Thursday, January 29, 2009

Bay State Budget Blues...

Governor Deval Patrick released his budget yesterday and its stark realities and grim prospects sent shivers across the Commonwealth. Luckily on the same day, he also released his mid year cuts, which although intense, are workable. In other words we can wait until fiscal year 2010 begins in July before we go apocalyptic.

Midyear cuts were primarily feared in the area of local aid. Local Aid in Massachusetts is divided between three main categories. Chapter 70 Education funds, Lottery Aid, and additional assistance. The first two use complex formulas to ensure that the neediest communities get what is necessary. This is especially true for Chapter 70. Essentially, the state pays 70 cents on the dollar for the Springfield, MA school budget under 70's funding system. Lottery aid, follows a similar formula, but is a bit different. Additional assistance is an arbitrary amount for each community inserted into the budget by the Legislature annually. You may recall a few years ago some controversy about Springfield's minuscule Additional Assistance funding. The cries ultimately fell on deaf ears especially when the higher ups said Springfield already makes out well on the other two local aid funding formulas. Others proposed simply zeroing out additional assistance and move its money into 70 and Lottery Aid. Needless to say it did not happen.

Anyway, Gov. Patrick promised not to cut 70 and level funded it next year. The net result of this change is Springfield survived FY2009 mid year cuts with only $4.6 million. Interestingly enough, a city four times Springfield's size, albeit less reliant on the economics of local aid, Boston lost over $23 million. Boston, although receiving far less in 70 and Lottery aid, does receive more additional assistance. Gov. Patrick's stated goal was to cut only 9.7% of non-70 local aid across the board. Whether it was meant to be 9.7% per community's allotment or from both the Lottery and Additional assistance overall is unclear. Given the overwhelming amount 70 takes up from Springfield's local aid allotment, if it was the latter, the city made out very well.

It is unknown at this time what local communities will have to do to make up the shortfall. The Control Board in Springfield is expected to probably use a combination of reserves, attrition, and possibly minimal layoffs to mitigate the effects.

The Governor's 2010 budget, however, contains a much bleaker picture. Cuts found their way from every budget from local aid to UMASS. Local aid is expected to drop precipitously and that includes an increase in the meals tax. Rather than allow local communities to add up to 2% on top of the existing meals tax, Gov. Patrick proposes that a statewide increase of 1% be added to mitigate local aid reductions. He continues to push for communities to gain the options tax, instead limiting it to 1%. Effectively, the state meals tax would be 6% and communities could add an extra 1% themselves under his plan. Hotel taxes would also go up both as a mandatory state tax and include more options for local hotel tax increases. Perhaps most strange is the ending of the exemption of soda, alcohol, and candy from the state sales tax.

Let's begin where this blog had already stood. The options tax idea is just wrong. Even in this bad economy, the notion that just because the big cities are where a lot of restaurants are is where they'll stay is simply foolish. Having an uneven meals tax will discourage development in the cities especially where they need it most (Springfield, Lowell, Fall River, Lawrence, Chelsea). Moreover, it defies the "we're in this together" spirit of the commonwealth. Additionally, as has been suggested, the more rural communities where the restaurants will not relocate, just get a cut with no capacity to make up the loss even with this new option.

Expanding the concern about meals tax is the danger it poses to the industry at large. A higher meals tax, in a bad economy, will discourage restaurant purchases if not outright visits. The industry has already suffered mightily, but it had kept puttering along better than some of its more monolithic colleagues. Additionally, a higher tax puts the responsibility on the restaurant to pay the added commission they pay to the Credit Cards when meals are charged. Finally, and most importantly, the issue could hurt servers. A high meals tax will discourage better tipping. Servers have already noticed a decline in income with a decline in patronage and restaurant bills. Waters are more common than sodas. Appetizers may be rare as well as dessert. The 6 oz sirloin will take the place of the 10 oz. Add this tax, which could become as high as two cents on the dollar and on a fifty dollar bill, a patron, often unwittingly, may take that dollar out of their server's tip in order to pay the tax.

In less financially stressful times, this argument, though still valid, could be obviated, by higher volumes of business. Moreover, Massachusetts continues to have the lowest server wage in New England. Maine, New Hampshire, and Vermont, all of which have 7% meals taxes, guarantee their servers an hours above that of Massachusetts. The server wage in Massachusetts is $2.63 and has been that for over a decade. Perhaps if servers were not getting such a low starting wage, they could eat the loss in tips as part of the impact on the economy. Unfortunately, a bad economy is also not the time to push for a server wage hike from stretched restaurateurs.

Moving on to Gov. Patrick's other proposed taxes. He wants to make alcohol purchased from package stores eligible for the sales tax. This is not an unreasonable concession, given that alcohol sales themselves are likely to weather this storm better than most industries. (I wonder why?). However, the liquor industry in Massachusetts beat back a sensible attempt to undo some of its draconian liquor laws and allow for grocery story sales of beer and wine. However, it too has problems. Massachusetts already assess a higher tax on beer, wine, and spirits than some of its neighbors and the lack of grocery store or liquor authority-direct sales drives costs up further. When Bay Staters head up to the Granite State for cheap cigarettes they may also get some cheap liquor, too. This tax could only exacerbate that trend. When gas was $4 a gallon, that fear would be diminished, but today not so much.

Extending the tax to soda, juice drinks (drinks less than 50% juice) and candy is troubling. The effort is obviously an attempt to extend the dissuasion tax policy used on cigarettes to junk food. This is especially true, given that the governor's budget calls for the money to go into a health account. Cigarettes are far more deadly than junk food because their effects cannot be mitigated. Exercise, moderation, and better food choice can diminish the harsh health effects of empty calories. There is no safe cigarette and no safe amount of smoking (although less is better). Furthermore, it could prove difficult to define the products eligible. It seems simple enough, but it may not be either. As the nation is already in the midst of another healthier living binge (banned trans-fat), companies could reconstitute their products fearing a wave of similar actions nationwide.

Finally, a gas tax is inevitable. Although hikes on the Turnpike must come (sorry Metro-West Bostonians), the gas tax is necessary to keep together our crumbling infrastructure. As Pres. Obama's stimulus bill looks more like a slap across 12 years of GOP Congressional rule (and 2 years of obstructionism) and less like an infrastructure bill, hopes for cleaning up the Commonwealths roads grows dim. We need to get the money from somewhere. That being said, both federal and state governments should consider an automatic ratchet in any raised gas taxes that permits the increase to shrink (not disappear) if gas breaks records again.

These are tough times and cuts alone will not solve it. However, the Patrick Administration may not have thought through their plan carefully enough. Ever the optimist, the Governor's introduction to the budget announced that "Together we still can." It is nice to believe that and we should believe it, but we should also temper it with choices that solve the problems rather than aggravate them.

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