Understanding the Budget Debate
Confused about all the numbers and claims being tossed around in the Massachusetts budget debate? Here is some basic information that might help. But don’t expect it all to become clear immediately. It’s a complicated topic and political rhetoric often creates confusion. Keep paying attention, and gradually the significant points will become clear.
How big is the budget?
The 2003Massachusetts budget totals approximately $22 billion. It relies on a tax estimate of slightly more than $15 billion.
Where does the money come from?
In 2002, tax revenues came from the following sources:
56.0% Individual Income
22.1% General Sales and Use
8.1% Corporate Income
4.0% Motor Fuels
7.0% All Other
State taxes only account for about 70% of the budget. The rest comes from Federal reimbursements, interest on deposits, and other sources.
What is the size of the budget gap?
There are two numbers that you will hear discussed. One is the gap for the fiscal 2003 (FY02) budget. In January, this shortfall was estimated to be about $500M. Governor Romney has identified about $350M in cuts that he wants to make to close this gap. At last report, the Legislature must make an additional $150M in cuts to avoid a deficit. The other gap is the shortfall in the FY04 budget. In February, this was estimated to be as much as $3.1B..
Why is there disagreement over the size of the shortfall?
The shortfall depends upon future revenues that the state will receive from state taxes and from federal sources. There is disagreement over how quickly the economy will recover from its current slump. There is also uncertainty over how fully stock market losses will be used by taxpayers to reduce their tax liabilities. Hence, there is disagreement over the revenues that will be received over the coming year.
Why do I hear that there is a shortfall in some programs that are getting more money than they got last year?
If there is inflation or other increases in program costs, then a program may need more money each year to maintain its level of services. Thus, it is helpful to ask what level of funding is required to provide the same services. Anything less than this is effectively a cut to the program.
Why did the Legislature have to vote to give Governor Romney power to balance the FY03 budget?
Governor Romney wanted to be able to cut local aid, which he could not do without the Legislature ceding him the authority. Remember that in Massachusetts a Republican Governor has little ability to influence tax policy or spending. Democrats hold 85% of the seats in the Legislature and thus their policy decisions determine the size of the cuts that must be made. Vetoes of the Republican governor are easily and routinely overturned by the Democratic Party leadership. The Governor’s budget is submitted in February, but it is thoroughly revised before being voted upon by the Massachusetts Legislature.
adjusted gross income (AGI) – An income calculated for income tax purposes which equals total income minus various exclusions, exemptions, and adjustments.
capital gains – Income received from the sale of capital property such as stocks, bonds, or real estate.
capital outlay An expenditure that purchases an asset of comparable value to the cash expended. For example, an expenditure to purchase a new office building would be a capital outlay. The cost of electricity for the building would not be a capital outlay.
Chapter 70 aid – Chapter 70 refers to the school funding formula by which state aid for education is distributed to towns through the “Cherry Sheet”.
credit – An amount that can be deducted from the tax owed.
deduction – A amount that is substracted from the income upon which taxes must be paid.
depreciation – A tax deduction that is allowed to represent the gradual exhaustion or obsolescence of tangible property used in the production of income. Depreciation deductions are primarily of use to businesses. Their effect is enhanced by allowing accelerated depreciation which assumes a greater rate of depreciation than actually occurs.
DOR – The Massachusetts Department of Revenue
excise tax – A per-unit tax that is applied to the sale or possession of particular services or commodities.
fiscal year – The fiscal year for Massachusetts begins on July 1 of each year. The fiscal year 2004 begins on July 1, 2003.
Governor’s budget – In February of each year the Governor submits his proposal for the state budget. When a Republican governor submits a budget, the Legislature, which is 85% Democratic, usually pronounces it to be highly unsatisfactory and then proceeds to rewrite it.
operating budget – The plan for exenditures for personnel, supplies, and other expenses associated with a particular year. This is contrasted with the capital outlay budget.
passive income – Income from an economic activity in which the recipient of the income does not actively participate, such as limited partnerships or rental income.
personal exemption – Amount of net income of each taxpayer that is exempt from taxation. Also called an “allowance”.
progressive tax rates – Tax rates that are structured so that higher income individuals pay a higher portion of their income than lower income individuals.
regressive tax rates – Tax rates that are structured so that lower income individuals pay a higher portion of their income than higher income individuals.
reserve fund – Funds set aside to meet unforeseen or unexpected expenses.
tax base – The incomes, individuals, or activities to which tax rates are applied.
taxable income – Amount to which the tax rates are applied in computing tax liability, after subtracting personal exemptions from net income.
tax expenditures – Provisions in the tax code that give certain taxpayers specific tax breaks. They are “expenditures” in the sense that they use the tax system to return revenues to individuals or businesses in the same way that a direct expenditure or benefit might return revenues.
tax incidence – Tax incidence refers to distribution of the tax burden across a population.