budget crises? Did no one predict that the good times would not roll forever?
You must be joking, says Massachusetts anti-tax advocate Barbara Anderson, the executive director of Citizens for Limited Taxation.
"Legislatures respond to economic conditions. They don't use forethought in any way," she said. "If they have lots of money, they spend it. They just ratchet it up into bigger and bigger budgets."
When economic times are good, tax receipts flow freely into state coffers. Legislators use the excess cash to start new programs, offer new benefits under existing programs and increase the pay and benefits of public employees, Anderson says.
"Public employee benefits are ratcheted up in good times," she said. "How do you say no to the unions when you've got the money?"
All this establishes a new, higher baseline of spending each year. When the good times inevitably end and tax receipts drop off, state budgets are left running deficits.
With this national recession, the good times have ended with a thud.
All but three states — North Dakota, Montana and Wyoming — face budget deficits. California's is the worst at more than $24 billion.
In Massachusetts, state revenue projections have worsened each month through the spring. That's made preparing a 2010 budget difficult for legislators. At the beginning of this year, planners were working with a projection of $19.5 billion in revenue for fiscal year 2010. By May, the Senate was building its budget on a projection of just $17.9 billion in revenue.
Where did the money go?
Much of the decline is due to a precipitous drop in capital gains tax revenue, the tax paid on the increase in value of an asset, such as stock, when it is sold. When the economy sours, there are few gains in the value of stocks. No capital gains, no capital gains tax revenue.
In 2008, Massachusetts collected more than $2 billion in capital gains taxes. For fiscal year 2010, the Massachusetts Taxpayers Foundation, a business-backed budget policy think tank, estimates the state will take in just $666 million in capital gains taxes.
The sharp fall-off in revenue has left Gov. Deval Patrick scrambling to cut spending to make ends meet in the 2009 fiscal year that ends June 30. And legislators are putting together some spending cuts and massive tax increases to balance the budget for 2010.
The Senate version of the budget passed last month comes in at $27.4 billion, down $700 million from the $28.1 budget adopted at the beginning of fiscal year 2009. The budget includes a host of new tax increases, including a 25 percent hike in the sales tax to generate about $633 million.
To balance the budget, legislators must also spend reserves and rely on federal stimulus money. But the state is plowing through those extra funds at an alarming rate, according to Michael Widmer, president of the Massachusetts Taxpayers Foundation.
The state's "rainy day" fund recently held $2.3 billion. But drawing down those reserves to cover the FY 2009 shortfall will leave only about $775 million. Further, the state is using federal stimulus money intended to boost local school aid in 2011 to make its final local aid payment in 2009, Widmer says.
"We're going to find ourselves by end of fiscal 2010 having run through most of the federal stimulus money and reserves," Widmer said. "That will leave us with the option of further cuts or tax increases."
Blowing through reserves just creates a structural problem in the budget that remains once those reserves are gone, Widmer says.
"We're building so much one-time money into the 2009 and 2010 budgets that we would have to have an economy growing dramatically in 2011 to make up for it," he said. "That's just not going to happen."
State Sen. Steven Baddour, D-Methuen, agrees that the outlook for 2011 is bleak.
"The budget is balanced, but if the economy doesn't pick up we're going to be faced with difficulties for FY 2011," Baddour said. "Everyone has said that FY 2011 is going to be more difficult than FY 2010."
The situation isn't much brighter in New Hampshire, where once taboo revenue sources such as slot machines, capital gains taxes and inheritance taxes are being considered to balance the state's proposed $11.6 billion, two-year budget.
As in Massachusetts, New Hampshire is still in the middle of its 2010 budget process and there are competing plans from the House and Senate. In Massachusetts, the competing versions of the budget differ in their revenue assumptions but otherwise are quite similar.
But in New Hampshire, there are radically different funding sources for the House and Senate version of the two-year budget. The Senate version relies on an estimated $205 million in revenue from slot machines at racetracks — a contentious funding source that has yet to receive approval from either the House or Gov. John Lynch.
And critics of the New Hampshire budget say it reflects runaway spending by a government dominated by Democrats.
New Hampshire's budget accounting makes it difficult to track. The state splits off various functions, such as its highway budget, into enterprise funds separate from the general fund. But total spending in the 2010-2011 budget is up nearly 10 percent, according to Charles Arlinghaus, president of the Josiah Bartlett Center for Public Policy, a Concord, N.H.-based free-market think tank. And that's on top of a 17.5 percent increase in spending from the previous biennium.
"Our budget is a disaster," Arlinghaus said. "They're using massive amounts of one-time money. The budget this year will end up $200 million short — that's after the governor makes spending cuts.
State Sen. Lou D'Allesandro, D-Manchester, disputes the claim of runaway spending. The Finance Committee chairman notes that general fund spending — which does not include education, transportation, fish and game, and other segments of the total budget — increases just 0.63 percent over the last biennium. Spending financed by federal funds, however, is up more than 24 percent, much of it due to the stimulus, D'Allesandro says.
"We're paving 750 miles of road," he said.
D'Allesandro says he hopes agreement can be reached with the House to go ahead with the expanded gambling package. D'Allesandro says failing that, he would push for spending cuts rather than adopt the House's package of tax increases that includes a capital gains tax and an inheritance tax.
D'Allesandro notes that Massachusetts' reliance on capital gains revenues has hurt the state in economic downturns.
"If you commit to capital gains and income taxes, you had better be healthy on the upside because you're going to be desperate on the downside," he said.
Avoiding tough decisions
How is it that state governments get into this crisis mentality, despite the predictable, recurrent nature of economic cycles?
Both Widmer and Arlinghaus say it's because legislators prefer not to make the tough, but necessary, spending decisions in difficult economic times.
"They just say, 'We can't cut, we can't cut, we can't cut.' But we have to make these decisions," Arlinghaus said. "At the end of the day, you should not spend more than you have. Period. We're saying, 'I can't fix the problem this year. Someone else can fix it in two years.'"
"Classically, the Legislature and the governor have been reluctant to do what's necessary to balance budgets during fiscal crises," Widmer said. "They're scrambling to find 'safer' choices, if you will."
Widmer says one way to ease the pain of economic downturns would be to be smarter during the good times. He suggests that legislators only spend half of capital gains revenues and place the rest in a reserve account. That would keep the spending base from growing so rapidly and leave a larger reserve fund when the capital gains take all but disappears during a recession.
"The volatility of capital gains has been so painful," Widmer said. "It would dramatically smooth out the ups and downs."
The rate at which state spending increases during the good times is a major source of the budgetary pain we experience when times get tough. The state budget Dukakis was trying to balance in 1988 was just $11 billion. Increasing that figure just by the inflation rate yields a state budget for Massachusetts in 2009 that should be around $20 billion, not $28 billion.
"That's part of the issue," Widmer said. "We've got spending by and large for good programs. But we've got a level of spending expectations that's higher than the revenue base."