Ending the Budget Whack-a-Mole Game 
By John McClaughry

The 2009 legislature has gone home - at least for now. It will return on June 2 to attempt to produce an amended FY 2010 budget bill that Gov. Douglas will agree to sign.

If governor and legislature fail to reach an agreement by June 30, the state will face an unprecedented fiscal and legal crisis. That crisis would command the attention of the agencies that decree credit rating agencies, and the investment houses that market Vermont bonds.  Not good.

In terms of actual spending for FY2010, the two sides do not appear to be far apart. In a general fund budget of $1086 million, the gap is only $38 million. The differences lie in the distribution of the spending, and in particular the political need of the Democrats to protect unionized state workers against layoffs. The fact that at least four of the key actors in this exercise aspire to be elected Governor in 2010 makes resolving this disagreement a highly political exercise.

Every player in this drama knows full well that next year's budget, painful as it is, is not even the greatest problem. The greatest problem is the combined FY2011 and FY2012 budgets.

Taken together, without new tax increases, they are currently projected to produce  $207 million in deficit spending - and that assumes a dubious 3.5% revenue growth rate. The relatively easy spending cutbacks have been made.

Finding another $207 million to balance the budgets in the following two years is a truly staggering proposition - especially since federal stimulus funds run out in FY2011.

In the budget sent to the governor, the Senate Democrats cleverly provided for a reduction in the five personal income tax rates. This will be paid for largely by ending the 40% exemption for capital gains realized in excess of $5000 a year. Terminating the exemption and reducing the tax rates was first proposed by Gov. Douglas in 2004, but rejected by the legislature. The Democratic ploy now puts the governor in the position of objecting to his own proposal.

Both legislature and governor are alarmed by the first-ever reduction of the statutorily required transfer of funds from the General Fund to the Education Fund. This $14 million revenue reduction will increase the education property tax burden. Neither side likes this idea, but both will probably agree to it.

The Democrats have taken to styling themselves as the friends of the property taxpayers, and this year even lowered the base state property tax rates by a nominal one cent. At the same time the same Democrats are firmly against any effort to reduce educational spending, for instance by introducing competition and choice into the unionized government-monopoly school system.

Looking past the battle of the budget, there is a thin silver lining. A growing list of leaders in both parties are showing signs of getting the message that good fiscal management requires more than playing budget whack-a-mole when revenues come up short. It requires a concerted strategic plan to reassess what state government does and how it does it, in light of the tax revenues the state's taxpayers can realistically be asked to pay.

Secretary of State Deb Markowitz, a Democrat considering a run for governor, recently agreed that the state needs "rational plans for restructuring state programs to maximize efficiency in getting measurable results from taxpayer dollars."

Democratic Auditor of Accounts Thomas M. Salmon, a CPA often mentioned as a future candidate for governor, goes further. He cites the successful experience of Washington State, that faced a $1.5 billion deficit in 2002. With the support of both parties, Democratic Gov. Gary Locke initiated a ten-week process to shift the focus from spending cuts and tax increases to finding a better and more lasting result for the people of their state.

They identified the tax dollars available, set priorities on what the people most wanted their government to do, paid for those programs, and stopped.

By June 30 the Vermont budget crisis of 2009 will most likely be over. It is also likely that all parties involved in that exhausting process will be more open to a better way of prioritizing what government does, finding more efficient ways of doing it, dropping low priority programs, and living within the revenues produced by the present tax structure.

This will mean stepping on some powerful interest group toes, but it has to be done - or Vermont will simply slide toward eventual insolvency.
 

John McClaughry is President of the Ethan Allen Institute (www.ethanallen.org).