May 13. 2014 11:49PM

Charles Arlinghaus: A budget crisis in need of leadership


I believe that the unique joys of another special legislative session loom on the horizon. The purpose of the session will be the byzantine creature known as the Medicaid enhancement tax, but we might just as easily call it the current budget crisis. Some legislators deny the existence of a crisis. They’re wrong.

The current crisis has come about as the courts have ruled a weird tax scheme of ours unconstitutional and placed in jeopardy almost $400 million the state is counting on for its budget. Solutions are swirling in Concord and some sort of grand alliance may yet come together. A solution must be reached by June 5 or a special session will be required. In the meantime, the governor’s delay in taking simple steps of preparation is inexplicable.

For two decades, the state relied on a perfectly legal scam known as the Medicaid enhancement tax to balance its budget. The shell game — referred to by critics on the right and left alike as Mediscam — was a clever shifting of money back and forth whereby hospitals got back every penny of a sham tax they paid, but we briefly laundered it through state coffers so it could be “enhanced” with federal Medicaid reimbursement dollars diverted to other uses.

The hospitals were happy to help out so long as the odd scheme didn’t cost them any money. Changes made in 2009 created winners and losers among hospitals and were a sign of things to come. Then in 2011 a tax that started as a net zero, simply an accounting favor the hospitals were doing the state as good corporate citizens, suddenly became a real tax with a vengeance.The final budget saw the hospitals take a $248 million hit, a far cry from net zero. Understandably, they started looking into the details of the scheme. They sued and a judge agreed that the tax was discriminatory. Some budget writers believe the state will win an appeal. Fewer lawyers than budget writers believe such a thing.The current ruling on the field is that the $185 million we hope to collect in October is unconstitutional. If so, hospitals will also be entitled to get back the money they paid last October. If the tax is taken off the table, then some of the uncompensated care program it pays for probably goes away too, but over the biennium the net budget problem is in excess of $300 million.

There are plans to fix it. Rep. David Hess, author of one of the plans, sums it up best when he quotes Churchill to describe the current discussion as not the end or even the beginning of the end: “But perhaps it is the end of the beginning.”

The Legislature has difficulty reaching an agreement with Democrats on one side and Republicans on the other. This situation is further complicated because a seat at the table is occupied by the hospitals. If they don’t agree to drop their lawsuit, they sit in the driver’s seat with the $300 million budget problem riding shotgun.

Senate President Chuck Morse has proposed slowly reducing the tax by a quarter percent a year for five years (that would phase it out over 22 years if the reductions continued) and increasing payments that hospitals receive. Changes proposed in the House by Hess, among others, would maintain the revenue stream by addressing the court’s administrative concerns.

To become law, a settlement would have to be negotiated between the House and Senate, between Republicans and Democrats, and between the Legislature and the hospitals. That’s a big task to accomplish in two weeks. In all likelihood, a solution will be complicated, will need time to be studied and fully explained to 424 legislators, and will almost certainly require a special session this summer rather than be cobbled together quickly now.

The one thing that is clear is that there is a gathering budget storm. Under our laws, when the governor determines that revenues will be insufficient to maintain a balanced budget, she is empowered to make reductions in expenditures. Every governor in recent memory has done this by executive order — in most cases multiple times. The MET problem has been there for more than a month. No solution is going to be budget neutral. With six weeks left in the fiscal year, time is running out to make reductions in the current fiscal year. With the legislature set to go home June 5, the time to get them to act on changes that need legislative approval is now. Leadership requires action.

Charles Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.