Revenue base eroding as annual budget talks ramp up
"We're going to have those conversations. I would say it's likely," House Ways and Means Chairman Brian Dempsey told the News Service on Wednesday when asked if he thought the revenue number would need to be adjusted. "I don't have a number, but I would say it's likely that we would have to come in and make some additional reduction around what we're projecting currently."
On Monday, Gov. Charlie Baker said he did not believe the fiscal 2018 tax revenue estimate needed to be changed before the Senate debates its budget - the Senate is scheduled to release its spending plan on Tuesday, May 16 and debate it beginning May 23.
Even if the state hits its May and June tax revenue targets on the nose, tax receipts would need to grow by 5.77 percent in fiscal 2018, significantly greater than any of the projections experts presented to state policymakers at a revenue forecasting hearing last year.
"It's hard to see how the economy can grow fast enough to yield that kind of tax revenue growth," said Robert Nakosteen, a professor at the UMass Amherst Isenberg School of Management and executive editor of the economic journal MassBenchmarks. He said, "Tax revenue growth has to be generated by growth in the economy absent changes in tax policy, and I just don't see that kind of growth in our future."
An official at the Massachusetts Taxpayers Foundation confirmed that if May and June revenues hit benchmarks, the state would need 5.77 percent growth in tax receipts to meet its target in fiscal 2018. Doug Howgate, director of policy and research for the business-backed group, said the last time the state exceeded that level of growth was in fiscal 2015 when tax revenues grew 7.8 percent.
When lawmakers solicited input on revenue projections for the fiscal 2018 budget in December, the Beacon Hill Institute provided the rosiest projections of the bunch, estimating growth of roughly 5.2 percent in fiscal 2018 over fiscal 2017. The institute's analysts also exceeded others' estimates in the amount of tax dollars they expected the state would receive by the end of fiscal 2017.
Legislative budget-writers and Administration and Finance Secretary Kristen Lepore in January agreed that fiscal 2017 would end with $26.056 billion in tax revenue, and predicted that tax revenues would grow 3.9 percent in fiscal 2018 bringing the total tax haul to $27.072 billion.
However a $462 million tax shortfall ten months into fiscal 2017 has lowered prospects for collections in the fiscal year that ends June 30. If fiscal 2017 revenue comes in significantly short of projections, fiscal 2018 tax revenue would need to climb more steeply to reach the $27.072 billion projection from January, which House lawmakers used as the foundation of the $40.4 billion budget they approved in late April.
"It's obviously going to be a very high hill to climb, and I guess we'll have to see what happens. We know that the odds are probably against us that we're going to be in that neighborhood," Warren Rep. Todd Smola, the ranking Republican on House Ways and Means, told the News Service.
Smola anticipated some challenging work ahead for the future budget conference committee — a group of six lawmakers from the House and Senate that meet to negotiate a compromise between the budgets passed by either branch. It's possible that major spending decisions, those stretching beyond the usual push and pull of annual budget talks, will be made secretly by that conference.
Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, said the projected fiscal 2018 revenue growth "looks unlikely," and she anticipates fiscal 2017 revenues will come in below earlier expectations.
Top officials in the legislative and executive branches huddled in the speaker's office on Monday, and afterward Senate President Stan Rosenberg said he was comfortable putting together the Senate budget using the consensus revenue figure agreed to in January.
"We'll look forward to the conference process to iron out any difficulties," Rosenberg said.
Dempsey declined to weigh in on how senators should approach their budget when they take it up later this month. He said state officials have a track record of addressing financial problems, which have been a perennial issue in recent years.
"For us to come together last year after both the House and the Senate passed its budgets and come in and reduce that figure by $750 million was significant and I think sends a very strong message to the bond-rating agencies that we are going to make sure that we're fiscally prudent and fiscally responsible," the Haverhill Democrat said.
Lawmakers have looked to Gov. Charlie Baker, who has the power to unilaterally cut spending, to address the fiscal 2017 revenue shortfall.
Massachusetts is not alone in facing budgetary problems. Connecticut Gov. Dannel Malloy reportedly announced a plan Wednesday to tap into reserves, divert money intended for municipalities and cut $33.5 million in spending. Officials in Rhode Island reportedly identified a $60.1 million revenue shortfall in their current budget year.
Sluggish tax revenue growth dates back to former President Barack Obama's administration but has continued under President Donald Trump.
While saying state officials "can't afford to wait" to respond to the shortfall, Dempsey theorized that laggard receipts could be the result of investors and businesses delaying their own actions as they wait for potential federal tax cuts from Capitol Hill. He said, "It appears that a lot of what's happening nationally is really investor-related activity. I think folks are hitting pause to determine what happens in Washington with respect to a potential tax package. And it appears that decision-making is on hold until the business community determines what level of taxation they'll see with a proposed tax package."
Rep. Jay Barrows, a Mansfield Republican, is also looking to Washington, D.C. for potential solutions to the state's budget woes. Barrows said he is hoping Massachusetts will be granted authority to take into consideration assets in addition to income to determine eligibility for MassHealth, the health care safety net that is the primary driver of state spending growth.
"Hopefully there will be some help on that and we can get the cost curve to come down," Barrows told the News Service.
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