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Four Things Other New England States Are Doing Worse Than Maine

June 6, 2016 Posted by Joe Horvath - No Comments

New England, on the whole, is an economically-depressed region. Between 2004 and 2014, the average cumulative growth of a New England state’s gross domestic product was less than 29 percent. During that same time, no New England state enjoyed growth levels among the top half of the United States, and only Massachusetts was higher than 36 out of 50. That said, while economic underperformance has been the region’s hallmark lately, hope has not completely faded.

As the recently released ninth edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index reflects, Maine officials have been helping the state move toward competitiveness and away from the bad policy habits harming the rest of the region. In the ninth edition, Maine enjoys its highest-ever ranking of 38, a jump of 10 spots since ranking 48 in 2011. While Maine is working to control spending and reduce tax burdens, other New England states seem happy to burden entrepreneurs and let government waste go unchecked. Below are four cases of New England states falling behind the policy example Maine is setting.

Connecticut – Budget

Connecticut has been lost in economic doldrums for years, having chased away businesses and high-income individuals with a series of record-breaking tax hikes over the past few legislative sessions. The General Assembly just held a special session to pass a budget that “diverged from the road of magical thinking and entered a new path of fiscal reality,” according to the Hartford Courant. While the budget did include significant cuts in some areas, they merely serve to reduce the overall rate of growth – and for the near future, Connecticut will still likely suffer deficits greater than $1 billion annually.

Maine, on the other hand, has worked to prevent the kind of economic damage associated with tax hikes, and has worked to cut spending enough to afford pro-growth tax cuts. Maine may finish the current budget season with a surplus. Additionally, despite the all-too-common rhetoric that labels income tax cuts as a budgeter’s worst nightmare, Maine’s income tax revenues exceeded projections.

Rhode Island – Pensions

Current Rhode Island Governor Gina Raimondo previously served as the state’s General Treasurer, a role that required her to serve as chair of the body that governs Rhode Island’s public sector pensions. Her service included implementing the 2011 reform process that led to Rhode Island placing limits on the growth of cost-of-living adjustments and implementing a hybrid defined benefit-defined contribution plan. Sadly, these reforms were partially walked back.

Despite some reforms, the Employees’ Retirement System of Rhode Island (ERSRI) remains underfunded. Under ERSRI, the state employees’ plan has a reported funding ratio of merely 56.6 percent, and the teachers’ plan is only 58.8 percent funded. These funding ratios, as reported in the state’s 2015 Actuarial Valuation Report, are less than ideal. Rhode Island’s pension liabilities are even graver, however, when using the more realistic accounting methods expected of the private sector. In 2014, using a fair-market valuation, State Budget Solutions (SBS) found Rhode Island’s total public pension funding ratio to be a mere 31 percent. When SBS releases its updated report on unfunded pension liabilities across the 50 states, the Ocean State’s pension funds will likely remain deep underwater.

The Pine Tree State, on the other hand, has a constitutional amendment requiring the Maine Public Employees Retirement System (MainePERS) to be fully funded by 2028 and banning new unfunded liabilities. As a result, a recent report in the Portland Press Herald indicated that MainePERS “is in good shape.” According to the most recent Actuarial Valuation Report, MainePERS’ funding ratio is a record 83.6 percent.  That said, it is important to note that even when state pension plans are well-funded, they remain the largest drag on a state’s budget, and have the potential to crowd out general fund spending for other core government services, as noted in the Maine Heritage Policy Center white paper, The Cost of Doing Nothing.

Massachusetts – Millionaires Tax

Unlike Maine, which, as referenced above, amended its Constitution in 1995 to force government to keep its promise to pensioners, Massachusetts recently held a Constitutional Convention to accomplish something very different. State legislators jointly approved initial steps to create an additional 4 percent income tax on individuals earning more than $1 million per year. The measure would also need to be approved as a referendum during the next legislative session, and then voted on by Massachusetts residents.

“Proposition 80, which would establish a graduated income tax, is bad enough in itself, but this specific measure is poorly designed. Earmarking revenue and specifying tax brackets aren’t the sorts of things that belong in our constitution,” Paul Craney, Executive Director of The Massachusetts Fiscal Alliance, said. “Putting such a muddled mess on the ballot is unfair to voters.”

Maine’s personal income tax system is graduated, but not nearly as drastically. Further reforms have Maine headed in a growth direction. Massachusetts, which should have learned its lesson about how states become less competitive when it lured General Electric away from Connecticut, seems happy to relinquish its competitive edge to the rest of New England.

Vermont – Minimum wage

Vermont is hardly a model of fiscal responsibility, which is why the recent news that Jane Sanders, the wife of Vermont political fixture and presidential hopeful Senator Bernie Sanders, completely mismanaged Burlington College’s assets is fairly unsurprising. Among the bad policies commonplace in Vermont is the ongoing phase-in of an increase to the state’s minimum wage. From 2004 to 2014, the cumulative growth of Vermont’s non-farm payroll employment was a mere 2.5 percent. During the same time, its cumulative gross state product growth was 30.1 percent. Those totals rank 38 and 43 in the nation for those time periods, respectively. Vermont’s labor force participation has been dropping steadily since 2010, and the march to $15 per hour will do little to improve economic opportunity for entry-level workers or bolster youth employment.

Figure 1: Labor Force Participation in Vermont, 2010-2016

Joe Graph

Source: Bureau of Labor Statistics

Maine is facing similar declines in labor participation, but has chosen to respond in a slightly different way. While a similar plan failed to pass in the legislature, it will be on the ballot this coming November. John Frary, in a recent contribution to The Maine Wire, reminded readers “a growing body of research seemed to produce a consensus among economists that the minimums did more harm than good,” and “the Congressional Budget Office estimated that increasing the federal minimum wage to $10.10 an hour would reduce employment by about 500,000 low-skill workers nationwide.”

If Maine wants to continue closing the gap between its economy and the rest of the nation, then overtaking New England’s low level of competitiveness is necessary. If the other five states in the region continue to make critical policy mistakes, then Maine can certainly take the center stage.