By Daniel B. Winslow
Copyright Commonwealth Magazine
Reprinted with permission
In “Point of Reckoning: Two Decades of State Budget Trends,” MassINC highlighted the structural imbalance of the Massachusetts state budget, made suggestions ranging from tax increases to service cuts to jump start a statewide discussion on budget solutions, and invited others to join the debate. It is possible in Massachusetts to extend a hand to the genuinely needy without reaching deeper into the pockets of hard-working taxpayers. It is possible to solve the state budget imbalance now, if the governor or Legislature resolve to embrace innovation and leadership.
The underground economy cheats the U.S. treasury of about one-third of a trillion dollars of tax revenue yearly, according to the Internal Revenue Service’s National Research Program. This amount does not include taxes that should have been paid on revenue from the illegal sector of the economy, so the actual size of the annual tax gap probably is several times larger. In Massachusetts, according to a Harvard University study, the tax gap was $152 million of state income tax revenue, again not including the illegal sector of the economy. Gov. Deval Patrick’s executive order creating a task force to “combat the underground economy” holds great promise to close the tax gap in Massachusetts. But if the governor focuses only on revenue, he will miss the larger and more immediate solution to the state budget crisis: entitlement reform.
Entitlement programs account for nearly half of all state spending in Massachusetts’ $28 billion annual budget. Most of these programs determine eligibility to receive financial or service assistance based on income, generally using the federal poverty level as the measurement tool. In 2008, the federal poverty level for a family of four in Massachusetts is $21,204. Massachusetts provides discount prescription drugs to persons under age 65 who have gross annual household incomes at or below 188 percent of the federal poverty level; families with income at or below 130 percent of the federal poverty level may qualify for free meals at adult and child daycare centers; and the Low-Income Sewer and Water Assistance Program was established to provide help in paying homeowners’ sewer and water bills for applicants who earn less than 150 percent of the federal poverty level. Indeed, in Massachusetts, programs that rely on reported income for eligibility can qualify a person for free or discount tuition assistance, heating fuel, job training, lawyers, doctors, food, housing, and more.
If “poor” people in the underground economy already underreport their income and cheat on their state tax payments, would a sudden pang of honesty and civic-mindedness make them pass up all that free stuff that Massachusetts hands out (and taxpayers pay for) each year? How can we know that people in the underground economy actually have the ability to pay for services?
In 2003, Gov. Mitt Romney proposed budget reforms to make criminal defendants pay for probation services and court fees that generally had been waived because the defendants had been found to be “indigent” based on their reported incomes. Romney’s proposal, called “retained revenue” because the trial court budget would be based in part on money collected by the courts, was condemned by the Massachusetts Bar Association as “unrealistic” and “dependent upon collecting more monies from less-advantaged individuals.” Court leaders slammed the proposal as “unreasonable and unrealistic.”
With the support of the Legislature, Romney’s retained revenue proposal was enacted into law. The result? In 2006, the trial court’s budget submission letter to the Supreme Judicial Court noted that a “significant portion of the trial court’s funding is derived from retained revenue. In fiscal year 2007, the maximum retained revenue available to the trial court totals $40,000,000. …The trial court, through diligent imposition and collection, has seen general revenue collections increase 44.7 percent from fiscal year 2003 to fiscal year 2006 while probation supervision fee revenue has increased 47 percent over the same time frame.”
The experience with trial court retained revenue proves the disconnect between income on paper and income in fact for many residents of Massachusetts.
How can Gov. Patrick reform entitlement spending in Massachusetts in time for the upcoming fiscal year? The statutes that base program eligibility on the federal poverty level do not specify the manner by which income must be measured. Most agencies in Massachusetts simply look to income tax returns, which are useless measures of worth for persons earning money “under the table.” While Romney needed legislative approval to reform the judicial branch budget, Gov. Patrick can impose an additional measure of eligibility to be used by executive branch agencies for programs and services for the poor simply by executive order. He could authorize the use of lifestyle analysis factors, or LAF.
Lifestyle analysis looks to a person’s spending habits, their material possessions, and lifestyle to determine income necessary to support such habits and lifestyle. Lifestyle analysis most frequently is used by the IRS to discover tax cheats and by divorce lawyers to prove that a spouse has a greater ability to pay alimony and child support than their tax returns might otherwise reveal.
Unlike tax gap studies, lifestyle analysis factors can determine income derived from the illegal sector of the underground economy as well as from unreported income. LAF should appeal both to fiscal conservatives, who want assurances of prudent state spending, and social liberals, who recognize that cheaters deprive the truly poor of much needed assistance.
For state entitlement eligibility, a simple LAF checklist can consider discretionary spending such as whether persons or households seeking free or discounted state services own property, have credit cards, hold bank accounts, or own a new car, multiple cars or a boat. The checklist could also consider whether an individual purchases cable television, Internet service, or premium cell phone service and whether they buy airline tickets, possess illegal drugs, or smoke a pack of cigarettes daily.
Most of these factors could be confirmed by requiring persons applying for aid to sign a release authorizing computerized cross-checks with utility, banking, Registry of Motor Vehicles, and other public records by name and location. Some human service advocates no doubt will object that such releases violate the privacy of people seeking services. But any taxpaying citizens who seek credit or mortgage financing for purchases already sign releases to verify income and credit histories, so releases to verify lifestyle analysis factors merely treat non-taxpayers similar to taxpayers.
In 2004, Romney unsuccessfully proposed lifestyle analysis factors to be applied to persons seeking free lawyers. Despite the success in the previous year of his retained revenue plan, Romney’s proposal that defendants who had discretionary spending must contribute partial payment for their lawyers was called “mean.” Taxpayers might have another word for it: “Fair.”
If only 5 percent of persons receiving state entitlements are found to be understating their ability to pay for services, the savings in the upcoming fiscal year would be close to $1 billion. It’s an idea worth considering and, while the Legislature also could enact this reform, the governor need not wait for the Legislature’s permission to get started.
Daniel B. Winslow formerly served as a District Court judge and chief legal counsel to Gov. Romney. He now works as a lawyer in Boston and can be reached at www.danwinslow.com. email@example.com. The ideas expressed in this article are his own.