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Local Aid and Finance Forecasts show state budget gap growing
Economists and other finance experts told state budget writers on Dec. 15 that tax collections are expected to drop sharply over the rest of this year and into fiscal 2010 as the recession deepens across the nation and in Massachusetts.
All four forecasts presented at the annual state revenue hearing at the State House project that tax shortfalls this year will exceed $1.5 billion, with little prospect for improvement next year. The most pessimistic of the forecasts puts this year’s shortfall at $2.4 billion.
The dire news has state officials reopening the discussion about whether they may have to cut into local aid this year. A week earlier, House Speaker Salvatore DiMasi had projected local aid cuts of up to 10 percent for next year’s budget.
All major parts of the state’s revenue system are showing weaknesses that are expected to worsen. The personal income tax, the state’s largest source of tax revenue, is expected to be hurt by sustained job losses and declines in financial markets. The sales tax is being hurt by reduced consumer spending. And business tax collections are expected to be adversely affected by declines in corporate profits.
The dismal projections came only two months after the governor reduced the state tax forecast for the year by $1.1 billion, as the first signs of an economic slowdown appeared in Massachusetts, and took steps to close the gap mainly by cutting the budget and tapping the state’s rainy day fund.
In addition to the tax forecasts, State Treasurer Timothy Cahill told the revenue panel that Lottery revenues through mid-December were down 3.5 percent compared to last year, although he was still hopeful that revenue would only be down slightly by the end of the year. The state budget included $124 million to subsidize Cherry Sheet Lottery distributions this year, but the Lottery shortfall could grow to more than $160 million if the current trend continues through the end of the year.
State leaders responded to the bad news by saying that steps would have to be taken to re-balance the fiscal 2009 budget, probably very early next year, and that all aspects of the budget would have to be reviewed.
Following the Dec. 15 hearing, Lt. Gov. Timothy Murray told newspaper reporters that that the size of the revenue shortfall might mean that local aid cuts cannot be avoided this year.
An important factor in the discussion will be any possible federal economic stimulus package that includes relief for state governments, including possible temporary Medicaid reimbursements and funds for state and local capital projects that are ready to start.
While there was general agreement at the revenue hearing that tax collections were likely to decline rapidly over the rest of the year, there was a lot of uncertainty about the extent of the drop. The capital gains part of the personal income tax, which totaled $2.1 billion in fiscal 2008, is hard to forecast and contributes much of the uncertainty. Under one scenario, capital gains tax collections for fiscal 2009 could fall by as much as $1.54 billion, or 73 percent. December and January are important months for capital gains tax payments and state revenue officials expect to have a better picture of trends by mid-January.
In testimony provided at the revenue hearing, the Department of Revenue noted that the economy might be in the middle of “the most severe recession since WWII.” The National Bureau of Economic Research, the official scorekeeper of recessions and expansions, reported that the national recession started in December 2007. Economists at the hearing said that the recession hit Massachusetts later, probably in the summer months.
Michael Widmer, president of the Massachusetts Taxpayers Foundation, told legislators at the hearing that state tax collections for fiscal 2009 can be expected to fall more than $2 billion short of the original $21.4 billion projection, the figure used to balance the fiscal 2009 budget, and $918 million less than the revised projection adopted in October. Widmer also told the panel that tax collections for next year are expected to drop by an additional $800 million to $18.6 billion.
The Taxpayers Foundation revenue forecast is based on projections of employment losses in Massachusetts of 3.8 percent from fiscal 2008 to fiscal 2010, including 75,000 jobs lost this year and another 51,000 next year. The unemployment rate is expected to peak at 8.1 percent in fiscal 2010. The forecast assumes that personal income growth in Massachusetts will slow from an average of 6 percent over the past three years to 2 percent this year and less than 1 percent next year.
Department of Revenue officials project that fiscal 2009 tax collections are now expected to fall within the range of $19.55 billion to $19.65 billion, a drop of roughly $700 million from the October forecast. Using more pessimistic assumptions about capital gains tax collections and adjustments for possible drops in bonus income, officials provided an alternative forecast in the range of $18.97 billion to $19.02 billion, a deeper drop of $1.3 billion.
Forecasts for fiscal 2009 provided by the Beacon Hill Institute and the team of Alan Clayton-Matthews from the University of Massachusetts and James Stock from Harvard University were less pessimistic, predicting revenue reductions of $738 million and $603 million, respectively.
Department of Revenue officials projected that fiscal 2010 tax collections are expected to fall to within the range of $19.99 billion to $20.31 billion, a small increase – roughly $548 million – over fiscal 2009. Using more pessimistic assumptions, an alternative forecast is in the range of $19.17 billion to $19.49 billion, a slight increase over the fiscal 2009 pessimistic outlook.
The annual Consensus Revenue Hearing was chaired by Sen. Steven Panagiotakos and Rep. Robert DeLeo, chairs of the House and Senate committees on Ways and Means, and Leslie Kirwan, the secretary for Administration and Finance. The purpose of the hearing is to bring together the state’s chief budget officers to reach agreement on a tax forecast for the next fiscal year.
The governor’s fiscal 2010 budget recommendation is due to be filed with the Legislature by Jan. 28.
Local Aid and Finance Forecasts show state budget gap growing
Forecasts show state budget gap growing
Economists and other finance experts told state budget writers on Dec. 15 that tax collections are expected to drop sharply over the rest of this year and into fiscal 2010 as the recession deepens across the nation and in Massachusetts.
All four forecasts presented at the annual state revenue hearing at the State House project that tax shortfalls this year will exceed $1.5 billion, with little prospect for improvement next year. The most pessimistic of the forecasts puts this year’s shortfall at $2.4 billion.
The dire news has state officials reopening the discussion about whether they may have to cut into local aid this year. A week earlier, House Speaker Salvatore DiMasi had projected local aid cuts of up to 10 percent for next year’s budget.
All major parts of the state’s revenue system are showing weaknesses that are expected to worsen. The personal income tax, the state’s largest source of tax revenue, is expected to be hurt by sustained job losses and declines in financial markets. The sales tax is being hurt by reduced consumer spending. And business tax collections are expected to be adversely affected by declines in corporate profits.
The dismal projections came only two months after the governor reduced the state tax forecast for the year by $1.1 billion, as the first signs of an economic slowdown appeared in Massachusetts, and took steps to close the gap mainly by cutting the budget and tapping the state’s rainy day fund.
In addition to the tax forecasts, State Treasurer Timothy Cahill told the revenue panel that Lottery revenues through mid-December were down 3.5 percent compared to last year, although he was still hopeful that revenue would only be down slightly by the end of the year. The state budget included $124 million to subsidize Cherry Sheet Lottery distributions this year, but the Lottery shortfall could grow to more than $160 million if the current trend continues through the end of the year.
State leaders responded to the bad news by saying that steps would have to be taken to re-balance the fiscal 2009 budget, probably very early next year, and that all aspects of the budget would have to be reviewed.
Following the Dec. 15 hearing, Lt. Gov. Timothy Murray told newspaper reporters that that the size of the revenue shortfall might mean that local aid cuts cannot be avoided this year.
An important factor in the discussion will be any possible federal economic stimulus package that includes relief for state governments, including possible temporary Medicaid reimbursements and funds for state and local capital projects that are ready to start.
While there was general agreement at the revenue hearing that tax collections were likely to decline rapidly over the rest of the year, there was a lot of uncertainty about the extent of the drop. The capital gains part of the personal income tax, which totaled $2.1 billion in fiscal 2008, is hard to forecast and contributes much of the uncertainty. Under one scenario, capital gains tax collections for fiscal 2009 could fall by as much as $1.54 billion, or 73 percent. December and January are important months for capital gains tax payments and state revenue officials expect to have a better picture of trends by mid-January.
In testimony provided at the revenue hearing, the Department of Revenue noted that the economy might be in the middle of “the most severe recession since WWII.” The National Bureau of Economic Research, the official scorekeeper of recessions and expansions, reported that the national recession started in December 2007. Economists at the hearing said that the recession hit Massachusetts later, probably in the summer months.
Michael Widmer, president of the Massachusetts Taxpayers Foundation, told legislators at the hearing that state tax collections for fiscal 2009 can be expected to fall more than $2 billion short of the original $21.4 billion projection, the figure used to balance the fiscal 2009 budget, and $918 million less than the revised projection adopted in October. Widmer also told the panel that tax collections for next year are expected to drop by an additional $800 million to $18.6 billion.
The Taxpayers Foundation revenue forecast is based on projections of employment losses in Massachusetts of 3.8 percent from fiscal 2008 to fiscal 2010, including 75,000 jobs lost this year and another 51,000 next year. The unemployment rate is expected to peak at 8.1 percent in fiscal 2010. The forecast assumes that personal income growth in Massachusetts will slow from an average of 6 percent over the past three years to 2 percent this year and less than 1 percent next year.
Department of Revenue officials project that fiscal 2009 tax collections are now expected to fall within the range of $19.55 billion to $19.65 billion, a drop of roughly $700 million from the October forecast. Using more pessimistic assumptions about capital gains tax collections and adjustments for possible drops in bonus income, officials provided an alternative forecast in the range of $18.97 billion to $19.02 billion, a deeper drop of $1.3 billion.
Forecasts for fiscal 2009 provided by the Beacon Hill Institute and the team of Alan Clayton-Matthews from the University of Massachusetts and James Stock from Harvard University were less pessimistic, predicting revenue reductions of $738 million and $603 million, respectively.
Department of Revenue officials projected that fiscal 2010 tax collections are expected to fall to within the range of $19.99 billion to $20.31 billion, a small increase – roughly $548 million – over fiscal 2009. Using more pessimistic assumptions, an alternative forecast is in the range of $19.17 billion to $19.49 billion, a slight increase over the fiscal 2009 pessimistic outlook.
The annual Consensus Revenue Hearing was chaired by Sen. Steven Panagiotakos and Rep. Robert DeLeo, chairs of the House and Senate committees on Ways and Means, and Leslie Kirwan, the secretary for Administration and Finance. The purpose of the hearing is to bring together the state’s chief budget officers to reach agreement on a tax forecast for the next fiscal year.
The governor’s fiscal 2010 budget recommendation is due to be filed with the Legislature by Jan. 28.
Written by MMA Legislative Director John Robertson
