BOSTON, July 26 (UPI) -- The green lawns of Massachusetts, smooth as carpets and peppered with sprinklers: Global View begins with them. In the budgetary difficulties of the state of Massachusetts we see trends that are bringing home to the United States the fiscal pain of the end of the "miracle" economy. As the world waits for a U.S. economic revival, these trends are going to matter across the globe.
Another globe, the front page of the Boston Globe, shows photographs of the old and infirm. "50,000 stand to lose health eligibility," says a headline. "Biggest tax rise in Massachusetts history," says a headline from another Boston newspaper.
Suddenly, in this, one of the wealthiest American states, home to the financial hub of Boston and to some of the most prestigious and, certainly, most expensive universities and hospitals in the world, the state government is cutting services and simultaneously raising taxes. What has happened?
"Revenues have collapsed," says Mike Widmer of the independent Massachusetts Taxpayers Foundation. In the 2002 fiscal year which just closed at the end of June the state's tax revenues were down by about 15 percent, dropping from $16.7 billion in the 2001 fiscal year to an estimated $14.3 billion.
Massachusetts no longer has money to play with. There are essentially two reasons. The first, responsible for about one-third of the drop in revenues, according to Widmer, is the -- in his view, unwise -- tax cut approved late in 2000. But the larger impact is from decreases in capital gains tax. The citizens of Massachusetts no longer make it big on stock gains and stock options, and nor does the state government. The hole made by the departure of bull and arrival of bear is a big one.
Was it ever wise to have relied so heavily on capital gains as a source of tax income? No, says Bruce Wallin of Boston-based Northeastern University. This is "one of the biggest mistakes Massachusetts has made in its budgeting," he says. It would have been wiser, he says, to use capital gains for one-off expenditure items, or to reduce debt. To grow to depend on them has left a vulnerability.
Now, in the absence of the bull market, the state needs to adjust, to tighten its belt, while causing as little hardship as possible. So far its politicians have not faced up well to that challenge.
"Every day is more amazing. The contempt that the Democratic leaders have for the taxpayers just blows my mind, " said the Minority Leader in the Massachusetts Senate, Brian Lees, a Republican, this week.
The acting governor, Jane Swift, also a Republican, vetoed a state tax increase of $1.1 billion at the beginning of this week. Less than 24 hours later the Democrat-controlled House reinstated it by 120 votes to 29.
The state's legislature has passed a tax increase but has not been willing to make sufficient spending cuts to balance the budget. Governor Swift, meanwhile, vetoed the tax increase in what the Boston Globe called "a bow to unthinking Republican orthodoxy" but is now, even with the tax increase in place, obliged to make some of the cuts from which the legislature shied.
According to Cameron Huff of the CTF, the legislature is proposing an increase of spending of about $600-700 million. Vetoes on some of these spending items by Swift are expected to amount to some $300-400 million. Thus, the budget finally approved for the 2003 fiscal year is likely to be modestly higher, by $200-300 million, than the spending for the previous year. So Massachusetts' effort to tighten its belt leaves it spending more.
The state has some leeway -- for now -- provided by a prudently put away rainy day fund. The fund rose to $2.3 billion at the end of the 2001 fiscal year. Provided Swift's expected vetoes prevail, and there is no overspending in the coming year, and revenues do rise by the projected 3 percent, some $500 million of this rainy day fund should be available for the 2004 fiscal year that begins in a year's time, July 2003. Without Swift's expected vetoes the rainy day fund would be all but eliminated in just two years.
What do Massachusetts' problems reflect, beyond the drop in the stock market and capital gains. Has the state been spendthrift?
The Citizens for Limited Taxation, a lobbying group, would say yes. "Taxachusetts" it calls the state on its website. But Massachusetts' tax take as a share of its residents' income is not high but average for the United States.
The CTF's Widmer says that in the 1980s Massachusetts went on a spending spree but not in the 1990s, when spending rose by an average of 5.8 percent per year and a lot of funding went into education.
Yet, less well-paid residents are feeling the impact of the local high cost of living. A local newspaper in a well-off suburb, Needham, reports on a policeman who can no longer afford to live in the town. Needham and many other towns are resorting to so-called overrides: emergency tax increases required to balance the budget.
Where does the tax money go? Duff points out that it is contributions to Medicaid, medical care for children and the disabled, as well as elderly people in nursing homes, that make up the biggest item in the budget and that have been rising most swiftly, by about 10 percent per year.
According to a report by the CTF, the number of Massachusetts residents qualifying for Medicaid has risen from 690,000 five years ago to about one million now. The report points out that "the state has established one of the most generous Medicaid programs in the nation." The annual cost is about $6 billion. (The federal government pays half.) Is Massachusetts going to finance its program or cut it? the CTF asks.
What will happen to those who are affected now by cuts in the Medicaid budget? Widmer says they will make greater resort to hospital emergency services, which they can obtain for free, rather than using regular care. But this is not a good solution. Sick people are left unsure if they can afford treatment. Their distress is real. Those hurt by cuts to Medicaid would appear to be the most vulnerable in the community.
Also real is the budgetary distress caused throughout the United States by the rising cost of health provision. The federal government is faced with growing bills for Medicare, the health program for the elderly. Meanwhile insurance premiums for private health insurance are rising apace. Both employers and employees are balking at them. Something needs to be done about the soaring price of health care. This is a problem that the United States is failing to tackle.
Northeastern University's Wallin feels that the federal government should help the states by bearing more of the burden of health financing. At present it pays half of states' Medicaid expenditures but has not followed through on a commitment made some years ago to absorb nursing home expenditures and other care for the elderly under federally funded Medicare.
The advantage of shifting more of the health burden to the federal government, Wallin says, is that "it has a much wider revenue base and greater scope to redistribute income." The states, Wallin says, are reluctant to raise taxes to pay for health care because wealthier people may move out of state. Thus, the problem the MTF alludes to is created: Massachusetts tries to provide health care for the poor but is reluctant to raise the taxes needed to pay for it.
Within the Massachusetts' budget, Widmer sees scope for cuts in state spending in aid to cities and towns, which makes up about a quarter of the state budget. But that, too, would be a politically difficult step given, as we mentioned above, that many Massachusetts towns are already calling for additional tax payments from their citizens. If the state were to cut its financing of states and towns, the latter would be forced to increase local taxes further, or cut the provision of local services, such as police and firemen and waste removal.
There are contradictions here, not easily resolved. Travelling about Massachusetts few could doubt the enormous prosperity and very high standard of living. The best European cars people the state's roads. The workers' pick-up trucks are shining and new. The large, freshly painted wooden homes stand tranquilly on landscaped lawns. The American dream is alive and well. Yet there is also poverty and hardship.
"It is political culture," says Wallin. "America has always been individualistic. The political will is not there to redistribute income."
The difficulties of Massachusetts are mirrored elsewhere. Some states, suddenly facing acute financing difficulties, are showing the sort of invention that has recently tended to give Wall Street a bad name. In nearby Rhode Island, in Wisconsin, Alabama, South Carolina, Louisiana, Iowa, New Jersey, the payments which tobacco companies are obliged to make to state governments following a court ruling are being used as collateral to raise fresh finance. Thus these states will forgo these sums in the future in order to have money to meet their obligations now. This will work only if the current slowdown in the economy and weakness in the stock market is something temporary, soon to give way to renewed growth.
Massachusetts has wisely shunned (so far) raising financing on the basis of future tobacco payments, which amount to a staggeringly high $300 million per year in perpetuity, in its case. But it has left a half billion dollar operating deficit in its budget for this year, which it is covering with the rainy day fund, and it assumes revenue growth in 2003 and beyond.
But the stock market has fallen since the end of June and it is far from certain that the U.S. economy will rebound. The economy has been kept from outright recession by steady consumer spending. But rising unemployment, an end to stock market gains, lower bonuses, increased health costs: all these factors increase the risk that the consumer will at some point curb spending and that economic growth and government revenues will in turn feel still greater strain.
The difficulties Massachusetts and other states are facing should sound a warning. The increased burden the states are obliged to place on their citizens are part of the reason why the U.S. economy is unlikely to bounce back.
A time of great yet falsely-based prosperity for the United States has come to an end. The bursting of the stock market bubble now leaves bills fluttering down onto Americans like ticker tape from a parade that has turned sour.
The post-bubble economy is just beginning.
(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected])
