The Legislature’s Budget: Who Will Pay?

by John McClaughry

John McClaughry

When the very liberal 2011 legislature assembled in January to hear the call to action from a new and very liberal Governor, most Vermonters had every right to expect the worst. Now, four months later, the legislature concluded a week ahead of schedule, without (so far) doing any lasting damage.

In January the state faced a FY2012 general fund shortfall of $176 million. But to its credit, the legislature managed to produce a theoretically balanced budget, that even allocated three million dollars to bring the General Fund stabilization reserve up to the statutory minimum.

It did so first by surprisingly finding unspent funds from the previous fiscal year, in the amount of $59 million. Another $38 million came from imposing a 2.5% reduction in human services payments to various “designated agencies”, albeit without instituting any structural reforms.

The budgeteers filched $4 million from the always vulnerable Transportation Fund. It shortchanged the mandated transfer to the Education Fund by $23 million. It’s worth noting that a similar proposal from Gov. Douglas in 2006 drew the wrath of Democratic leaders, who were eager to pose as the champions of beleaguered property taxpayers. But that was then.

These provisions, along with several minor items, brought the shortfall down to $33 million. The legislature booked $9 million more in expected revenue increases from the current cigarette tax and the MediScam provider tax on hospitals. At this point the budgeteers had to turn to new taxes. Since Gov. Shumlin had repeatedly declared that “there is no more tax capacity left in Vermont” and had promised no increases in “broad based taxes”, finding the remaining $24 million posed a political problem.

The Governor and legislature solved this problem by jacking up the MediScam tax to new levels, taxing health claims paid by insurers, adding 38 cents per pack to the cigarette tax, and tweaking some minor taxes. The $24 million thus expected will, if it turns up, give the state a balanced General Fund budget.

So what has happened here?

First, the 38 cents a pack cigarette tax hike (to $2.62 a pack) will have important border effects. That’s why Gov. Shumlin surprised legislators by coming out against it (at $3.24 a pack). To bank the expected revenues, the state will have to have guessed right about how many smokers quit, and how many more buy their smokes elsewhere (especially in New Hampshire).

Second, shorting the Act 60-required transfer to the Education Fund penalized local property taxpayers collectively for failing to restrain school spending. That restraint was mandated by last year’s largely failed “Challenge for Change” program. Since local school spending is in the hands of the voters, the restraint became a suggestion, not a requirement.

Now, with $23 million less in the Education Fund to meet 2012 school budget expenses, property taxpayers will get the bill for the shortfall. One could argue that they are being forced to subsidize Medicaid, the largest component of General Fund spending.

Third, in addition to shorting the Education Fund, the legislature was forced for the first time to increase the base education property tax rates that provide two thirds of the money in that fund. That will show up in everyone’s education property tax bills.

Fourth, the hospital provider tax and the fivefold increase in the tax rate on health claims creates new costs for hospitals, insurance companies, and self-insured companies. Those higher costs necessarily produce higher insurance premiums. As those premiums are raised, the cry goes up from the Left that “health insurance costs are out of control”; we must move even more quickly to put an end to health insurance and engulf all Vermonters in the single payer health plan already lumbering down the legislative track.

What these folks won’t face up to is that the state’s ever deepening Medicaid underpayments to hospitals, nursing homes, doctors and dentists, plus the state’s ever increasing provider and health claims taxes, are the root cause of those soaring premiums.

Once Green Mountain Care drives out private health insurance, the budgeteers will no longer be able to shift government health care costs onto private health insurance premiums. Then what? Hello, taxpayers!

John McClaughry is vice president of the Ethan Allen Institute.