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Budget Plan Includes T Reforms, Troubling Tax Reversal

Posted by Brad MacDougall on Jul 8, 2015 11:17:00 AM

A proposed $38.1 billion state budget to be debated today on Beacon Hill contains no broad-based tax increases and makes substantive public-transportation reforms sought by the business community.

State_House_and_One_BeaconEmployers are disappointed, however, that the spending blueprint reverses an agreement reached between business and the Legislature as part of the 2008 “combined reporting" tax policy change. Repeal of the so-called FAS 109 deduction, which had been postponed as the state revenues declined during the recession, could harm capital-intensive national and global companies.

“AIM continues to review the final budget for Fiscal Year 2016, but the budget conference committee has generally maintained the kind of spending discipline that employers support,” said John Regan, Executive Vice President of Government Affairs.

“The proposal lays the groundwork for real changes at the MBTA, changes intended to prevent the widespread service breakdowns we saw this past winter.”

The committee budget increases spending by 3.5 percent, less than the predicted 4.8 percent consensus on revenue growth. Unrestricted local aid would rise by $34 million and local education aid by $111.2 million.

The MBTA reforms provide Governor Charlie Baker with many of the tools he is seeking to overhaul the transit agency. The budget would suspend for three years the onerous privatization vetting of the Pacheco Law, give the secretary of transportation the authority to hire an MBTA general manager, increase the size of the state Transportation Board and create a temporary fiscal and management control board for the T.

The budget contains other good news for employers as well:

  • Requires state executive offices and agencies to develop measurable, outcome-based performance goals and metrics.
  • Forms a special commission to improve state agency information-sharing capabilities to facilitate new business registration.
  • Authorizes the commissioner or revenue to offer an amnesty program for tax penalties in 2016.
  • Provides $2 million to the Workforce Competitiveness Trust Fund, which will train new workers in manufacturing, hospitality and other high-need industries.

Beacon Hill observers say the FAS 109 deduction is being repealed to pay for an increase in the earned income tax credit for low-income workers. The reversal sends a troubling signal to employers that previous agreements on major tax policy may be changed on a whim.

“It certainly does not help the commonwealth’s reputation for consistency on tax matters,” Regan said.

AIM and other business groups will recommend today that the governor veto the FAS 109 repeal.

The 2008 Combined Reporting tax law brought income from companies' operations in other states into a unitary or "combined" Massachusetts return. The FAS 109 deduction was adopted to avoid penalizing companies after the fact for making capital investments. FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences.

Fiscal Year 2016 began on July 1. If the Legislature approves the blueprint today, it goes to Governor Baker for his review. The Governor has 10 days to review the budget and take action - approve or veto the entire budget, veto or reduce specific line items, veto outside sections or submit changes as an amendment to the budget for further consideration by the Legislature.

The Legislature can override the governor’s vetoes with a two-thirds vote in each branch. The House must vote first to override any vetoes before they may be considered by the Senate.  

 

Topics: Massachusetts state budget, Budget, Taxes, Transportation

Budget Proposal Targets 'Unsustainable' Spending Growth

Posted by Brad MacDougall on Mar 4, 2015 3:40:55 PM

What does the proposed state budget filed today by Governor Charlie Baker mean for Massachusetts employers?

Baker2014The bottom line is pretty simple – state spending is growing at twice the rate of tax revenue and that trend is unsustainable. The new administration must therefore make difficult choices to close a projected $1.5 billion budget shortfall for next fiscal year just weeks after addressing an unexpected $750 million gap in the current budget.

It's something that that the CEO of almost every member company of Associated Industries of Massachusetts has had to do at one time or another.

Secretary of Administration and Finance Kristen Lepore said the administration will not raise taxes or fees, nor tap the state’s rainy day fund, meant for fiscal emergencies. At the same time, the allocation of scarce budget resources provides an insight into the new governor’s long-term priorities, from having state employees pay an increased share of their health insurance premiums to increased aid to cities and towns.

“For two consecutive years, our spending growth has outpaced our revenue growth. After over $1 billion in budgetary reductions last year, state spending still grew at 7.8% more than the year before, while tax revenue only grew at 4%. This is simply an unsustainable path for Massachusetts - we must live within our means,” the governor said in his budget message.

“This proposal keeps spending growth around 3%, and allows us to begin to address long-term structural changes and reduce our reliance on one-time revenue. We protect our rainy day fund, because in a largely healthy economy it is clear our issues are based on a need to prioritize spending and make state government more efficient. We also avoid layoffs through an early retirement package that will reduce the size and cost of the state workforce.”

Fiscal discipline and predictability are welcome themes for Massachusetts employers who, according to the Massachusetts Taxpayers Foundation, pay approximately $150 million more in taxes each year than they did a decade ago. CEOs expect the government to conduct its financial affairs in the same responsible manner as the corner grocery store, the young biotechnology company or millions of citizens managing the household budget.

“The 4,500 member companies of Associated Industries of Massachusetts typically pay more attention to the budget as a proxy for the ability of state government to manage its affairs, rather than to individual line items,” said John Regan, Executive Vice President of Government Affairs at AIM.

“The governor’s proposed budget takes constructive steps toward ensuring that the commonwealth lives within its means.”

The projected shortfall for Fiscal Year 2016 is driven by two factors, according to the Taxpayers Foundation.

The first is a significant increase in costs for items and programs considered nondiscretionary — such as Medicaid, the state-federal health program for poor and disabled people, and pensions — just to keep the same level of service next year. The second is the state’s heavy reliance on one-time sources of money — pots of cash that are tough or impossible to tap again — this fiscal year.

Those sources of money total about $1 billion and include tax settlements with corporations, a temporary diversion of tax revenue intended for the state’s rainy day fund, and casino licensing fees.

Here are the key elements of the Baker budget proposal:

  • A $34 million increase, or 3.6%, in unrestricted local aid to $980 million
  • A $105.3 million increase in Chapter 70 funding, which increases funding for all 321 school districts
  • A phase in of the Earned Income Tax Credit to 30% of the federal limit while phasing out the Film Tax Credit
  • Funding local aid by 75% of revenue growth, a 3.6% increase
  • Increasing transportation spending by 20%, including $187 million, or a 53% increase, in direct aid to the MBTA
  • An early retirement incentive program to responsibly reduce the state’s administrative spending 

Topics: Budget, Taxes, Charlie Baker

Some Good News about Medicare

Posted by Andre Mayer on Aug 28, 2014 4:51:28 PM

An otherwise mixed report yesterday from the Congressional Budget Office (CBO) offered some good news about what was supposed to be the most intractable aspect of federal deficit spending. For the sixth consecutive year, the CBO lowered its projections for the cost of Medicare, because of slower growth (or even outright decline) in expenditure per participant. Since 2010, when the Affordable Care Act was enacted, estimates for the decade through 2020 are down by some $700 billion.

In recent years three distinct federal deficits have raised serious concern about our nation’s future. The first, the budget deficit, is manageable – the last four Clinton budgets, before the Bush tax cuts, the War on Terror, and the Great Recession, were balanced. The second, the projected Social Security deficit, is hardly comparable to the pension crises faced by some European nations; pillowed by its trust fund, our system can be stabilized by further tweaks similar to those already made.

Medicare appeared to be the greatest threat because adverse demographic trends (the aging of the Baby Boom generation) were coupled with a seemingly inexorable rise in health care costs, at rates far above any calculation of cost of living. And the most widely touted remedy, raising the age of eligibility, would cut government spending by shifting the burden to employers. New hope on Medicare costs should help us face up to the long-term fiscal challenges that our country confronts.

Topics: Affordable care Act, Budget

Fiscal Watchdog - Mission Not Accomplished on Budget Crisis

Posted by Christopher Geehern on Mar 14, 2014 11:59:00 AM

 The recent bipartisan budget accord in Washington merely postpones the difficult decisions needed to place the United States on a sustainable fiscal footing, the Executive Director of the Concord Coalition said this morning.

ConcordRobert Bixby urged 200 people at the AIM Executive Forum to demand that politicians address the ticking budgetary time bomb that sits under the nation’s financial future. It is a time bomb, he said, driven largely by automatic spending increases embedded in the budget by decades of short-term policy decisions.

Those spending increases, combined with expected increases in interest rates on the federal debt, Bixby said, threaten to overwhelm the ability of government to provide the day-to-day services upon which citizens rely.

“It’s running on autopilot and anything you do to address it is politically toxic,” said Bixby, who has headed the Concord Coalition for the past 15 years.

Bixby said that the federal government has historically spent at a level equal to 20 percent of gross domestic product while generating tax revenue at 17 percent of GDP. That level of deficit is at least sustainable with normal economic growth, but Bixby said that the gap between spending and revenue is projected to increase to as much as 4.5 percent of GDP during the next 15 years.

The challenge for policymakers, according to Bixby, is that 60 percent of the federal budget is now consumed by required, automatic expenditures such as social security, Medicare and Medicaid. The cost of those programs is projected to grow faster than the economy. Interest on the debt, meanwhile, is projected to rise from just over $200 billion this year to more than $800 billion in 2024.

“The laws enacted years ago are now driving the federal deficit,” Bixby said.

The bottom line, he continued, is that Congress will not solve the fiscal crisis simply by cutting defense or non-defense discretionary spending. He believes that all issues must be open to negotiation, including a broadening of the tax base coupled with an examination of popular tax deductions for items such as mortgage interest and employer contributions to health insurance.

The budget accord negotiated by Republican Representative Paul Ryan and Washington Senator Patty Murray essentially placed any serious debate about the budget gap on the back burner until after the presidential election of 2016.

“They set out to do a deal that did not do much, and they succeeded,” Bixby quipped.

Bixby served as a member of the Bipartisan Policy Center’s Debt Reduction Task Force (the Domenici-Rivlin commission), which produced a model plan for comprehensive fiscal reform. He frequently speaks around the country on the nation’s fiscal challenges and possible bipartisan solutions, including greater government efficiency, tax reform and improvements in the entitlement program.

Topics: Budget, AIM Executive Forum, Fiscal Policy

Senate Budget Omits Dangerous Contingent Contract Provision

Posted by Brad MacDougall on May 24, 2013 4:23:00 PM

Sometimes a budget is significant more for what it omits than what it includes.

Senate budgetThat’s the case with the $34 billion spending blueprint approved Thursday by the Massachusetts Senate, which wisely chose to pass its budget without a proposal to allow the Department of Revenue to hire outside tax auditors and pay them a portion of what they recover.

The budget proposal also replaces two existing health care assessments with a new Employer Responsibility levy and does way with the Health Insurance Responsibility Disclosure (HIRD) form as Massachusetts prepares to replace its 2006 health care reform with the federal Affordable Care Act.

A conference committee will now hammer out differences between Senate and House versions of the budget for the Fiscal Year that begins July 1.

Senators adopted an amendment from Senator Michael Rodrigues, D-Westport, that struck the so-called “contingent contracts” provision that had been added to the budget in an outside section. Rodrigues noted on the Senate floor that the National Conference of State Legislators, the Securities and Exchange Commission and and the American Institute of Certified Public Accountants all reject the use of contingent contracts.  

The AIM Taxation Committee had urged the Senate to reject the provision.  

“The proposal was bad public policy,” said John Regan, Executive Vice President of Government Affairs at AIM.

“An auditor should have no financial stake in the outcome of an audit. The conflict of interest is readily apparent and should trouble policy makers concerned about tax fairness and Massachusetts reputation for its tax climate.”

The Senate budget represents a 4.2 percent spending increase over the current fiscal year. The document anticipates using between $500 million and $800 million in new taxes for transportation currently pending before a separate Beacon Hill conference Committee.

AIM has maintained throughout the debate that lawmakers should fund transportation improvements with transportation-specific sources of revenue rather than business taxes such as those proposed for computer software. The association nevertheless believes that the legislation passed by the House and Senate takes positive steps toward fixing the transportation system without crippling increases to the income tax or other broad-based levies.

The Senate budget includes a $50 per employee medical assistance assessment on employers that was filed by Governor Patrick and included in the House budget.  The new fee replaces the $67.20 Medical Security Trust Fund assessment.  The Senate did not support an AIM amendment to require legislative approval for any increases to the assessment and gives the authority to increase the fee up to 5 percent per year to a rate review board.

As part of the package for this new assessment, the Senate budget eliminates the fair-share contribution and the requirement that employee Health Insurance Responsibility Disclosure forms be collected and retained by employers. 

Senators followed suit with the House in voting to postpone implementation of the so-called FAS 109 deduction instead of eliminating it as the administration proposed. FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences. The deduction was adopted as part of the 2008 debate over adoption of combined tax reporting in Massachusetts.

Topics: Massachusetts state budget, Budget, Massachusetts senate, Issues, Taxes

$34 Billion House Budget Contains Key Provisions for Employers

Posted by Brad MacDougall on Apr 25, 2013 1:02:00 PM

The Massachusetts House of Representatives last night passed a $34 billion Fiscal Year 2014 budget that increases spending by 4 percent, avoids increases to the income tax and ensures the privacy of companies that exercise their statutory right to use tax benefits.

BudgetThe blueprint includes between $500 million and $800 million that Beacon Hill lawmakers have already  passed to improve roads, bridges and mass transit. The transportation funding package includes $110 million from increasing the gasoline tax 3 cents per gallon and then indexing the levy to inflation; $161 million from a tax on computer services; $110 million from tobacco taxes; and $83 million from changes to utility classification and sales sourcing.

The House budget also includes several key provisions for employers, including one that would keep private the financial information of companies that use the Investment Tax Credit and the Research and Development Tax Credit. The bill removes two employer health-care contributions - the Fair Share Assessment and Medical Security assessment – while requiring that any increases to a new $50-per-worker Employer Responsibility Contribution for health care be approved by the Legislature.

House members approved the budget by a 127 to 29 margin.

“The House budget takes a prudent approach by reducing dependence on one-time revenues and not instituting dramatic tax policy changes. Such ongoing prudence has been an important element of Massachusetts’ positive standing with bonding rating agencies,” said John Regan, Executive Vice President of Government Affairs at Associated Industries of Massachusetts.

“Speaker Robert DeLeo and Ways and Means Committee Chair Brian Dempsey clearly understand that we remain in a time of slow job growth.  This budget and future legislative proposals must maintain a long-term approach that sustains vital government services while creating a predictable environment for investment and job creation.”

The budget now goes to the state Senate for debate in May. A conference committee will then attempt to craft a final bill in time for the start of the new fiscal year on July 1.

The financial privacy provision, contained in an amendment filed by Dempsey, removes the Investment Tax Credit and R&D Tax Credit from new requirements contained elsewhere in the budget that companies receiving credits file detailed financial information that would then be posted to the Web.  AIM maintained that the ITC and R&D credit should be exempted because both are granted as a matter of statutory right, while other tax benefits are individual credits granted through a public application process through a state agency.

AIM has supported moves to eliminate the Fair Share Assessment – created under the 2006 state health reform law – and Medical Security assessment because both will become unnecessary under federal health reform.  The original proposal to replace those two assessments with the Employer Responsibility charge generated concern because it gave a board of three unelected people broad authority to raise the assessment by up to 5 percent annually. The House budget would require that panel to submit proposed increases to Beacon Hill.

Fair Share mandates that employers with 11 or more full-time equivalent employees make a “fair and reasonable” contribution toward the health-care costs of employees or pay an assessment of up to $295 per employee per year. The Medical Security Program requires companies to contribute money to provide low-income unemployed people with health insurance.

An AIM-supported amendment that would have ended a three-year delay in implementation of the so-called FAS 109 deduction was withdrawn, though the House declined to go along with the administration's proposal to eliminate the deduction altogether. FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences. The deduction was adopted as part of the 2008 debate over adoption of combined tax reporting in Massachusetts.

Employers also remain concerned about a section of the budget that impacts the tax audit procedures for entities such as partnerships and limited liability companies (LLCs).  The section would allow the Department of Revenue (DOR) to expand audits beyond the legal entity being audited and limit the taxpayer’s appeal options, potentially forcing companies into expensive litigation of issues at the Appellate Tax Board that should be resolved at a more cost-effective administrative level.

Dempsey told State House New Service that the bill addresses many of the priorities Gov. Deval Patrick highlighted in his budget plan in “a balanced a fiscally responsible way.”

Topics: Budget, Issues, Massachusetts House of Representatives, Taxes

AIM Members See Limited Consequences from Sequester

Posted by Andre Mayer on Apr 12, 2013 11:06:00 AM

What do AIM members expect from the sequester?

SequestrationThe mandated reductions in federal spending, divided between defense and non-defense accounts, which took effect in March will of course be felt directly by some government contractors. Other employers may suffer some consequences as a result of reductions in certain services, such a federally-funded workforce development programs.

Many economists have been concerned about macroeconomic effects – a slowdown in overall growth because of reduced federal spending – although the prospective increase in tax rates, largely averted, was considered the more dangerous part of the 'fiscal cliff.' And a substantial body of opinion holds that the cuts won't hurt (or not much) in the short run, and will be beneficial in the longer term.

Member responses to a special question on AIM's March Business Confidence Survey indicate that the direct impact of the spending cuts is limited – only 3 percent of respondents cited direct effects (which they are already feeling).  A plurality of respondents, 57 percent expected indirect negative effects; and 40 percent did not foresee negative effects from sequestration.

Responses from manufacturers and from employers in other sectors were virtually identical; but there were clear differences by size. All of the companies reporting direct impact were in the medium size range (the respondents did not happen to include large defense contractors or healthcare/research institutions).  The small and medium-size groups otherwise responded similarly, with slightly more expecting negative effects than discounting them. Among larger employers, by contrast, more than three out of four (76 percent) expected negative indirect effects from the spending cuts.

These results are generally in line with past surveys showing small employers most concerned about government spending while larger ones are more likely to value government programs.

On this evidence, direct benefits (contracts) do not appear to be a major factor; but it is not clear to what extent the divergence is an effect of, for example, different tax situations, ability to access programs, or simply varying political and economic views. The balance of responses does hint at why fiscal issues, at least on the spending side, may be challenging for business organizations.

Topics: Budget, Issues, U.S. Congress

Interplay of State, Federal Budget Issues Places Premium on Reform

Posted by Andre Mayer on Mar 28, 2013 1:23:00 PM

What does the ongoing fiscal crisis in Washington have to do with the debate over taxation and spending on Beacon Hill? More than we've been hearing. And that's a problem.

SequestrationCongress's acquiescence in sequestration represents an inflection point in federal fiscal policy. Spending is getting tighter. Someday there will be a new, real federal budget in place of the series of continuing resolutions that basically roll forward existing accounts, and that budget is likely to make significant changes not just in levels of expenditure, but also in spending patterns.

Transportation and education, the twin foci of the governor's plan on the program side, are both areas where the future federal role is very much in doubt, and there are major implications of a somewhat different kind for health care, the largest component of the state budget.

Some observers believe that the federal government is essentially getting out of the land surface transportation business (as opposed to air and sea).  Federal highway funds come primarily from a gas tax that has not risen in 20 years, and the military considerations that justified the creation of the interstate highway system have dissipated. Railroads and mass transit are regional issues that do not command majority support in Congress. 

Education likewise faces budget cuts, immediately and in the longer run. Dollars from Washington play a major part in student aid and research support in higher education (and Massachusetts institutions have done well in capturing these funds). They provide the backbone of public funding for early education, and make a lesser but still significant contribution to K12 public education.  The workforce development system is largely structured around federal funding streams.

Health care is in a different situation, but is also in play. The federal role was already immense, in dollars and through the basic framework created through Medicaid, ERISA and reams of detailed regulations. Now with the Affordable Care Act, as well as burgeoning Medicare population, it becomes even greater. Here too there are strong pressures to control spending; and through its role as by far the largest purchaser of services, the federal government has the power to substantially reshape the health care system through market power.

Massachusetts can survive all this – in only a few fields are we clearly getting "more than our share" back from the feds – but different federal roles will require that the commonwealth rethink its own structures and priorities, which means hard and controversial decisions. Ultimately state spending is may well increase in the areas the governor cites; but we do not know now what the funding needs will be, or what the receiving programs will look like if the federal funding streams around which they are currently structured disappear.

In this situation, AIM's insistence on "reform first" carries an extra level of meaning.

Topics: Sequestration, Budget, Issues

Dear President Obama: Seek Consensus on Fiscal Crisis

Posted by Rick Lord on Nov 6, 2012 11:55:00 PM

Dear President Obama,

PresidentObamaSmallCongratulations on winning re-election.

Associated Industries of Massachusetts and its thousands of member employers are ready to roll up our sleeves and work with you and members of Congress to accomplish the most important task facing our nation – solving the debt crisis and avoiding the automatic budget cuts and tax increases due to take effect January 2 if the government cannot come up with a long-term deficit reduction plan.

Employers pledge to support efforts by you and the Congress to demonstrate that government can move beyond petty and dyspeptic partisanship to solve complex problems that threaten the very foundations of economic stability and opportunity. That means exerting the leadership necessary to forge consensus among a divided nation, a divided government and a sometimes divided vision of the American future.

The subtext of the election in virtually every exit poll is that Americans want their leaders to work together in a manner that generates confidence in a world and an economy rife with uncertainty.  The pervasive scale of that uncertainty has already depressed business spending for much of 2012 - fixed investment fell 1.3 percent during the third quarter, and more than 40 percent of companies surveyed by Morgan Stanley this summer cited the fiscal cliff as a major reason for spending restraint.

The unmistakable message – negotiate, legislate, educate and articulate.

Under the Budget Control Act of 2011, Congress must act by January 2, 2013 to reduce the federal deficit, or automatic budget cuts (“sequestration”) will impose immediate, drastic reductions on both defense and non-defense spending, amounting to $1.2 trillion over 10 years.  The first-year cuts are $54.7 billion on each side of the ledger - a 10 percent reduction in non-exempt defense spending and an average 8 percent reduction in most other discretionary non-defense accounts.

Sequestration, put in place in a failed attempt to force resolution of budget issues last year, is just part of the “fiscal cliff” before us in 2013 – we also face the expiration of extensive tax reductions initially enacted under President Bush, and of the employee payroll tax cuts included in your stimulus package.  All of these will take effect automatically if Congress does not act.

The budget cuts and tax increases will go a long way towards eliminating the budget deficit.  But they will also bring an end to the already weak economic expansion we have been experiencing. Economic forecasts suggest that sequestration alone would push the nation into recession and raise unemployment by two percentage points.

Sequestration would also represent a catastrophic failure of the political process. Former U.S. Comptroller General David Walker maintains that the federal debt as a percentage of Gross Domestic Product is worse in the United States than in any country in Europe except Greece. Walker argues that the nation needs at least $5 trillion in deficit reduction during the next decade and that federal debt as a percentage of GDP must fall from 103 percent to 60 percent. 

Failure to reach agreement on reducing the federal deficit will cost Massachusetts thousands of high-skill jobs in key industries such as health, education, research and defense.

AIM’s perspective on the federal fiscal crisis is a product of its non-partisan position and of the breadth of its membership, which includes employers in every sector of the economy. The key components of our view may be summarized as follows:

  • The ongoing political deadlock over federal finances is having a serious impact on business confidence, evident in AIM’s own Business Confidence Index and in national studies. Inaction in Washington, and the impending crisis created in a failed attempt to force action, is a principal source of the uncertainty that is depressing job creation and investment in the private-sector economy.
  • Everything needs to be on the table in the search for a solution – budget controls, Social Security reforms, spending reductions and comprehensive tax reform that would generate more revenue.
  • To frame the choices before us as basically between defense spending on the one hand and expenditures on domestic programs on the other is to continue to evade decisions that are difficult, complex, and ultimately unavoidable.
  • Attaining long-term federal fiscal balance will require discipline with regard to spending and revenues, and economic growth that will make manageable for our children and grandchildren the massive public debt accumulated over the past generation.
  • A primary component of any long-term program to achieve fiscal balance must be control of health care costs, which push up the price tag of all federal programs and pose the principal threat to the viability of entitlement programs (notably Medicare). The fact that all businesses, as well as state and local governments, bear similar burdens makes this the number-one issue for AIM and its members.

The member employers of AIM respectfully urge you and members of Congress to work towards timely action on this most pressing matter. We do so in full understanding that the issues are complex, the decisions hard, and any solution to some degree necessarily painful.

In your own words, Mr. President, it’s time to move Forward.

Best wishes for success.

Topics: Budget, Issues, President Barack Obama

Congress, President Must Act to Avoid 'Fiscal Cliff'

Posted by Rick Lord on Aug 8, 2012 11:10:00 AM

If you’re wondering what the looming “fiscal cliff” will mean to Massachusetts, think the ending of the 1991 Ridley Scott movie Thelma and Louise - with Congress taking Massachusetts along for the ride it as it drives into the economic abyss.

Fiscal CliffFailure by Congress and President Barack Obama to reach agreement on reducing the federal deficit will cost Massachusetts thousands of high-skill jobs in key industries such as health, education, research and defense. Associated Industries of Massachusetts and its thousands of member employers wish to tell federal policymakers in the strongest possible terms that such a scenario cannot be allowed to happen.

Under the Budget Control Act of 2011, Congress must act by January 2, 2013 to reduce the federal deficit, or automatic budget cuts (“sequestration”) will impose immediate, drastic reductions on both defense and non-defense spending, amounting to $1.2 trillion over 10 years.  The first-year cuts are $54.7 billion on each side of the ledger - a 10 percent reduction on defense spending and an average 8 percent reduction on most other discretionary accounts, including Medicare and Medicaid reimbursements.  

Sequestration, put in place in a failed attempt to force resolution of budget issues last year, is just part of the “fiscal cliff” before us in 2013 – we also face the expiration of extensive tax reductions initially enacted under President Bush, and of the employee payroll tax cuts included in President Obama’s stimulus package.  All of these will take effect automatically if Congress does not act.

The budget cuts and tax increases will go a long way towards eliminating the budget deficit.  But they will also bring an end to the already weak economic expansion we have been experiencing. Economic forecasts suggest that sequestration alone would push the nation into recession and raise unemployment by two percentage points. 

Massachusetts sits about in the middle among the states in terms of the projected impact of sequestration – but important sectors of our economy would suffer extreme disruption from the federal budget cuts, on both the defense and the non-defense sides.

Our state ranks fifth in Defense/Homeland Security contracts, with almost $14 billion in contracts, 2,500 contractors, and 130,000 jobs.  Our largest employment sector is health and education - we rank third in National Science Foundation funding and second in National Institutes of Health grants. The hardest-hit employment sector nationally would be research and development, which is the core of our economy on both sides of the defense/non-defense line.

AIM’s perspective on the federal fiscal crisis is a product of its non-partisan position and of the breadth of its membership, which includes employers in every sector of the economy. The key components of our view may be summarized as follows:

  • The ongoing political deadlock over federal finances is itself having a serious impact on business confidence, evident in AIM’s own Business Confidence Index and in national studies. Inaction in Washington, and the impending crisis created in a failed attempt to force action, is a principal source of the uncertainty that is depressing job creation and investment in the private-sector economy.
  • Whatever resolution is eventually achieved will have enormous implications for the business climate across all industries nationally, and perhaps especially for economic activity in Massachusetts.
  • To frame the choices before us as basically between defense spending on the one hand and expenditures on domestic programs on the other is to continue to evade decisions that are difficult, complex, and ultimately unavoidable.
  • Attaining long-term federal fiscal balance will require discipline with regard to spending and revenues, and economic growth that will make manageable for our children and grandchildren the massive public debt accumulated over the past generation.
  • A primary component of any long-term program to achieve fiscal balance must be control of health care costs, which push up the pricetag of all federal programs and pose the principal threat to the viability of entitlement programs (notably Medicare). The fact that all businesses, as well as state and local governments, bear similar burdens makes this the number-one issue for AIM and its members.
  • Our state should be treated fairly in this process, bearing in mind that we depend heavily on both defense and non-defense expenditures – and that (unlike many states) we nevertheless pay significantly more into the federal treasury than we receive back in federal spending.

Accordingly, we call upon national political leaders of both parties, including members of the Massachusetts Congressional delegation, to get to work towards timely action on this most pressing matter. We do so in full understanding that the issues are complex, the decisions hard, and any solution to some degree necessarily painful.

But Massachusetts does not want to be in the passenger seat as the car accelerates over the cliff.
 

Topics: Budget, Issues, U.S. Congress

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