Baker budget’s focus is fiscal restraint

No new taxes, fees and limited spending growth

STATE HOUSE NEWS SERVICE

GOV. CHARLIE BAKER’S ANNUAL BUDGET PROPOSAL filed Wednesday featured the administration’s focus on fiscal restraint, with an emphasis on limiting overall spending growth and growing state government’s savings account.

While the $39.6 billion budget proposed for fiscal 2017 makes new investments in targeted areas such as local aid, child welfare, substance abuse prevention, and charter schools, large swaths of state government would see budgets grow by less than 1 percent with many accounts level-funded from last year.

Environmental activists say accounts in that area are reduced by 7 percent in Baker’s plan, some of which the administration attributed to early retirements and elimination of earmarks.

Baker proposed a corporate tax reform, aimed at helping the state compete for jobs, that would save Massachusetts-based businesses more than $67 million in income taxes when fully implemented in four years. The reform has no impact on next year’s budget.

“We believe this budget makes great progress in our effort to bring the deficit that’s been beleaguering the Commonwealth for the past few years into balance,” Baker said during a press conference. “We believe that getting state spending under control to the point where state spending grows at a rate that’s similar to the rate of economy is essential to the state’s economic health going forward.”

In limiting spending growth to 3.5 percent, Baker said his budget closes a $635 million gap between available revenues and spending needs despite tax collections projected to grow 4.3 percent next year. The gap, budget officials said, can be attributed to growth in non-discretionary programs such as MassHealth, where the administration hopes to limit spending increases to 5 percent.

While fiscal conservatives applauded the governor’s restraint, some critics lamented the lack of progress Baker’s budget made in good economic times to increase investments in areas such as early education or transportation infrastructure.

“Gov. Baker’s barebones budget reflects his barebones vision for Massachusetts, where little to nothing is done to address major issues like income inequality, transportation infrastructure or maintaining our national leadership in clean energy, life sciences and education,” said Pat Beaudry, a spokesman for the Massachusetts Democratic Party. “The Governor’s barebones approach jeopardizes job growth and hard-earned gains made during the last several years, where investments in education, innovation and infrastructure gave us several No. 1 spots and a global reputation for vision and innovation.”

Since taking office in 2015, Baker has worked to drastically reduce the state’s reliance on one-time revenue sources to balance spending. In the fiscal 2017 proposal, Administration and Finance Secretary Kristen Lepore said one-time sources would be limited to $253 million, down from about $1.2 million in fiscal 2015.

The budget proposal would also put between $206 and $282 million into the state’s stabilization account. “Saving money for a rainy day, especially in good times, is a must,” Baker said.

“Once again, Governor Baker has delivered a spending plan that is fiscally responsible and accountable to the state’s taxpayers and does not rely on any new taxes or fees, or a draw-down from the state’s Rainy Day Fund,” House Minority Leader Brad Jones said in a statement.

Noah Berger, president of Massachusetts Budget and Policy Center, credited the governor with reducing the reliance on one-time revenues to balance spending, but questioned some of the governor’s priorities.

“I think there are other choices in this budget. I think that when you’re spending $67 million on an expanded corporate tax break that hasn’t worked in the past that might be the first place to look in terms of finding money to invest in things like making higher education more affordable or fixing our transportation infrastructure,” Berger said.

Along with his budget, Baker filed separate legislation that would restructure the state’s film tax credit and extend a tax benefit to all corporations based in Massachusetts that do business in multiple states.

By restoring a $7 million per project cap on the film credit and eliminating refundability, Baker hopes to reap about $43 million in savings starting in fiscal 2018 that can be poured back into affordable housing credits and corporate tax relief.

While manufacturing companies and some defense contractors and financial service providers can already take advantage of the single sales factor, Baker’s bill would extend the benefit to all corporations allowing them to get a break on property and payroll investments as they relate to corporate income.

Baker said General Electric, which stands to benefit from a package of $145 million in state and city tax breaks and investments as a condition of its decision to relocate its headquarters and 800 jobs to Boston, did not request the corporate tax change during negotiations with the state.

“That was simply because we’ve heard from a lot of Massachusetts-based businesses that compete in many other markets that most other states at this point have moved in that direction and that’s a competitive disadvantage for Massachusetts firms,” Baker said.

The budget proposal to restructure the charter school reimbursement formula for public schools and fully fund the first two years of the reimbursements with more than $100 million in funding also served as an overture to House and, especially, Senate leaders as Baker looks to push an expansion of charter schools through the Legislature.

“Our proposal with respect to the charter school funding formula is an attempt on our part to acknowledge that this is a debate and a discussion that needs to be had. We look forward to engaging with the legislature on this, but it is certainly our hope that we can use this as an opportunity to do what many families and their children here in the Commonwealth would like to see us do, which is to lift the charter cap and give a lot of parents in this Commonwealth the access and opportunity to send their kids to the schools they believe can do best by them,” Baker said.

Massachusetts Taxpayers Association President Eileen McAnneny said the governor’s budget “aligns with his public policy priorities” outlined in last week’s address to the state, including new spending on charter schools and substance abuse prevention.

McAnneny said the foundation would have preferred to see the budget sweep 1 percent of tax revenues into the stabilization fund to replenish that account.

“That’s a little more aggressive in replenishing the stabilization fund but that was our recommendation and would have been our preference, but in a tight budget they are making progress and we want to acknowledge that,” McAnneny said.

Baker used the same term “progress” to defended the decision to use $150 million in capital gains taxes that otherwise would have, by statute, gone to reserves, and said he was not worried about a credit rating downgrade.

The governor’s budget, referred Wednesday by the House to its Ways and Means Committee, proposes to increase unrestricted local aid to cities and towns by $42 million, consistent with his pledge to increase local aid by the same rate of revenue growth, but increases in Chapter 70 school aid by $72.1 million, or 1.6 percent.

Some Democrats, including Sen. Sonia Chang-Diaz and Sen. Jason Lewis, criticized this investment as the smallest increase in half a decade.

Baker’s budget also level funds other education-related local aid accounts such as special education and regional school transportation.

Lewis said he was disappointed that Baker’s budget did not begin addressing health insurance and special education costs that the Foundation Budget Review Commission concluded are not accurately reflected in the state’s education funding formula. “Without these reforms, our communities will continue to struggle to provide all students with access to a quality public education,” Lewis said.

After being rebuffed by lawmakers last year, the governor decided to take another bid at reforming the film tax credit and requiring all state employees to contribute 25 percent to their health insurance coverage. He did not, however, revisit the full expansion of the earned income tax credit that he sought last year for low-income families.

“I certainly think you’ll see us come back to that at some point as an administration, but there were a number of other things… budgets are built on tradeoffs and while I would love to take another run at getting the rest of the earned income tax credit this year, I think that’s probably something we’re going to have think about doing next next year,” he said.

The Children’s League of Massachusetts applauded Baker’s proposed $30 million increase in funding for the Department of Children and Families, which he and Lepore said will allow the agency to hire 281 new staff and make progress toward reducing caseloads for social workers.

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“The increase in funding to the Department of Children and Families will ensure that it can follow through with its plans to increase staffing, improve management oversight, and decouple area offices,” Children’s League President Erin Bradley said. “Also, we respect that he has provided level funding for the Office of the Child Advocate, whose work is vital to ensuring the safety and security of our children.”

Chief Justice Ralph Gants and the Massachusetts Bar Association both said they looked forward to working with Baker and the Legislature to bridge the gap between the 1 percent increase for the courts proposed by the governor and the Trial Court’s full funding request. MBA Chief Legal Counsel Martin Healy called Baker’s spending on drug courts and new money for a housing court expansion “a welcome sign of support.”