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Coronavirus restrictions will help protect the public. They may also crater the state budget

A man passed through a nearly empty Faneuil Hall Marketplace in Boston on Friday.
A man passed through a nearly empty Faneuil Hall Marketplace in Boston on Friday.Craig F. Walker/Globe Staff

Bars have closed their doors. Downtown offices are quiet. Once-clogged highways are suddenly clear.

The next place likely to empty out amid the Covid-19 outbreak: state government coffers.

The coronavirus and the social restrictions reshaping daily life to slow its spread will undoubtedly upend Massachusetts’ once-flush financial outlook, economists and officials warn — undercutting tax revenue, pinching off money to cities and towns, and forcing officials to pare spending, potentially in ways unseen since the depths of the Great Recession.

“A global recession seems a virtual certainty. And I don’t think Massachusetts will be spared," said Michael Goodman, an economist at the University of Massachusetts Dartmouth. “I think every indication of what we know today is the next several months are going to be very difficult.”

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The Massachusetts Taxpayers Foundation estimated Tuesday that tax receipts could drop as much as $500 million below expectations this fiscal year because of lost economic activity. And should they dip even 5 percent next year, it could mean as much as $3 billion in lost revenue.

While it remains uncertain how long the crisis will last, when residents will be allowed to return to normalcy, or how deep an economic decline there will be, revenues collected from tourism and transportation “are going to be dramatically impacted,” said Jane Swift, a former Massachusetts governor.

“There’s no doubt that in the short term there will be revenue collection shortfalls that will impact both the state and local municipalities,” said Swift, who was in Governor Charlie Baker’s place when the state grappled with the economic fallout of the Sept. 11, 2001, terrorist attacks.

That fiscal year tax revenues plummeted by more than 15 percent. Then, in October 2002, Swift used emergency powers to further slash state spending by $202 million, cuts that largely targeted health and human services programs and led to layoffs of hundreds of state workers.

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Swift said one of the first indicators then of the coming revenue hit was “the impact on collections on turnpike tolls. That gave us a really good sense of how significantly things had slowed down.”

Of course, what’s different now is that the government is enforcing that slowdown, and those restrictions could play out in a variety of ways.

Closing off in-person service at restaurants and bars will eat into sales taxes. A slowing labor market is expected to drive up unemployment insurance claims. Capital gains tax receipts, an oft-volatile revenue source, helped spur back-to-back $1 billion-plus budget surpluses in the last two years, but now they could dry up amid wild stock market fluctuations.

Officials at the Massachusetts State Lottery said its revenue had already dropped $1.3 million last week.

“Even something like gas taxes” could suffer, said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, which tracks legislative spending nationwide. With more people working from home, he said, fewer drivers are going to the pumps.

“Nearly all of the major sources of revenue will be impacted in one way or another," he said.

The business-backed Massachusetts Taxpayers Foundation had warned in January that the state was facing financial pressures, from finding new money for education to covering increased pension fund contributions.

There were already challenges, and “certainly they have been exacerbated by the pandemic,” said Eileen McAnneny, the group’s president.

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Fortunately, the state is entering this unstable future from a position of strength. By the end of February, state revenues were tracking $176 million, or about 1 percent, above expectations for the fiscal year to date. The state is also sitting on a $3.5 billion emergency savings account, a record amount for its so-called rainy day fund.

But deflated tax revenues could have an even wider effect on the budget cycle ahead. The House and Senate are in the middle of crafting spending proposals for the fiscal year starting in July, a plan that the House typically releases and debates in April.

House Speaker Robert A. DeLeo on Monday said that whether state representatives can stick to that time frame — or be "delayed somewhat” — is unclear, because lawmakers and Baker are faced with responding to the pandemic.

Also unclear is whether the state will have to dip into that savings account, including to avoid painful cuts. Asked last week if there is enough money to battle the health crisis, Baker hinted at tapping the fund, should the outbreak drag on.

“A lot of us have worked pretty hard up here over the last few years to dramatically expand the state’s rainy day fund," Baker said. "I fully expect that, over the course of the next — pick a number — five or six months, there are many issues we’re going to need to figure out how to help people work their way through.”

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Sarah Finlaw, a Baker spokeswoman, said he has already taken emergency steps to blunt the economic fallout, including filing a bill that would make it easier for some people to more quickly collect unemployment benefits.

Baker hopes to see those bills, and the budget, enacted “in a timely fashion,” Finlaw said.

Unease, however, is quickly spreading.

Jay Gonzalez, who led then-governor Deval Patrick’s budget office as the state climbed out of the 2008 financial crisis, said that in lean times the state gets hit from both sides: Revenues drop as people who lose jobs need more help from the state.

Add in a public health crisis, economists warn, and health care costs are likely to climb, though federal help could be coming. The US House-passed coronavirus aid bill currently before the Senate includes a provision to raise the federal Medicaid matching rate, which would deliver roughly $35 billion in immediate fiscal relief to the states, according to the Washington-based Center on Budget and Policy Priorities.

“This is obviously an unprecedented health emergency, but it is also creating a potentially unprecedented economic emergency. Our economy was going 100 miles per hour, and it’s literally at zero right now,” Gonzalez said.

In 2008, he added, “tax revenues [were] falling off a cliff," which prompted emergency budget cuts that further complicated the state’s fiscal picture.

“You could see a similar situation happening here,” he said.

Deep spending cuts would not be bloodless, either. As the state lost billions in revenue in the last financial crisis, the budget for the Department of Children and Families, for example, was decimated, its funding dropping from $837 million in fiscal year 2009 to $737 million by fiscal year 2012.

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Those reductions led to heavy caseloads at the department and strained already overworked social workers — challenges that sprang to the forefront years later, when the death of 5-year-old Jeremiah Oliver exposed widespread problems at the agency. (Its budget now stands at nearly $1.06 billion.)

That the country, and policy makers, are only a few years removed from the last recession could ultimately be a blessing in disguise, said Louise Sheiner, a senior fellow in economic studies at the Brookings Institution. That recent memory, buoyed by the immediate impact the pandemic is having across the economy, could help officials better respond to this crisis than 12 years ago.

“They know this could be bad," Sheiner said.


Matt Stout can be reached at matt.stout@globe.com. Follow him on Twitter @mattpstout. Victoria McGrane can be reached at victoria.mcgrane@globe.com. Follow her on Twitter @vgmac.