All Maine Matters

May 2006



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The Fleecing of Maine: Enron-Style Accounting Takes Control of State Budget
by Reps. David Trahan and Jon McKane

When the financial empires of Enron and WorldCom began to crumble, their executives resorted to a series of gimmicks that eventually led them to federal prison. They moved money into accounts to inflate figures. They propped up revenue projections to pacify stock holders. And they hired their own accountants and directed them to hide financial losses.

About three years ago, not long after John Baldacci took office, and at the same time serious state budget problems started to rear their ugly heads, our own state leaders turned to similar gimmicks to hide our financial problems. Taxes and fees started to increase, billion-dollar deficits plagued state government, and budget gimmicks became the norm. Common sense and fiscal responsibility went out the window.

One of the most imprudent moves made by the governor and his legislative allies was leasing the Maine liquor business for a one-time windfall of $125 million. In return for this quick cash infusion, Maine will lose $26 million a year in revenue for 10 years, a total of $260 million At the very least, this was disastrous fiscal management. But it gets worse.

In an extraordinary example of perverse logic, the $26-million loss of the liquor money, formerly recorded annually as tax revenue, is now listed as a tax reduction, the same as if the state had cut taxes by $26 million. On paper, this gimmick appears to lower the tax burden. In addition, by recording this lost revenue in this fashion, a hole or void is created that allows the administration to raise taxes by the same $26 million a year without appearing to do so. This is Enron style accounting gimmickry at its best – and it’s our own state government doing it.

This liquor sale stunt is just one example of the “shell game” being used by the leaders of our state to manipulate tax dollars and fool the taxpayers. But as P.T. Barnum used to say, “You ain’t seen nothin’ yet!”

In another scheme, an even bigger one, three major pools of money have been moved “off budget.” The Business Equipment Tax Reimbursement Program (BETR), the Circuit Breaker, and the Expanded Circuit Breaker Programs – all totaling $262 million – have been moved to what is called the unallocated income tax line in the budget. This line is not recorded as revenue as it is used to reimburse taxpayers who overpay taxes. This shake-and-bake maneuver does three disturbing things.

First, it artificially reduces the level of state spending. Last January, the legislature passed a weak spending cap that the governor had requested to limit spending by all levels of government – municipal, county and state. The spending cap in the new law allowed state government to increase spending just under three percent in fiscal year 2006. Politically, it was essential that state spending appear to be below this cap. By moving these three items off budget, $262 million in spending disappeared. The governor could then claim that state spending had been successfully “capped.”

We asked the non-partisan Office of Fiscal and Program Review to recalculate the budget with these programs added back. They reported that state spending exceeded the cap by $32.8 million.
Second, this “off budget” gimmick, like the liquor sale gimmick, allows $262 million in tax burden to disappear, creating an opportunity to raise the equivalent in taxes without appearing to do so, and that is exactly what happened.

Third – and of particular interest to municipal government officials – this gimmick changes the revenue-sharing formula under which state money is passed to town and city governments. Under state law, the portion of revenue sharing sent back to towns to help with the costs of fire, police and ambulance services is calculated as a percentage of state taxes collected (5.1%). By moving these revenues “off budget,” the amount of taxes collected is artificially reduced. As a result, in fiscal years 2006 and 2007, town and city governments will lose $11.2 million in revenue sharing.

eanwhile, state government books the windfall. So much for property tax relief.

One of the most onerous examples of merciless and deceptive taxation is the automatic annual tax increase on gasoline. The revenue generated by gas tax “indexing,” which started in 2004, is no longer recorded as a tax increase by the governor and his budget people. Instead, it is simply counted in future revenue projections. A wink and a nod and in fiscal years 2005, 2006 and 2007, just over $82 million in real tax increases vanish as if they were never paid.

Many other problems interfere with accurate accounting – computer “glitches” wreaking havoc in the Medicaid program, funding shifts, claims of ineligible social service recipients, and the infamous “sick tax” on hospitals to artificially raise our Medicaid rates for higher federal reimbursement.

These gimmicks, schemes, and shell games are not only a misuse of taxpayer dollars; they are an insult to the trusting and honest people of Maine. How could we have gotten this far out of balance to become the most fiscally mismanaged state? The primary reason is that there is no longer a system of checks and balances in state government. One “team” has total control over every aspect of Maine’s government. Now they have created Maine’s own version of an Enron “perfect storm.”

Rep. David Trahan, a self-employed logger, lives in Waldoboro. Rep. Jon McKane, an electrical contractor, lives in Newcastle.


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