How Mitt Romney handled Massachusetts' spending problems

After a victory that surprised the pollsters, Mitt Romney took control of a divided, partisan government plagued by budget shortfalls and an anemic jobs outlook, vowing immediate, hard action.

"We've used up virtually all our cash, borrowed all the banks will lend us, and we are still spending much more than we're earning," Romney said during a 20-minute inaugural address. "We are facing a financial emergency."

The year: 2003.

The setting: Boston.

Though no two situations are ever the same, Romney's first months as governor of Massachusetts are an interesting case study in how he might manage the budget woes that afflict Washington almost 10 years later. In Massachusetts, Romney walked into a $500 million budget shortfall, a larger $3 billion budget gap in the year ahead and an overabundance of skepticism from state Democrats.

Romney highlights that period today as proof that cutting taxes and public spending can reinvigorate the economy — a prescription the presumptive Republican nominee hopes to deliver to the American people.

"As president, I will rein in spending and balance the budget," Romney said last month while visiting Florida.

A closer inspection of Romney's record in Massachusetts shows a much more complex fiscal picture.

Though Romney cut taxes and public spending in some places, he also forced businesses to pay at least $174 million more a year in corporate taxes, according to one estimate, and raised dozens of fees that affected small businesses, gun owners, golfers, parkgoers and others.

"The rhetoric, which is so similar to what we hear today, was all about finding efficiencies and waste and cutting spending," said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation. "But it's not what he did here, or any governor could have done."

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Massachusetts' fiscal house just wasn't out of order at the beginning of 2003, it was near chaos. Although the economy was showing signs of recovery from the dot-com bubble and the 9/11 recession, the state government was struggling to pay its bills.

Like Florida, Massachusetts lawmakers are required to pass a balanced budget. But despite $1.2 billion in tax hikes and $200 million in emergency spending cuts in 2002, Romney entered office on Jan. 2, 2003, with the state still deeply in the red.

To make it up, Romney — who had plenty of experience as a CEO but none in government — would have to almost immediately cut spending or raise revenues by more than 2 percent. And he'd have to do it with the acquiescence of an overwhelmingly Democratic Legislature, which could override any veto Romney might issue.

Heady times for someone with a high learning curve, said Brian Lees, a Republican state senator who served as minority leader during Romney's one term in office.

"Mitt Romney was an unknown entity," Lees said. "I mean, we knew who he was, but he hadn't been active in government before. The thought was that he'd get steamrollered."

In his first weeks on the job, Romney asked for and received unilateral power from the Legislature to make emergency cuts. By the end of one month, he whacked $343 million from the budget and asked the Legislature to cut another $143 million.

Just weeks after that, Romney delivered a proposed state budget for the 2003-04 fiscal year that included almost an additional $3 billion in savings.

Some ideas Romney suggested stuck, others were rejected.

No matter their fate, many of Romney's solutions were what you'd consider fiscally conservative. He proposed significant cuts to social programs — $6 million from a program to help teen parents, $7.5 million from legal aid programs for poor families, bigger cuts to hospital and nursing home providers.

He targeted Medicaid, the federal-state insurance program for children and poorer Americans, and education funding, including money for the state university system.

Romney also sought to shrink the cost of government, asking state employees to pay more for their health care, withholding aid to cities and towns, and consolidating departments and agencies.

But Romney's response to Massachusetts' fiscal crisis was more nuanced than simple belt-tightening.

Romney closed corporate tax loopholes, generating an additional $174 million in the first year, according to the Massachusetts Department of Administration and Finance. (Other groups, like the National Conference of State Legislatures, estimated the figure as high as $280 million.)

The biggest loophole targeted banks and investment firms, which created real estate companies to shelter their assets and avoid paying taxes. In March 2003, Romney signed a bill into law banning the practice retroactively to 1999. That June, the state reached a settlement to recoup $110 million from 65 banks that had moved their assets into real estate investment trusts.

"The story's he's telling now about his time as governor, it just doesn't add up," said Joseph A. Curtatone, a five-term Democratic mayor of Somerville, Mass., just north of Boston, who says Romney's cuts to local governments were devastating. "It doesn't reconcile with the facts."

Romney generated an additional $260 million in 2003 by raising fees on everything from the cost to register a firearm to the cost to sell milk, and he unsuccessfully proposed transferring $180 million worth of surplus land to the state pension fund to keep it sound.

The exact number of fees and size of the increases depends on the source. The campaign for President Barack Obama says in a television ad that Romney raised or created more than 1,000 fees as governor, though the campaign uses some mathematical gymnastics to get there, including subdividing fee increases in one area several times over.

Media accounts from 2003 say Romney's budget altered or created 88 fees.

Among them:

• Romney proposed raising the cost to register a firearm from $25 to $75. The Legislature upped it to $100. Romney agreed.

• The cost to file a property deed: up from $25 to $100.

• Season passes at a state golf course: up from $650 to $800.

• A license to sell beer or wine: up from $2,500 to $5,000.

Romney's administration even proposed a process to be certified blind to get a special bus pass or receive other benefits.

The cost to be certified: $10.

The cost for a photo ID: $15.

Those fees didn't stick. "We of the blind community were able to fight that one," said Bob Hachey, president of the Bay State Council of the Blind.

• • •

Romney supporters, like Lees, the state senator, and Barbara Anderson, president of Massachusetts' Citizens for Limited Taxation, correctly note the differences between the situation in Massachusetts nearly 10 years ago and in Washington today.

"Look, he did take some from the reserve funds, looked at user fees and closed some tax loopholes," Lees said. "But that's the only way a Republican is going to be successful here."

By raising fees and closing some loopholes, Romney avoided cutting state services to the bone, a prospect Democrats likely wouldn't stand, Lees said. That, in turn, chilled calls from Democrats to raise the state income tax, which Romney publicly opposed.

Romney also was able to present tax cuts as the economy improved starting in 2004, including a $250 million refund of the state's capital gains tax, and the creation of a back-to-school sales tax holiday.

"Mitt Romney held the line on broad-based taxes in the middle of one of the worst budget crises in Massachusetts history despite opposition from the most liberal state Legislature in the country," Romney spokesman Ryan Williams said.

Romney also unsuccessfully pressed lawmakers to lower the state income tax in 2004, 2005 and 2006.

"He was great on taxes," Anderson said. "He tried to cut a tax for us, to roll back the income tax rate. Every year, he'd file (a bill). Even while he was raising fees, he was trying to cut taxes."

The progression — from raising revenues in bad economic times to cutting taxes as the economic situation improves — is typical in state capitals across the country, said Kim Rueben, an expert on state and local public finance at the Urban Institute. How that history might affect a Romney presidency is another matter.

"The Massachusetts example illustrated his willingness to negotiate with Democrats and consider some tax increases," Rueben said. "While I would like to think he would be willing to negotiate with a Democratic Congress — I'm less certain he would be willing to keep . . . broader tax increases on the table that would be necessary to actually get the federal budget closer to balanced."

Romney had an advantage of entering office as the economy was improving — though the state budget did not yet reflect it.

He also had the benefit of a 2002 tax increase without having to shoulder any responsibility.

In 2004, Romney's administration lobbied Standard & Poor's to improve Massachusetts' credit rating based in part on the extra money generated by that tax hike — which raised capital gains tax rates, eliminated charitable deductions, delayed a planned cut to the state income tax and raised the state cigarette tax 75 cents.

A presentation to Standard & Poor's, which was first obtained by POLITICO, included the tax increases on a computer slide that said Massachusetts "acted decisively to address the fiscal crisis."

The state's credit rating was upgraded four months later, from AA- to AA.

Wrote Standard & Poor's: "Over the last few years, Massachusetts has taken certain actions that have reduced budget uncertainty, reined in spending, and prudently managed resources during a difficult national economic slowdown."

Aaron Sharockman can be reached at asharockman@tampabay.com.