A Closer Look at the Elements of Spending and Revenue

State Spending Trends: FY 1998 – FY 2008

Figure 5 shows how different categories of spending have changed over the years. The following section discusses these spending changes, by programmatic area.

Education

Education spending includes pre-school, K-12 and public higher education, and comprises the second-largest category of state expenditures. Education spending increased as a percentage of personal income between FY 1998 and FY 2002 as the state made funding the education reform initiatives of the 1990’s a priority. Spending declined during the fiscal crisis in the early part of this decade, with state public higher education being particularly hard hit. While education spending has increased since FY 2005, it has not yet returned to the spending levels of FY 2002 as a percent of personal income. Recent spending increases in education are largely the result of an increased focus on early childhood education and the implementation of changes to the state’s K-12 school funding formula.

Environment

Environment spending includes the Department of Environmental Protection, the Department of Conservation and Recreation and other programs within the state’s Executive Office of Environmental Affairs; it is the smallest category of state spending in the figure above. Between FY 1998 and FY 2008, environmental spending in the state has remained steady as a percentage of personal income at around 0.1 percent.

Economic Development

Economic development includes labor, workforce, housing and economic development programs. Between FY 1998 and FY 2008 spending in this category, measured as a share of personal income, remained relatively constant at around 0.4 percent. However, in real dollars spending has increased slightly over this period. Like other categories of spending, economic development programs experienced decreased funding during FY 2003-2004. Since that time, funding has returned to prior levels.

Health Care

Health Care includes all spending for MassHealth (Medicaid), spending associated with other health care programs including the costs of the 2006 health reform law, public health spending, spending on mental health services, and spending on state employee health insurance.

Between FY 1998 and FY 2008, spending on health care grew from 2.4 percent of total personal income to 3.2 percent. This number, however, overstates the net state spending on health care, because close to half of MassHealth spending – which represents more than two-thirds of total health care spending – is paid for by the federal government. If we were to subtract the federal share of health care spending from these totals, net state spending on health care grew from 1.6 percent of total personal income to 2.1 percent of total personal income. This increase in net state spending on health care, while not as large as the increase in total state spending on health care, is still notable and is due to several factors. Although there were significant cuts to the MassHealth program and other health care programs during the middle part of the decade analyzed, in FY 2006 the Commonwealth began another major health care expansion with the passage of Chapter 58, the state health reform law. MassHealth membership once again has topped 1 million members, and the Commonwealth also provides subsidized health insurance to more than 160,000 persons in the new Commonwealth Care plan.

At the same time, health care cost inflation has outstripped general inflation, increasing the real cost to the state of maintaining health care services. Not only has health care cost inflation significantly affected the cost of the state Medicaid program, it has also affected the cost to the state of providing health insurance to state employees.

Human Services

Human services includes funding for the state’s child welfare programs, social services, cash assistance, veterans services and services for other vulnerable populations.¹² Between FY 1998 and FY 2008, human services spending has decreased substantially as a percentage of personal income, from 1.2 percent to 0.9 percent. This reduction is largely due to a decline in spending on direct cash assistance programs that was not matched by a reinvestment of those funds in other human services programs, such as child care. Human services spending has increased slightly in real dollars over this same period.

Law and Public Safety

Law and public safety includes the state’s court, prison and law enforcement systems. Between FY 1998 and FY 2008, spending in this category has remained relatively constant as a share of personal income at approximately 0.7 percent. However, spending has increased over this time.

Local Aid

Local aid includes the state’s lottery aid, additional assistance and reimbursements to cities and towns for state owned land. Between FY 1998 and FY 2008, aid to cities and towns has decreased slightly as a percentage of personal income, from 0.5 percent to 0.4 percent. This reduction reflects decreases in additional assistance over that time. Since FY 2003-2004, local aid has increased, though not to its prior levels, as the state has uncapped lottery aid to cities and towns.

Other

Other includes the state’s elected offices, pension system, salary reserves and other miscellaneous spending. Spending in these other categories decreased substantially as a percentage of personal income between FY 1998 and FY 2008. This decrease is the result of level funding across many of these categories as total personal income increased.

State Revenue Trends: FY 1998 – FY 2008

Taxes

Figure 6 shows the composition of state tax revenue between FY 1998 and FY 2008. During this time, revenues as a a share of personal income fell $3.34 billion. The largest part of this is the $3.26 billion decline in tax revenues over that time. In order to understand how the state’s revenue picture has changed from 1998 to 2008, it is important to look at how the major sources of tax revenue have changed over that time.

Taxes

Figure 6 shows the composition of state tax revenue between FY 1998 and FY 2008. During this time, revenues as a a share of personal income fell $3.34 billion. The largest part of this is the $3.26 billion decline in tax revenues over that time. In order to understand how the state’s revenue picture has changed from 1998 to 2008, it is important to look at how the major sources of tax revenue have changed over that time.

• Income Tax – the income tax is the single-largest source of state revenue.  Over the period being examined, income tax revenues as a percentage of personal income have declined due to a series of tax cuts.  As discussed above, the personal income tax rate of 5.95 percent, in effect for calendar years 1998 and 1999, was reduced over three years to its current rate of 5.3 percent by 2002.  These tax cuts, along with cuts to the tax rate on interest and dividend income and increases in the personal exemption, cost $2.56 billion. This amount was partially offset by the repeal of an earlier capital gains tax cut, and other measures. All told, income tax collections, as a percentage of personal income, dropped by $1.4 billion, or 10 percent between FY 1998 and FY 2008.
• Sales tax – the sales tax is the second-largest source of state tax revenue.  While the sales tax rate remained constant at 5 percent over the period between FY 1998 and FY 2008, the percent of personal income devoted to the sales tax has declined over that time due to Internet sales and the increasing share of spending devoted to services.¹³ Calculated as a share of personal income, sales tax revenues declined more than 20 percent between FY 1998 and FY 2008.  The drop in the sales tax resulted in more than $1 billion in lost revenue in FY 2008.
• Corporate taxes – corporate taxes declined between FY 1998 and FY 2008 by $332 million, or more than 18 percent as a share of personal income.  Recent closure of corporate tax loopholes should slow this erosion in the future, but like other elements of state revenue, corporate taxes experienced a large decline over the previous 10 years.
• Other taxes – other taxes include cigarette, gasoline and alcohol taxes, as well taxes such as those on banks and insurance companies.  While cigarette tax revenue increased substantially over this period, revenues associated with other taxes remained relatively flat in nominal dollars, meaning that when seen as a share of personal income, other tax revenues have declined by approximately $500 million between FY 1998 and FY 2008.

Other State Revenues

• Departmental revenues – departmental revenues include assessments, fees and other charges payable to state agencies, such as the Department of Fish and Game or the Registry of Motor Vehicles.  Fees, as a share of personal income, declined $230 million between FY 1998 and FY 2008.  Fees declined most sharply up until the financial downturn in FY 2003.  In FY 2003 and FY 2004, many fees and other charges were raised, substantially increasing revenues from this source.  Since FY 2004, however, departmental revenues have again trended downwards and in FY 2006 these revenues once again fell below their FY 1998 level.
• Lottery revenues – lottery revenues, after prizes are distributed, have declined in recent years.  Between FY 1998 and FY 2008, lottery revenue, as a share of personal income, decreased in every year except FY 2002.  Lottery revenues in FY 2008 had declined by $370 million, or almost 25 percent, from their share of personal income in FY 1998.
• Tobacco settlement – beginning in FY 2000, the state began receiving revenue through a settlement with tobacco companies.  This revenue source has been relatively consistent in recent years, although this consistency has meant it has declined as a percentage of personal income.

 12. The Human Services category the Department of Mental Health, which is included within the Health Care category.

 13. Under current federal law it is difficult for the state to require merchants who sell over the Internet to collect sales and use taxes on their sales in Massachusetts. Thus, as more goods are purchased over the Internet, the state is able to collect sales taxes on a smaller share of the goods purchased by Massachusetts consumers. Similarly, the shift in spending towards services, such as education, health care, or home improvements and away from goods reduces the share of consumer spending that results in the payment of sales taxes.