Devlin Proposal May Break Budget Talk Blockade

Senator Richard Devlin proposed a plan that would cut $500 million in state spending, increase business taxes by $500 million and hike the hospital tax to pay for rising Medicaid costs.

Senator Richard Devlin proposed a plan that would cut $500 million in state spending, increase business taxes by $500 million and hike the hospital tax to pay for rising Medicaid costs.

Veteran Senate Ways and Means Co-Chair Richard Devlin may have broken the deadlock on the state’s projected $1.6 billion budget hole. He called for $500 million in new taxes matched with $500 million budget cuts, including the Public Employees Retirement System (PERS).

Devlin’s idea may not be popular with everyone – or anyone, but it offers a basis for actual negotiations on how to raise revenue and what spending to trim. Until now, the major players in the budget battle have just stared at each from opposite sides of the room.

Another $500 million in tax revenue combined with $500 million in budgets cuts doesn’t equal $1.6 billion. Much of that remaining $600 million budget shortfall is expected to come from higher hospital and provider taxes to sustain Oregon’s Medicaid program.

Around $350 million of the $1.6 billion budget hole reflects the state’s requirement in the next biennium to pay 10 percent, up from 5 percent, of the cost of Medicaid. And that’s an optimistic number. Legislation Republicans are pushing in Congress could make deeper cuts in federal support of Medicaid as early as 2020. An Oregon fiscal analysis suggests the GOP health care bill, which proposes to slash more than $800 billion in Medicaid funding over the next decade, could put Oregon in the hook for an additional $2.6 billion to sustain existing coverage and eligibility by 2023.

A thorny budget debate was predictable after an acrimonious campaign on a union-backed initiative to impose a gross receipts tax, in the form of a minimum tax, on corporations with $25 million or more in sales in Oregon. After the sound defeat of the measure, business groups basically said the price of their participation in talks to raise revenues depended on making cuts in PERS.

For Democrats, tinkering with PERS is awkward politically because of their support from public employee unions. But finding ways to cut back on PERS is legally challenging because of a series of court rulings and contract arrangements. Devlin included PERS cuts in his concept, but said at most there would be modest savings from what he described as “technical fixes.” He foresees cuts in public employee compensation, vendor payments and staff levels.

On the revenue side, a lot of ideas have been floated – from limits on mortgage interest deductions to a tax on coffee. Senate Finance and Revenue Chair Mark Hass, D-Beaverton, dismissed those ideas and said he is concentrating on a gross receipts tax patterned after one in place in Washington. Hass said it would have a broad base and a low rate. He has been working on the idea since last year.

Devlin hopes the inclusion of PERS on the cutting board will entice business groups to negotiate an acceptable tax-raising measure. At least some level of business support will be necessary to win the three-fifths majorities needed for passage in both the Oregon House and Senate.

The hospital tax discussion may have a different track. In the last two biennia, former Governor John Kitzhaber worked behind the scenes with the Oregon Health Leadership Council to negotiate funding for Medicaid as well as steps to slow increased spending on health care delivery. Those quiet consultations enabled a 4-year extension of the hospital tax to pay for Medicaid to pass in the early months of the 2015 Oregon legislative session.

Governor Brown doesn’t have the same health care chops as Kitzhaber, but the same side rail conversations are underway with hospitals and other health care providers to address the Medicaid funding dilemma, which seems likely to get worse if Congress enacts its American Health Care Act. Health care providers and insurers may be wary of cutting a deal on Medicaid when the individual health insurance market that is supported by federal subsidies also may face significant changes under the GOP-backed legislation.

Devlin expressed hope that a revenue package could be wrapped up as early as next month, even a final budget won’t pass until at the end of the legislative session this summer. That may be an optimistic hope on Devlin’s part, because of the shaky relationship between business interests and union leaders. Serious negotiations could be delayed until after the May economic and revenue forecast, which includes the numbers on which final budgets are based.

Meanwhile, almost 40,000 Oregonians landed jobs in the past 12 months, bringing down the state’s unemployment rate to 4 percent, the lowest point on record. That’s good news in the short run, but it also means the current tax revenue stream is about as good as it is going to get and could be a lot worse in the next two years.