Taxes, Taxes, Taxes:  Governor Charlie Baker’s New $42.7 Billion Budget

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By Matt Murphy

Massachusetts Governor Charlie Baker filed a $42.7 billion budget on Wednesday that features the biggest overhaul to public education funding in decades and proposes new taxes on electronic nicotine products and on pharmaceutical manufacturers to help pay for opioid addiction services.

The education reform, which Baker teased in his inaugural address earlier this month, proposes to spend an additional $200 million on public education this year and increases the baseline amount of money that school districts must spend on education by $1.1 billion over the next seven years.

The plan, according to the administration, would “fully” implement the recommendations of a special commission that three years ago found the state’s education funding formula insufficient to meet the growing costs of health insurance, special education, and services for English language learners and low-income students.

The budget and the companion education legislation are highlights of what has been an expansive early agenda for the Republican governor in his second term. Baker has also put forward proposals to legalize sports betting, toughen seat belt law enforcement, ban hand-held cell phone use while driving, address the impacts of climate change, and enable judges to consider someone’s full criminal record when deciding whether to release the person before trial or hold the person as a danger to society.

The budget would increase spending by 1.5 percent over the current fiscal year, according to the administration, and includes $133 million in new revenue from anticipated recreational marijuana sales, $28 million from taxes on short-term housing rentals, and $6 million from an expansion of tobacco excises taxes to e-cigarettes and vapor products.

The bill would increase funding for the Massachusetts Bay Transportation Authority by at least $88 million to $1.3 billion, and the governor also wants to boost funding for the state Department of Public Utilities’ pipeline safety division by $5.5 million to better ensure utility compliance with safety regulations after the Merrimack Valley natural gas disaster of September 2018.

“It’s fiscally responsible and increases investments in our schools and our communities and supports efforts to combat the opioid epidemic, address the housing crisis, improve our transportation infrastructure, and protect our state from the impacts of climate change,” Baker said at a press conference.

In addition to his plan to raise the real estate transfer tax to pay for climate change mitigation, Baker is also proposing to force online marketplaces like Amazon, Ebay, and Etsy that allow third-party vendors that sell through their websites to collect and remit sales taxes on those transactions with Massachusetts customers.

The state already requires large online retailers that sell directly to Massachusetts customers to collect sales taxes, but the administration estimates that the new application of the sales tax could generate $42 million in revenue, and help local retailers compete with online shopping.

The governor has also put forward a revamped proposal to accelerate the process for large retailers to remit sales taxes to the state in a more timely manner, shifting the monthly collection process earlier and netting $306 million in fiscal year 2020 (which begins July 1, 2019) in one-time additional revenues that will be put toward school safety, scholarships, and school water deleading.

Baker’s reliance on tax and fee increases to help finance some of his investments early in his second term has come as a surprise to some on Beacon Hill who have heard the governor time and again tout his opposition to broad-based tax increases.

“The bottom line is from the beginning we’ve said, if we’re leveling the playing field … or we’re creating new services that we believe, on a targeted basis, are important, then we’re going to propose those,” Baker said, when asked about the taxes.

Some of those one-time sales tax revenues will also become part of a $297 million deposit into the state’s stabilization account, which officials said would boost the “rainy day” fund to $2.8 billion by the end of fiscal year 2020 as economists warn about a slowdown and public officials prepare for an eventual recession.

Baker expressed confidence in the experts that have said the downturn in state revenue collections in December that wiped out a mid-year surplus was a “timing issue,” but Massachusetts Taxpayers Foundation President Eileen McAnneny said she doesn’t necessarily share his optimism.

“I certainly don’t want to be Henny Penny here, but there are some pre-recession warning signs. I think January revenues will be critically important because if it is just a timing issue, that great. If it’s not though we’d want to understand what’s causing the softness in those numbers,” McAnneny said.

After working in his first term to pass two significant bills to fight back against the opioid addiction epidemic, Baker’s budget includes $266 million for treatment and other services, a $48 million increase over this year that includes almost $50 million to expand MassHealth addiction treatment services through a federal Medicaid waiver.

To help pay for that investment, the governor is proposing a 15 percent tax on opioid manufacturers on gross receipts from the sale of opioid products. The tax is expected to net $14 million.

Asked if he was worried about the tax being passed on to consumers, Baker said, “It’s charged to the manufacturers. I can’t do anything about how they actually run their books, but the manufacturers have a lot to do with creating the crisis that we all are paying for every day and creating a mechanism in which they put something in to help pay for the carnage they’ve created, I think, is important.”

The governor also wants to give MassHealth, which would see its total budget grow to $16.54 billion in fiscal year 2020, the ability to negotiate directly with drug manufacturers over pricing of the costly pharmaceuticals. The reforms, the administration estimates, will help save $80 million in a program for which the cost to the state is expected to grow 4.3 percent in fiscal year 2020.

The budget proposes to allow MassHealth to use a public rate-setting process to determine what it will pay for select high-cost drugs, and the Health Policy Commission would be allowed to require the disclosure of some pricing information, or to refer a case to the attorney general for review if the manufacturer won’t issue rebates to meet the target price.

Massachusetts Association of Health Plan chief executive officer Lora Pellegrini said she is hopeful the governor’s proposal would lead to lower drug spending, but MassBIO President Robert Coughlin, who represents the life sciences industry, blasted the idea.

“Governor Baker’s proposal to force certain drug manufacturers to pay additional, supplemental rebates on incredibly effective drugs that MassHealth deems too expensive sends a message across the industry that government is going to punish success and that only it can be the final arbiter of drug pricing,” Coughlin said, arguing that MassHealth is “already paying significantly less for the same drugs than private insurers.”

Coughlin suggested that Baker, instead, target pharmacy benefit managers and the practice of “spread pricing” to generate savings at MassHealth. Baker’s budget does call for pharmacy benefit managers to be more transparent about pricing spreads and rebates in contracts with managed care organizations and to limit their margins.

The governor’s budget filing is the first step in a months-long process designed to culminate over the summer in a new annual spending plan for the fiscal year that starts on July 1. The governor said he hopes the Legislature could complete work on his education reform plan in the same timeframe.

“The success of this legislative session will be defined by our collective ability to take bold action on critical issues such as climate change and resilience, our transportation and housing needs, and funding our education system. I am encouraged to see so many of the Senate’s shared priorities included in the Governor’s budget proposal,” Senate President Karen Spilka (D-Ashland) said in a statement, which cited priorities like prescription drug pricing, health care cost reduction for low-income seniors, and lifting a cap on family welfare benefits.

Massachusetts Budget and Policy Center interim president Marie-Frances Rivera, however, said the governor’s budget falls short in some areas.

“The Governor’s proposal includes some new initiatives, acknowledging the need for additional resources, but it will be difficult for state lawmakers to make important investments without significant new revenue,” Rivera said in a statement. “While additional revenue is helpful for investing in essential programs, most of these new revenue sources come from sales taxes, use taxes, and other consumption-related taxes that are not progressive. They will not help turn our state’s upside-down tax system right-side up.”

The budget includes 83 outside sections, many of which pertain to implementing the new excise taxes on vape and e-cigarette products. There are also proposals to allow the hunting of deer by bow and arrow on Sundays, and to limit the accrual of unused sick time to 1,000 hours for executive branch and public higher education employees.

Another proposal would expand the allowable use of money from the sale of carbon emission credits through the Regional Greenhouse Gas Initiative program to include greenhouse gas mitigation and climate change adaptation.