The Eisenthal Report

Vote No on (Massachusetts) Question 1

The Eisenthal Report urges a "no" vote on Question 1, which will appear on ballots statewide in Massachusetts on November 4.

Question 1 would eliminate the state income tax. The effect of this measure would be highly disruptive, at best, and conceivably catastrophic for this state. The state budget of the Commonwealth of Massachusetts gets about 40 percent of its funding - about $12 billion - from the income tax.

The best case scenario if Question 1 passes is that the legislature and Governor will move quickly to gut  or eliminate the new aw. Even in this case, it is likely that state and local services will see disruptions as agency managers plan and act based on the anticipation of much reduced revenues.

More likely is that the law would survive in some form, requiring a drastic combination of service reductions and revenue increase from other sources.

The effects could be dramatic on public education, public safety, infrastructure, and the full array of local services. Massachusetts municipalities had budgeted revenues of nearly $21 billion in fiscal 2008. $5 billion of that amount was state aid. A forty percent reduction of state aid would thus likely translate into a 10 percent reduction in overall local revenues - a recipe for disruptions and reductions in services.

The group, Vote No on Question 1, is actively educating voters about the dangers posed by this question. I urge my readers to get involved.

Note: The Boston Globe today published an editorial urging the defeat of Question 1.

A Boat, A Still, and Beavers

Friends,

It is well past July 1 and I am still contemplating the future of The Eisenthal Report. I announced a hiatus in May shortly after I was elected to the West Brookfield Board of Selectmen. I thought I would be able to make a decision about the future of TER by July 1 - that hasn't happened. I'm still thinking...

While I think about this - at the behest of a respected reader - I've decided to share some of my impressions of life as a Selectman in the Town of West Brookfield.

I have enjoyed my service so far on the Board of Selectmen. My fellow board members - Barry Nadon, Jr. and Tom Long - are civil, dedicated, and public-spirited. We do not agree on all of the issues, but there is a common dedication to the best interests of the Town of West Brookfield.

We have dealt with important issues, such as the final resolution of the budget of the Quaboag Regional School District - to which West Brookfield belongs. Budgetary issues are only going to become more intense in the coming months and years. I feel that I'm beginning to apply my expertise and experience in this area in a concrete way to this set of issues.

We have also dealt with more offbeat issues - which brings me to the title of this piece.

The boat is an abandoned boat that someone left on the side of one of our rural roads. It kind of looks like the S.S. Minnow, sitting there by the side of the road. It is certainly a nuisance at this point - and it could become a hazard. It's been attracting trash - including a full patio set. The Board of Selectmen is going to need to keep tabs on the boat until it is disposed of.

The still is a 1,000 gallon distillation unit - built in the 1970s with money from the federal government for the purpose of producing ethanol for fuel. Not long after I was elected, one of the people involved with this project contacted me. He informed me that under the terms of the federal grant the Town of West Brookfield has an ownership interest in the unit. I began investigating this - I still haven't turned up the grant documents - but I did invite a professor at Worcester Polytechnic Institute's Alternative Fuels Project to come to West Brookfield. One Saturday afternoon in June, we went to visit the still. This was an impressive looking machine; it wasn't clear, however, how long it had been since the still had been fired up - or whether it would now operate. At this point, we need to determine what the Town's interest is in this unit before we discuss any investment of time or money in making it operational again.

The beavers are a colony of beavers that have dammed a stream close to one of our roads. Recently, the Board of Selectmen met jointly with the Board of Health to discuss the situation. It is the latter board's responsibility to deal directly with the beavers. However, the Selectmen got involved because of the threat to the road and nearby culverts. The issue is somewhat complicated and sensitive - particularly for the Board of Health. Under Massachusetts law, they can authorize trapping - but not killing - of the beavers. Also, since the beavers are partly on private property, the BOH needs the cooperation of private property owners. This situation is still developing...stay tuned...

The boat, the still, and the beavers are representative of the kind of ground-level, nitty-gritty issues that local officials deal with. I was elected because I talked a lot about finance and personnel issues; I will have plenty of opportunity to address these issues, but the other kinds of issues will take up a good part of my focus. Fortunately, I'm finding both the big picture and nitty-gritty issues to quite engaging and interesting. It will be an interesting three years...

The Politics of Tough Choices During Tough Fiscal Times

MassInc, the Massachusetts Institute for a New Commonwealth, is holding a high-profile panel discussion this coming Thursday on the politics of the budget difficulties facing Massachusetts.

The panelists include former Senate president Thomas Birmingham, former Senate Ways and Means chairwoman Patricia McGovern, former secretary of Administration and Finance and MassINC board member Thomas Trimarco and former secretary of Administration and Finance Steve Crosby. It is moderated by Jim Braude from WTTK and NECN.

The discussion will be at the Omni Parker House in Boston from 8:00 AM to 9:30 AM on Thursday, April 10.

Given the budget problems that face the Commonwealth and its cities and towns, including West Brookfield, this sounds like it should be a very interesting and timely discussion.

Senior Citizen Exemptions from Proposition 2 1/2 Overrides

As has been widely reported in the media, the Massachusetts House of Representatives has approved legislation that would exempt property taxpayers who are 65 and older from paying increases in property taxes that are attributable to operating overrides or debt/capital exclusions of levy limits under the Massachusetts local property tax cap known as Proposition 2 1/2.

The purpose of the legislation is to increase the likelihood that overrides and debt exclusions will pass in local elections. The reasoning is that seniors receive relatively few benefits from local government, but shoulder a substantial portion of the local property tax burden. If their tax bills were lower, seniors would be more likely to vote in favor of overrides and debt exclusions that would benefit the community as a whole, according to this reasoning.

The property tax relief would be made in the form of an abatement to an eligible property owner - a reduction that would cease if a property is transferred to an owner younger than 65 or if an owner ceases to meet income eligiblity requirements.

This legislation seems well-intentioned, but potentially ineffective or problematic. It is not clear to this observer how large a population would be affected by the legislation. In addition to being older than 65, an eligible property owner would need to have annual gross income of less than $60,000 and the annual property tax bill would need to be greater than 10 percent of gross income. This observer wonders whether members of the House voted this based on anecdotal evidence rather than a more considered study of the numbers of affected taxpayers and the likely financial impact of the legislation.

Even if one grants that a significant number - however defined - of elderly taxpayers will receive benefits - to the point that local political decisions will be meaningfully affected, there are additional concerns about the legislation.

It could be fairly complex to administer - especially with the passage of time. Operating overrides are built into the property tax base. This means that an abatement of an override would happen every year following that override as long as the taxpayer is eligible. Not only would the original override be abated, but any subsequent increase in taxes that is built on the override would need to be abated as well. On top of this is the fact that individual valuations and tax bills fluctuate with time. If the value of a property owned by an elderly taxpayer declines relative to that of other properties some years after an override, possibly lowering a tax bill below what it was at the time of the override, should that elderly owner still receive an abatement?

Beyond the administrative complexities are the unintended or unforeseen consequences of the legislation. One possible consequence is that overrides might become more difficult to obtain with time as those property owners younger than 65 bear the entire burden of such tax increases.

The Massachusetts Senate now will consider the legislation. This observer hopes that the Senate looks at quantifiable public policy impacts rather than anecdotal evidence in considering this bill.

MBPC Sizes Up Massachusetts Fiscal 2009 State Budget Gap

The Massachusetts Budget and Policy Center (MBPC) yesterday released an initial assessment of the fiscal conditions facing the Massachusetts state government for the fiscal year beginning July 1, 2008.

According to MBPC, the Commonwealth faces a structural budget deficit in excess of $1.1 billion. About $760 million of this is the structural gap to be carried over from the current fiscal year. This gap was comprised of applications of one-time revenue totaling more than $500 million, an overestimate of lottery revenue totalling nearly $125 million, and a forgone deposit to state reserves of more than $100 million.

MBPC estimates that the remainder of the FY09 gap will total over $400 million. Increased expenditures to maintain current services are estimated to total more than $1.1 billion; these increases are projected be offset by more than $750 million in new revenue. The new revenue projections assume a 3.8 percent increase in state revenues - less than recent average increases. However, with the national economy softening, it is reasonable to think that the revenue increase will be smaller than projected - and the budget gap will be larger.

Governor Patrick to File Corporate Tax Legislation

Massachusetts Governor Deval Patrick announced yesterday that he will file legislation to change the state's tax code as it applies to businesses.

This legislation would close so-called corporate tax loopholes, but also implement a phased reduction in corporate tax rates.

Governor Patrick proposed closing tax loopholes last year as a way of making the tax code fairer and increasing state revenues. These loopholes include

-   corporations shifting income to out-of-state subsidiaries to avoid Massachusetts tax,

-   businesses claiming to be corporations for federal but not Massachusetts tax purposes (the so-called "check the box" loophole),

-   insurance companies paying taxes only on premium income and not on non-insurance revenues,

-   companies avoiding deeds excise by not selling property directly, but rather placing the property with a subsidiary that will be sold,

-   internet retail agents avoiding room occupancy taxes on lodging sold through the Internet,

-   businesses avoiding sales tax on equipment by leasing from a subsidiary rather than purchasing directly, and

-   non-residents taking advantage of the state earned income credit.

This proposal faced major opposition in the legislature, particularly from House Speaker Sal DiMasi. Governor Patrick and the legislative leadership then agreed in April to create a special Corporate Tax Commission. That Commission recently released its report, which endorsed closing some of these loopholes, but also reducing corporate tax rates.

The Governor's legislation would close a number of these loopholes and reduce the corporate tax rate from its current 9.5% beginning in fiscal 2010, with the rate reaching 8.3% for fiscal 2012.

The Governor's proposal does appear to address the fairness of the tax code - closing the loopholes would make the tax code fairer. His proposal also seems to be more politically acceptable than the proposals he made last year. One concern about the legislation is that it might provide temporary fiscal relief for the state government, but constrict the state's resources in the long term. The Commonwealth of Massachusetts faces ongoing fiscal pressures. Unless the reduction in corporate taxes generates a large amount of additional economic activity, the reduced revenues will need to be replaced in some manner - either through increased revenues from some other source or from reduced expenditures.

The question is whether Governor Patrick is potentially setting the stage for further fiscal problems for his second term in office - or for a successor.

A Practitioner Discusses "Municipal Meltdown"

Bill Manzi, the Mayor of the City of Methuen, Massachusetts, has weighed in on the issue of "Municipal Meltdown."

The fall 2007 issue of Commonwealth Magazine had an article entitled "Municipal Meltdown," which made the case that a greater number and diversity of Massachusetts municipalities than ever before are facing extreme fiscal stress. TER commented on the article in October.

As a long-time municipal practitioner - as a Mayor and a City Councillor - Mayor Manzi's views on this are worth considering. The Mayor focuses on health insurance as a major fiscal pressure point. He notes the recent change in state law that allows cities and towns to join the state's Group Insurance Commission, but notes some of the difficulties associated with the change. Local public employee unions have a veto on whether the local government that they serve can join the GIC. Also, as the Mayor notes, local governments do not otherwise have the management control over health insurance that the state does.

In the end, the Mayor does not mince words about the difficulties that many municipalities face. "Local government and citizens should prepare for a radical restructuring of municipal finance and service delivery."

Massachusetts Corporate Tax Loopholes Report Coming

The Worcester Telegram and Gazette reports this morning that the Study Commission on Corporate Taxation in Massachusetts, created in April to analyze proposed changes to the state's tax code, is expected to release its report this coming Tuesday.

This past spring, Governor Deval Patrick proposed closing a number of so-called corporate tax loopholes in order to increase state revenues - and increase the fairness of the state tax code. The loopholes include:

-   corporations shifting income to out-of-state subsidiaries to avoid Massachusetts tax,

-   businesses claiming to be corporations for federal but not Massachusetts tax purposes (the so-called "check the box" loophole),

-   insurance companies paying taxes only on premium income and not on non-insurance revenues,

-   companies avoiding deeds excise by not selling property directly, but rather placing the property with a subsidiary that will be sold,

-   internet retail agents avoiding room occupancy taxes on lodging sold through the Internet,

-   businesses avoiding sales tax on equipment by leasing from a subsidiary rather than purchasing directly, and

-   non-residents taking advantage of the state earned income credit.

In advance of the Commission's report, the Telegram and Gazette reports that one key member of the House of Representatives has offered a "compromise" proposal on closing the loopholes. Rep. John Binienda (D - Worcester), Chair of the Joint Committee on Revenue, has proposed supporting eliminating the "check the box" and combined reporting loopholes as long as the elimination is accompanied by a reduction in the corporate tax rate. Business leaders have reportedly insisted that any closings of corporate loopholes be done in a revenue neutral manner - not increasing their tax burden.

Binienda says that the reduction need not be revenue neutral. His initial proposal is to reduce the corporate tax rate from 9.5 percent to 6 percent, but Binienda says that figure is not "set in stone." The important issue for Binienda, according to the Telegram and Gazette, is

recognition by the administration that the Legislature has to agree to any changes in the tax structure. “It’s a matter of respect,” he said of the Legislature’s role.

Apparently, the Study Commission is split on revenue neutrality. Secretary of Administration and Finance Leslie Kirwan, who is also a member of the Commission, advocates that changes in the tax code produce additional revenue for the state. She indicated to the Telegram and Gazette that

the administration does not have a specific revenue increase figure in mind at this point, but knows there is a need for more money to meet demands for better schools, roads, and other services and to meet rapidly increasing health care costs and the need for more local aid in the state budget.

We will see later this week where the Commission come down on this issue.

This observer has written previously on this issue here and here.

Casinos Face Long Odds in Massachusetts Legislature

This morning's Boston Globe reports that a large majority of the members of the legislative committee that will consider Governor Deval Patrick's proposal to license three "destination resort casinos" in Massachusetts would vote against the proposal as it is currently constituted.

The Globe did an "informal poll" of the members of the Joint Committee on Economic Development and Emerging Technologies. According to the Globe,

Twelve members of the committee said they are inclined to vote against the proposal, unless wholesale changes are made, such as reducing the number of casinos in the plan, giving more gambling proceeds to cities and towns, or allowing the state's racetracks to add slot machines. Three members said they are leaning in favor of the proposal. Four said they are on the fence.

Rep. Barry Finegold (D - Andover), who was a candidate in the recent special election for the Fifth Congressional District, was quoted as saying that "there are a lot of strikes against" the proposal.

One significant obstacle to the casino plan within the Committee is the fact that the Committee's chair, Rep. Daniel Bosley (D - North Adams), is an outspoken critic of introducing casino gambling to Massachusetts.

It is still early in the process. Much will depend on any accomodations made between the Governor and House Speaker Sal DiMasi and Senate President Therese Murray. Nevertheless, the fact that 12 key legislators oppose the Governor's proposal is not a promising sign for the Governor.

How to Control Healthcare Costs

In an op-ed piece in this morning's Boston Globe, two chief executives of Massachusetts health insurance plans offer their thoughts on controlling healthcare costs.

In fact, James Roosevelt, Jr., President and CEO of Tufts Health Plan, and Charles D. Baker, President and CEO of Harvard Pilgrim Health Care, do not offer much of substance in this piece. They do, however, vigorously advocate for more transparency in healthcare operations: specifically, public hearings on cost drivers and public reporting of healthcare revenues and expenses.

These are good proposals. The public should become more aware of what is driving the dramatic increases in healthcare costs - and specifically, the extent to which these are driven by provider compensation, patient utilization, capital costs, and external costs (such as those passed on by pharmaceutical companies).

Roosevelt and Baker do present one stunning statistic. Between 2002 and 2006, healthcare spending in Massachusetts increased from $46.5 billion to $62.1 billion. As Roosevelt and Baker note, this is a significant increase - 33 percent in four years. What is also striking - but not really surprising - is that healthcare spending is a large and growing part of the Massachusetts economy. In 2002, healthcare spending was 16 percent of this state economy; by last year, it was more than 18 percent.

Many public policy discussions in recent years have focused on healthcare. Much of the discussion during the recent special election in the Massachusetts Fifth Congressional District centered on healthcare. Roosevelt and Baker's piece is welcome because it will help maintain focus on the issue - both at high levels of government and broadly among the public.