Structural transformation required

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PROBLEM

Vermont has been struggling to balance state budgets during an economic expansion. In a recession, when economic activity slows and tax revenues decline, it would be understandable to have budget difficulties. But to have deficits during an expansion means that the state is trying to do too much with too little on a structural basis. I believe we need to undertake a thorough transformation of our fiscal system. We have lost control of key aspects of both spending and tax revenues.

BENEFITS

Some of our large benefit programs have never been properly funded and costs have grown faster than expected. Benefits are a form of

"entitlements." This means that certain criteria for receiving benefits are established, and anyone who meets the standards will receive them. So the state doesn't control the costs of an entitlement program, since it depends on how many people qualify.

Such transfer payments to support Vermonters are a legitimate and crucial function of state government. Examples would be programs like Food Stamps and Fuel Assistance, and very large programs like Medicaid and retirement benefits to state employees and teachers. It is the large programs that are causing budget problems.

With entitlements there is a tendency for government to promise benefits without establishing sustainable funding for the program. There can also be a tendency to underestimate the eventual costs: it is politically popular to promise benefits, but politically difficult to put in place taxes to fund them, so using lower cost estimates makes it easier to approve programs. Once established, program costs outrun available revenue, but it is politically difficult to cut back on benefits.

This pattern has played out with Medicaid, which is a primary cause of current budget difficulties. There have been expansions of Medicaid eligibility and coverage. Costs are repeatedly higher than expected, even though health providers are not properly compensated for serving Vermonters on Medicaid. It is therefore difficult for such Vermonters to find a doctor, so they have trouble actually receiving the benefits promised.

We should structure programs like Medicaid so that basic benefits can be provided reliably. We should purposely use higher cos estimates with large programs to ensure sustainable funding. It is irresponsible to promise benefits that cannot be delivered, betraying the very Vermonters the benefits are intended to help. We should only make promises that we can pass taxes to fund. This would help to get the budget under control.

TAX EXPENDITURES

Another kind of entitlement is what are called "tax expenditures" (TEs). These are credits, deductions, subsidies, and exemptions within the income, sales, and property tax codes. These reduce taxes owed for those who qualify, so the costs in lost revenue are out of the state's control. These tax costs are not listed in the regular budget.

As with benefits programs, once a TE is set up it can be politically difficult to reduce them. A further issue is that it can be hard to be sure there is really an increase in the behavior they are designed to encourage, or whether the actions would have been undertaken anyway. If the desirable actions would have been taken without the tax credit, the tax revenue foregone was just wasted. They can also add inequity to the tax code when profitable corporations and high income individuals get reductions in taxes that others do not.

Legitimate cases can be made for most TEs, but they add complexity to the tax code, and their costs in lost tax revenue add up to over $1 billion. This leakage means that in order to raise a certain amount of revenue tax rates have to be higher than otherwise. This can mean that then more industries or groups of Vermonters ask for credits, deductions, or exemptions from the higher tax rates. If they get them, then the new losses of tax revenue contribute to budget difficulties, requiring spending cuts or higher tax rates. This is a vicious cycle.

To regain control of the tax code we should follow the recommendations of the Blue Ribbon Tax Structure Commission: eliminate many TEs and lower all tax rates. There would be less motivation for groups to seek special treatment when all rates are lower. The tax code would be simpler and it would be easier to be sure that all are paying their fair share.

We could then use regular spending lines to achieve policy goals with defined subsidies or grants instead of TEs. It would be easier to control the costs of the policies, to monitor performance, and to alter provisions based on effectiveness or available resources.

STRUCTURAL SUSTAINABILITY

The state must transform the spending and tax systems to ensure that programs are sustainable into the future. This requires getting control of large benefits programs and getting control of the tax code. But I don't see much political appetite for structural transformation in Montpelier. I see the Democrats and the Progressives as generally pushing to spend more on benefits, and some of them are willing to raise taxes and eliminate TEs to do it. I see many Republicans pushing for spending cuts and against raising taxes, but they support TEs that cost revenue and disproportionately benefit large businesses or high income individuals. The outcome is a kind of paralysis, in which we muddle along, balancing the budget every year as best we can, but continuing to promise more benefit entitlements than we can support, and continuing to allocate significant resources to tax expenditure entitlements that mean that tax rates are higher than they would otherwise be. I think we can and should do better.

Cynthia Browning is a state representative from the district which includes Manchester, Arlington, Sunderland and Sandgate.


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