Baker explains, addresses budget disconnect

Spending and revenues out of whack despite strong economy

GOV. CHARLIE BAKER STEPPED BACK from the numbers in his fiscal 2018 budget on Wednesday, and tried to explain why the state keeps struggling to balance revenues and spending even as the economy is humming along with a 2.8 percent unemployment rate.

Baker offered three primary reasons.

He said his administration has been struggling to reduce the use of one-time revenue sources to balance the budget, a situation that creates a structural deficit at the start of every fiscal year that is difficult to close without holding the line on spending. When he came into office, Baker said, the structural deficit was more than $1 billion. With his current budget proposal, he hopes to reduce the use of one-time revenue sources to less than $100 million.

The governor also said sales tax revenue has tapered off. Through the first six months of this fiscal year, sales and use tax revenue totaled $3.1 billion, up $61 million, or 2 percent over the previous year. But sales tax revenue was down 0.6 percent from what had been projected.

“It’s nothing like it used to be,” Baker said of the state’s sales tax. The governor said he and his staff have been spending a lot of time discussing what’s happened to the sales tax.

“Some of it is the continued movement to the online space, where collection of sales tax is a lot more complicated than it is with traditional retail,” he said. Another theory, which Baker said had been put forward by an economist writing in Governing magazine, suggested that sales tax revenues across the country are sluggish because the prices of the items being purchased have remained fairly flat. “If the things to which the tax is applied don’t go up very much, then your sales tax isn’t going to go up very much,” he said.

Baker’s budget proposal includes a provision that appears to target internet retailers who aren’t collecting taxes on sales to Massachusetts residents. Under current law, Massachusetts can require retailers with a physical nexus in the state (stores, warehouses, or other major facilities) to collect and remit sales taxes. But Massachusetts has traditionally had little leverage on internet retailers who don’t have any facilities in the state.

According to an administration budget handout, the state in the coming fiscal year will apply “an existing definition of ‘economic activity’ to require merchants who do not have a physical nexus in the state and have significant online business in the Commonwealth to collect sales tax.” The provision is expected to target internet retailers with significant sales in Massachusetts, possibly around $500,000. The budget handout said the provision would result in the collection of $30 million from “highly active, internet-only retailers who are not already collecting and remitting sales tax in Massachusetts.”

Baker’s third reason for the disconnect between the Massachusetts economy and the state budget is rising spending on Medicaid, the health insurance program for the poor and elderly that is jointly funded by the state and federal governments. Medicaid currently eats up about 40 percent of state spending.

Budget materials indicate gross spending on Medicaid went up 10.2 percent in fiscal 2014 and 14.9 percent in fiscal 2015 before falling back to 8.5 percent in fiscal 2016 and 3.8 percent in fiscal 2017. Medicaid spending is forecast to rise 6.6 percent in fiscal 2018.

Baker said a big part of the increase in spending is due to a shift in the health insurance market. According to administration budget materials, 65 percent of the state’s residents obtained their health insurance through their employer in September 2011, but that percentage had fallen to 58 percent by March 2016. By contrast, the percentage of the population on Medicaid rose from 14 percent to 21 percent over that time period.

What the numbers mean is that many workers who are working full-time jobs are now getting their health insurance through Medicaid rather than through their employer. As a result, the cost of Medicaid has gone up by about $1 billion.

“This is a problem and this isn’t what anyone intended to happen under the healthcare law,” Baker said.

To address the problem, Baker is proposing that employers with 11 or more full-time employees pay the state an annual penalty per employee of $2,000 per year if they provide health insurance for less than 80 percent of their workforce and pay less than $4,950 of their workers’ health insurance premiums. The penalty is forecast to raise $300 million a year.

The state is also proposing to cap payments to some health care providers in an attempt to rein in costs. Acute hospitals and providers of various medical services (but not primary care physicians or behavioral health providers) would be lumped in three tiers based on their pricing. The most expensive providers would be allowed no increase in their rates. Those in the mid-range would be allowed to raise rates less than 1 percent while the least expensive providers would operate with no rate cap.

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Bruce Mohl

Editor, CommonWealth

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

Baker said he laid out his health care proposals to spur a debate. He said that debate may be further complicated depending on what officials in Washington do with the federal Affordable Care Act. President Trump has pledged to repeal the health care law.

“If the game changes at the federal level, then obviously we’ll have lots of adjustments we’ll have to make to deal with that,” Baker said. “And we’ll be prepared to deal with that.”