A new analysis by the state’s budget bureau projecting a $756 million revenue deficit in the next two-year budget is likely to renew debate over the sustainability of tax cuts passed, but not entirely paid for, by the current Legislature.
The tax cuts were passed by a two-thirds vote and touted by Republicans as the largest in Maine history. The bill doesn’t come due until 2013, when lawmakers figure out how to pay for the estimated $342 million the cuts will cost in the next budget.
The tab is nearly half of the revenue deficit forecasted by the state’s budget bureau.
Such deficits projections have become common in recent years. The current one is well below the $1.17 billion revenue shortfall projected in 2010. The current projection is also partially based upon statutorily mandated education spending routinely bypassed by state lawmakers.
Nonetheless, the projected gap and the LePage administration’s spending priorities will likely foreshadow some tough choices for state lawmakers when the next Legislature convenes next year.
Democrats say that the tax cuts are reckless and will likely lead to reduced education spending, higher property taxes because of a reduction in state revenues to municipalities and the elimination of health care benefits for low-income Mainers.
Republicans counter that the projected budget gap is less than in previous years because of reforms passed under their leadership. State finance chief Sawin Millett said reforms to the state retirees pension system and welfare put the state in a position to pay for the tax cuts and sustainable spending.
The tax cuts lower the top income tax rate from 8.5 percent to 7.95 percent and eliminates income taxes altogether for about “The tax cuts passed in the last Legislature are compounding the (revenue deficit),” said Rep. Peggy Rotundo, D-Lewiston, the lead Democrat on the Legislature’s budget-writing committee. “These are tax cuts that mostly benefit the wealthy at the expense of health for the elderly, the disabled and the most vulnerable.”
Millett countered that spending reforms will help pay for the tax cuts.
The pension changes, passed in 2011 when Republicans took control, have produced a smaller revenue deficit, according to Millett.
The gap projection is also predicated on the state fulfilling an obligation to fund 55 percent of public education. The state has never met the requirement, which was established in 2004, currently funding about 45 percent of public education. If lawmakers maintain that same level of spending in the next budget, the projected revenue gap is reduced by $253 million.
The state is also supposed to pay municipalities 5.1 percent of all sales and income tax revenue. Previous legislatures have temporarily curtailed that spending to bridge budget shortfalls, but the LePage administration has made the reductions a matter of policy.
In 2011, at Gov. Paul LePage’s request, the Legislature lowered the municipal revenue sharing to 3.5 percent. The governor has indicated that he plans to maintain that spending level.
If he does and the next Legislature goes along with it, the revenue deficit falls by another $95.8 million.
Democrats, however, say reduced revenues for municipalities are ultimately paid for by property tax owners, particularly if towns and cities want to maintain their current level of services and education funding.
Nonetheless, Millett said that another $160.9 million in cuts to MaineCare, the state’s Medicaid program, will also lower the projected deficit.
Still unsettled are the $63.8 million in Medicaid reductions that Republicans passed this year, but that still haven’t received federal approval.
LePage has suggested that more MaineCare reductions are forthcoming. Millett said Tuesday that the revenue analysis showed that while recent reforms to MaineCare were successful in lowering state spending, more were needed to prevent future budget gaps like the ones lawmakers dealt with this year.
Given that position and LePage’s refusal to raise taxes, it’s likely that next year’s budget debates will look a lot like the ones that took place over the last two years.
For now, however, state officials are playing down the revenue analysis by the state budget bureau. The study is released every two years to help the governor in drafting a two-year budget. It’s projections could change when the state’s revenue forecasting committee meets in November.
“It’s important to watch, but I’m reminding everyone that it’s like a poll, a snapshot in time,” Millett said.
Steve Mistler — 791-6345