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McClaughry: Shumlin's Fiscal Challenge

12/06/10 7:55AM By John McClaughry
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(HOST)  Commentator John McClaughry is the founder of the Ethan Allen Institute, a Vermont-based free market think tank.  And he doesn't think that Governor-elect Shumlin is likely to find any easy solutions to Vermont's economic woes.    

(MCCLAUGHRY)  The most immediate challenge facing Vermont's new Governor is the projected $112 million General Fund shortfall.  In the past two years the legislature harvested the low-hanging budget savings fruit. Future savings will be increasingly harder to come by. The vaunted Challenge for Change process, promises to achieve $38 million in savings by improving the efficiency of government operations - without diminishing services.

The Challenge authorizing legislation explicitly rules out practically anything that would actually produce significant savings. Programs must be maintained "without reducing government benefits, limiting benefit eligibility, or reducing personnel". There can be no competition with the designated agency monopolies. Savings must be "reinvested" in program expansion. If the promised Challenge savings don't turn up by next spring, the $112 million general fund deficit grows accordingly.

Governor-elect Shumlin has promised to initiate single payer health care, universal preschools, and the extension of broadband services to every "last mile" in the state. He has vowed to shut down Vermont Yankee in 2012, thus foregoing the millions of dollars in tax revenues it generates along with the state's cheapest electricity. He has told the state employees union that there won't be any more layoffs.

Will raising tax rates be his answer? During his recent campaign, Shumlin repeatedly boasted that he had been a key figure in three income tax rate reductions - all three of which, incidentally, produced "tax cuts for the wealthy".

Shumlin has long been a determined opponent of sales tax increases. It would seem unlikely he would succumb to the temptation to levy sales taxes on services. This is especially so because such service taxes are enormously unpopular with the service providers - such as accountants, lawyers, doctors, taxi drivers, barbers, beauticians, auto mechanics and plumbers. It would create a highly motivated constituency for "anybody but Shumlin" in 2012.

Shumlin also strongly opposed a Douglas proposal that would have increased residential property tax rates. Reversing course on this issue would also invite serious adverse political consequences.

One would think that Shumlin would thus rule out jacking income tax rates back up, or expanding the sales tax, or increasing the educational property tax burden. He is, however, justly renowned for his flexibility.

The truth is, there is little prospect of further curbing state expenditures without making disruptive changes in services offered, client eligibility, employee compensation, provider payments, and protected monopolies. To get elected, the new Governor proposed sweeping new programs, and denounced every proposal for increasing taxes.

There was once a justly celebrated man who fed a multitude of thousands with a few loaves and fishes. Peter Shumlin is not likely to exhibit that ability.
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