2016 state budget: Cuts won’t fix the problem

Montpelier is struggling to plug a state budget gap again this year—$113 million. As in the past, the preferred option is cutting Vermont’s already slashed-to-slivers state services. While austerity proponents love it, this strategy will make Vermonters more miserable, especially those who’ve seen their real incomes decline for a decade. Cuts also dampen the state’s economy.

Why put Vermont through this again?

Here’s the governor’s answer, from a recent op-ed:

“Unless we address the underlying structural issue—the fact that spending is growing at 5 percent and economic growth is at 3 percent—raising revenue this year to fill the gap wouldn’t fix the problem next year. We need our spending to match our revenue growth, period—or we will find ourselves in this same budget gap discussion year after year.”

He’s right: We need to better match spending and revenue growth rates. But just as raising revenue this year will not fix the mismatch, neither will budget cuts.

Why do we have this mismatch? Here are a few big reasons.

On the spending side, health care costs are out of control. Vermont’s health care spending has grown much faster than the economy for at least two decades. As employers try to control operating costs, they’ve shifted more of their health insurance costs onto employees. And as private health care becomes less affordable, public health care programs like Medicaid grow. Health care-related costs—including insurance for public employees—now account for more than one-third of the state budget. And since fiscal 2010, state health care costs have increased at more than twice the rate of overall spending. This leaves little capacity for the state even to cover inflation of other state service costs, much less deal with caseload increases. The result has been reduced General Fund support for education, which has increased property taxes, and cuts in services to vulnerable Vermonters, such as child protection.

On the revenue side, money is coming from the wrong places, and stunting annual growth.

Consumption taxes are lagging. Income tax is the strongest performer of the state’s General Fund sources—projected to grow at 5.5 percent next year. But that growth is not enough to make up for laggards. Sales, rooms and meals, and liquor taxes—the largest consumption taxes, which contribute most to state coffers overall—are projected to grow much less than 4 percent next year.

Taxes are targeted at taxpayers with less money. Vermont’s taxes overall take a smaller bite of income from those at the top than from those in the middle and at the bottom. With more of Vermont’s income going to the top, the state gets less revenue than it could despite reasonable economic growth.

What can we do?

The governor’s single-payer plan held the most promise for reducing health care costs, a necessary part of solving this structural budget problem, and making health care more accessible for all Vermonters. Now he has proposed a smaller-scale reform plan, which is still a move in the right direction. The 0.7 percent payroll tax he recommended would allow Medicaid to pay doctors and hospitals more reasonable rates, which in turn should slow the growth in private insurance costs.

Vermonters are increasingly spending more of their money on services, and less on goods. Expanding the sales tax beyond consumer goods to include services would improve that tax’s performance.

Removing income tax breaks, especially those enjoyed by upper-income Vermonters, would increase revenues while improving the fairness of the tax system.

To solve its perennial budget problems, the state needs to better match the rates of spending and revenue increases year after year. The two never will line up perfectly; year-to-year adjustments will be needed. But simply raising taxes or cutting the budget will not change these growth rates. By acting strategically to increase the revenue growth rate, decrease the growth rate of budget drivers like health care, or some combination of the two, the state can finally pull out of what has become a steady state of fiscal crisis.