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Edited by Robert Tarnaenwald
and Lesley Eydenberg
Winter 1991
Editor’s Note:
This is the first issue of a qnarterly newsletter desig~ted to brief readers
on fiscal developments in the New England states. The newsletter is based
on newspaper reports, official state budget documents, attd verbal reports
f!’om state bndget officials throughout the region. From time to time, the
newsletter will inch,de a short at~alytical piece that in vestigates a fiscal issue
especially relevant to New England.
Fiscal Facts a.d Myths
New England’s state governments are beginning to
face the fiscal facts. All are reducing growth in spending
and/or raising taxes sharply in order to balance their FY92
budgets and to pay off debt generated by previous deficits.
These stark realities have spawned at least two fiscal
myths.
Myth #1. States can balance their budgets simply by
eliminating waste. True, New England’s state govern-
ments can, should, and have become more efficient.
However, trimming fat alone will not achieve long-run
fiscal stability. As a recent Federal Reserve Bank study
of Massachusetts’ fiscal problems points out, "the forces
that exerted pressure for increased [state] spending during
the 1980s~ecreased federal funding, rapidly rising health
care costs, and Proposition 2-1/2--will continue to exert
pressure in the 1990s." Nor will greater efficiency reduce
the instability of several of the region’s state tax systems,
a problem that has severely exacerbated the region’s fiscal
woes. Like it or not, New Englanders are being forced to
make harsh trade-offs between higher taxes and lower
service levels. The boom years of the middle 1980s only
postponed the day of reckoning.
Myth #2. State tax increases in New England have
made the region one of the most heavily taxed in the nation.
Evidence concerning this contention is mixed. In FY90 (the
latest year for which data are available), Connecticut,
Massachusetts, New Hampshire, and Rhode Island had
among the lowest ratios of state and local taxes and fees to
personal income in the nation. Maine and Vermont ranked
24th and 19th, respectively, out of the 50 states (Table 1 ).
On the other hand, Connecticut and Massachusetts both
ranked in the top 10 in terms of state and local taxes and
fees per capita (Table 2). Maine, Rhode Island, and
Vermont were all near the median. Only New Hampshire
ranked low according to the per capita measure.
It is easy to confuse fiscal fact and myth. One of the
goals of this newsletter is to help New Englanders separate
the two.
Table 1
~ State and Local Taxes and
Fees, FYg0
At a percentage of ~tatewide Rank among the
personal income 50 state~
CT 13.9 47
ME 16.6 24
MA 14.3 42
NH 11.8 50
RI 15.3 37
VT 17.2 19
US Median 16.5
Source: U. S. Bureau of the Census, preliminary data.Overview
New England’s states generally passed lean budgets
for FY92. With the exception of Connecticut and New
Hampshire, each appropriated an increase in general fund
spending that is smaller than the projected national rate of
inflation of 3.5 percent (Table 3). Items bearing a dispro-
portionately large fraction of the cost-cutting were local aid,
welfare, Medicaid, and compensation of state workers.
With the exception of Massachusetts, each state is relying
heavily on tax increases to keep its budget in balance
(Chart 1 ).
Despite this belt-tightening, every state in the region
except Massachusetts faces a deficit this fiscal year absent
further spending budget cuts and/or tax increases. Rev-
enues are falling short of projections. Several states are
having difficulty limiting actual spending to appropriated
levels. Tentative agreements between governors and pub-
lic employee unions have not been ratified and recession-
induced increases in entitlement programs are exceeding
expectations. Newly enacted taxes in Connecticut and
New Hampshire are under legal or political attack.
Connecticut
Connecticut entered FY92 with
a $970 million deficit, 14.5 percent of
its FY91 spending. After several
months of intense controversy, the
state enacted a $7.6 billion budget
that 1 ) increases general fund spend-
ing by 4.8 percent 2) increases
taxes by $1 billion and 3) eliminates
the deficit over a six year period.
The most controversial compo-
nent of the new tax package is a
flat-rate personal income tax, to be
imposed at a rate of 1.5 percent in
calendar year 1991 and 4.5 percent
in subsequent years. It is expected
to raise $1.4 billion in fiscal 1992.
The tax package also lowers the
state sales tax from 8 to 6 percent
but broadens the tax’s base to in-
clude selected personal services and
clothing items costing at least $50.
The 20 percent surcharge on the
corporation income tax is to be
phased out by 1993.
On the spending side,
Chart I
State and I_x)c~l Taxes and
Dollars per Rank among the
capita 50 state~
CT 3,383 8
ME 2,678 29
MA 3,118 10
NH 2,386 38
RI 2,704 27
VT 2,844 19
US Median 2,711
Source: u. s. Bureau ot the Census, preliminary data.
Connecticut’s budget assumes total reductions in compen-
sation to public employees of $354 million. Governor
Lowell Weicker and representatives of the state’s public
employee unions are still negotiating the means by which
these savings are to be realized. With negotiations stalled,
the Governor has laid off more than 4,000 state workers to
ensure that the savings targets are met.
Opposition to the new income tax has become so
intense that the General Assembly convened a special
FY92 Estimated
Revenue Changes
ResuhingJ~om Recent Legislated Tax
and Fee Increases, as a Percentage of
FY92 Goteral Fund Budgets
New England States
Percent
a    b         a a    b
CT ME MA NH RI VT
&Tax increases, bTax and fee increases.
Source: Conversations with state budget officials
and National Conference of State Legislatures.
session on November 18 to consider
repealing the tax. Just before the
session opened, the Governor fore-
cast a general fund deficit of $175
million for the current fiscal year. The
state legislature’s Office of Fiscal
Analysis forsees a deficit of $770
million in FY93.
Republican legislators have pro-
posed replacing the state income tax
with 1) $300 million in spending cuts,
including reductions in welfare, job
training, and housing assistance; 2)
an increase in the sales tax from 6
percent to 8.25 percent, a quarter of a
point higher than its previous level;
and 3) restoration of the graduated
tax on dividends, income, and capital
gains. Other proposed alternatives to
the current tax include a graduated
income tax and a "piggyback" tax.
Under the piggyback option, a
household’s state income tax liability
would equal between 24 percent and
25 percent of its federal income tax
liability.
Fiscal Faots Winter 1991Maine
As in Connecticut, Maine’s debate on the current state
budget began with projections of a large deficit--about 40
percent of the cost of maintaining state services at current
levels. After a long, acrimonious debate, the state passed
a budget in July that allows general fund spending to
increase by only 1.3 percent (Table 3). The budget
eliminated the projected deficit with program cuts worth
approximately $450 million, tax and fee increases pro-
jected to raise approximately $300 million, deferral of
pension payments, the refinancing of bonds, and a one-
time increase in Medicaid reimbursements from the federal
government.
Newly enacted taxes include an income surtax high-
income households; a temporary 10 percent surtax on
corporate income tax liabilities; an increase in the general
sales tax from 5 percent to 6 percent; an increase in the
meals tax from 6 percent to 7 percent; extension of the
general sales tax to cable television, newspapers and
magazines, and snack food; and acceleration of payments
of premium taxes by insurance companies.
Despite these measures, state tax collections during
the first four months of the fiscal year (July through Octo-
ber) were $20.6 million below projections. Public alarm
over the rape of a baby in Portland has caused the
legislature to appropriate additional funds for child protec-
tion and prison security. Economists have become more
pessimistic about the near-term path of the state’s economy.
For all of these reasons, Governor John R. McKernan
recently forecast a state deficit of $125 million for fiscal
1992, about 8 percent of 1992 appropriations.
In November, the governor proposed spending cuts to
eliminate the current-year deficit and to achieve cost sav-
ings in FY93 and beyond. The short-term proposals
include large cuts in general government administration,
economic development programs, and general revenue
sharing with cities and towns. Human service programs
would be only marginally affected. The governor’s long-
term proposals include extensive privatization of state
programs, intended to reduce the state work force by 20
percent. Hearings on the governor’s proposals were being
held as this newsletter went to press.
Massachusetts
Massachusetts enacted a balanced FY92 budget with
appropriations 6 percent below FY91 spending levels. No
other state in the region enacted a cut in spending. One
of the budget’s largest casualties was local aid, scheduled
to decline by over 10 percent. General relief, mental
health, and higher education were also cut by a dispropor-
tionately large fraction.
Although the budget provides for no increases in taxes,
tax increases enacted in 1990 during the last year of the
Dukakis administration, some of which did not take effect
until after Governor Weld assumed office, have boosted
revenues considerably. Had these tax increases not been
enacted, state tax revenues in 1991 would have been 12
percent lower. The Weld administration’s estimate of tax
receipts for fiscal 1992, $8.3 billion, has been widely
criticized as too pessimistic. If the estimate is realized,
FY92 tax revenues will be 6.7 percent below their FY91
level. For the first four months of FY92, state tax collections
were 9.4 percent above the year-to-date FY91 total.
The state’s House of Representatives recently passed
a hospital finance bill that increases the state’s excise tax
on cigarettes from 26 cents to 39 cents per pack. Whether
the governor will veto the bill because of the tax is uncertain
at this time.
New Hampshire
Several recent developments suggest that New
Hampshire’s FY92 budget is unbalanced. State revenue
collections in the first four months (July through October)
were $16 million below budget. Largely as a result,
Governor Judd Gregg in November forecast a deficit of $80
million for FY92 (including a $24.5 million deficit carried
Table 3
~ General Fund Balance, FY91,
and Planned Change in
Spending, FYO2
General fimd balance as a Planned percentage
percentage of spending, FY91 change in spending
FY92a
CT - 14.5 + 4.8
ME + 0.5 + 1.3
MA + 1.6 - 5.8
NH - 3.9 + 21.9
RI +0.0 +2.1
VT - 9.1 + 3.1
alncrease in FY92 appropriations over FY91 spending.
Sources: Newspaper reports, conversations with state budget
officials, and National Conference of State Legislatures.
Fiscal Faots Winter 1991 3over from last year), about 15 percent of estimated spend-
ing. Estimates in November of the deficit for the 1992-1993
biennium ranged between $150 million and $200 million.
The state legislature’s response to the projected short-
fall was to enact a plan designed to elicit $117 million in
additional federal Medicaid reimbursements in FY92. Un-
der the plan, the state would increase its payments to
hospitals with Medicaid patients. The federal government
matches these payments dollar for dollar. The state,
however, would tax the hospitals it subsidizes, recouping
its subsidy. The net effect of this plan would be to extract
federal Medicaid money for the state treasury, without an
increase in care provided to Medicaid patients. This plan
is intended to supplement a similar one enacted in June,
which has turned out to be insufficient. The Bush adminis-
tration wants to change the Medicaid program to prevent
states from using it in this fashion.
Meanwhile, the state and its public employee unions
have yet to agree on how to cut $24 million from state
personnel costs, a reduction explicitly assumed in the 1992
budget. Also, lawsuits have been filed challenging the
constitutionality of several state taxes, including the lucrative
tax on dividends and interest and the new Seabrook property
tax.
The governor and the House-Senate Fiscal Commit-
tee can cut spending to a limited degree without approval
of the whole legislature. The governor and the Committee
ordered a 3.5 percent across-the-board cut in state agency
budgets this fall, a move estimated to save $11.5 million
this fiscal year.
several times in recent years. The state’s FY92 appropria-
tions for local aid are 6.8 percent lower than FY90 outlays.
Projected revenues for fiscal 1993 are $203 million
below FY92’s budgeted outlays of $1.48 billion. The state
has promised to restore to its budget the savings it obtained
this year through temporary cuts in state pay, reductions in
pension fund contributions, and deferral of local school aid.
Vermont
Vermont’s FY92 budget calls for a 3 percent increase
in overall general fund spending. The budget includes a
$100 million tax package that increases the state’s "piggy-
back" personal income tax from a flat 28 percent of federal
income tax liability to a tiered tax with piggyback rates
ranging from 28 percent to 34 percent, depending on the
taxpayer’s income. The package also raises the sales tax
rate from 4 percent to 5 percent and the rooms and meals
tax from 7 percent to 8 percent. Local aid is level-funded.
Payments to public pension funds totalling $15 million
have been deferred until FY93. The budget includes a plan
for eliminating the state’s $58 million FY91 deficit over a
period of three years. In late September, Governor Howard
Dean asked state officials to plan for a 3 percent cut in
spending in FY93, after he had received reports of a
projected deficit for fiscal 1992. Projected shortfalls for
1992 range betwean $5 million and $15 million, or 0.8
percent and 2.3 percent of 1992 appropriations.
Rhode Island
Governor Bruce Sundlun is projecting a budget deficit
of $51.4 million for FY92, about 4.4 percent of appropria-
tions. The state’s Revenue Estimating Conference has
estimated the deficit at $63.1 million. The projected deficit
reflects both revenue shortfalls and higher-than-expected
welfare caseloads and prison population.
The state received an unanticipated $77.8 million Med-
icaid reimbursement from the federal government for hav-
ing a disproportionately high share of low-income patients
in public hospitals. These funds were used to repay the
Rhode Island Public Buildings Authority for a loan that
helped to balance the FY91 budget and to create a reserve
against the looming FY92 deficit.
The adequacy of state aid to cities and towns has
emerged as one of the state’s most salient public finance
issues. Growth in this aid is difficult to measure, because aid
payments have been postponed from one year to the next
Fiscal Facts is produced by the Research Department and
designed by Fabienne A. Madsen. The views e&ressed in this
publication do not necessarily reflect official positions of the Federal
Reserve Bank of Boston or the Federal Reserve System. Fiscal Facts
is available without charge. To be placed on the mailing list or to
receive additional copies, call Lesley Eydenberg 617-973-3098.
This newsletter is printed on recycled paper.
Fiscal Facts Winter 1991

Fiscal facts and myths

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Fiscal facts and myths

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