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Massachusetts could face a $5 billion budget hole; Baker administration takes tax hikes off the table for now

The Senate and House chairmen of their respective chambers' budget committees, Michael J. Rodrigues and Aaron Michlewitz, prepared to host a virtual round table with experts to determine how dire Massachusetts' financial picture is.
The Senate and House chairmen of their respective chambers' budget committees, Michael J. Rodrigues and Aaron Michlewitz, prepared to host a virtual round table with experts to determine how dire Massachusetts' financial picture is.David L. Ryan/Globe Staff

With the prospects for a federal stimulus package in flux, Massachusetts’ financial picture is likely to crumble in the months ahead, state officials and outside economists warned Wednesday, projecting that tax revenues this year could dive anywhere from nearly $3 billion to $5 billion below expectations amid the pandemic.

The sobering estimates, detailed in an hourslong economic hearing at the State House, raised the potential that painful budget cuts may be unavoidable as the state struggles under the economic constraints brought on by the novel coronavirus.

Michael J. Heffernan, the state budget chief for Governor Charlie Baker, told reporters after the hearing that he doesn’t envision having to raise taxes to close any holes in the state’s still-outstanding budget plan. Baker, a Republican, has long opposed broad-based tax hikes, and more recently, opposed a House-passed proposal to raise the gas tax. But he’s signed tax and fee increases into law since taking office in 2015.

“Right now, from what we see, we won’t need to raise taxes,” Heffernan said Wednesday.

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Whether legislative leaders will agree is unclear. State Senator Michael J. Rodrigues and Representative Aaron Michlewitz, the Democratic-led chambers' respective budget chairmen, did not commit to a specific path in crafting an annual budget, saying they would need to talk to their fellow lawmakers.

Along with raising taxes to pull more revenue into its coffers, the state could also lean on a $3.5 billion savings account, known as the Rainy Day Fund, or slash spending in certain areas. But any formal decisions have long been delayed by the uncertainty surrounding a federal aid package, whose prospects plunged even further after President Trump abruptly ended his administration’s negotiations with Democrats on Tuesday over another round of aid.

“We certainly are going to take a balanced approach,” said Rodrigues, a Westport Democrat. “We know there’s only a few ways to balance a budget: raise revenue, institute cuts, or utilize reserves. There’s also what we get for federal support — which changes literally by the day."

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Three months into the fiscal year, state leaders have yet to craft an annualized budget, instead relying on a series of temporary measures, including a $16.5 billion spending plan that’s slated to expire at month’s end. Legislative leaders have not said whether they’ll propose and pass a complete budget by then.

A dark picture awaits them whenever they do, officials and economists said. Geoffrey Snyder, the state’s revenue commissioner, said his office expects tax receipts to plummet between $2.8 billion and $5.2 billion below the state’s previous estimates, though he said the more optimistic projection appears more probable.

For context, under the $44.6 billion budget plan Baker released in January before the pandemic hit, a $2.8 billion budget hole would be the rough equivalent to the proposed state spending on two whole branches of government, the judiciary and the Legislature, and the state’s public safety secretariat and its office of energy and environment.

The Massachusetts Taxpayers Foundation, a business-backed watchdog, is expecting a drop in revenue of $3.9 billion compared to initial estimates, according to its president, Eileen McAnneny. Others projected a more positive picture, though they included little good news for this year. Tufts University’s Center for State Policy Analysis, for example, estimated revenues to drop $1.6 billion.

State tax receipts are currently running slightly ahead of last year’s pace one-quarter into the fiscal year, and the fiscal year that ended in June saw a relatively smaller shortfall of $693 million. But several of those testifying Wednesday warned the surprising positive returns will likely not continue, particularly as various forms of federal aid and taxable unemployment insurance dry up.

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“Most of this improvement is temporary,” McAnneny said.

Shaping these various pressures is what economists described as an “unprecedented” amount of uncertainty, particularly with the scope and scale of COVID-19′s continued spread.

Michael Goodman, a University of Massachusetts Dartmouth economist, warned that should coronavirus infections spike enough to force Baker to pull back on reopening, Massachusetts could again slide back toward the “brutal” economic experience of the spring and summer, when the state had the highest unemployment rate in the country.

“There is no port in this storm so far,” Goodman said of the economic tumult’s impact on different sectors, including on those working frontline jobs who are unable to work remotely.

“The bottom line is a substantial number of US workers, and certainly Massachusetts workers, continue to have to commute. And the less well-educated you are, the more likely you have to commute to jobs that require face-to-face interaction,” he said.

With Trump’s announcement Tuesday, the potential for federal aid appears to be off the table for “at least the foreseeable future,” Rodrigues said. It’s a prospect that has frustrated state lawmakers who have seen it as a difference-maker in avoiding drastic cuts to state services at a time when people are increasingly relying on unemployment benefits and other public assistance.

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“It is not only disappointing but will also have a drastic negative impact on the Commonwealth’s finances,” said Michlewitz, a North End Democrat.

Advocates have also warned about a potential coming wave of evictions, further complicating people’s individual economic prospects, and economists say the state’s employment picture could take years to stabilize to pre-COVID levels.

There are 420,000 fewer people working today than before the pandemic hit, according to McAnneny, who said Moody’s Analytics projects that in July 2022 — the start of fiscal year 2023 — there will be 300,000 fewer employed in Massachusetts than during this past February. Fewer people working can mean a drop in the withholding and sales tax collections upon which the state relies.

“There’s a budgetary crisis happening,” said Marie-Frances Rivera, president of the left-leaning Massachusetts Budget and Policy Center.

To plug any holes, the state can turn to its $3.5 billion Rainy Day Fund. But how the state draws down from the reserves can also impact its ratings with bond agencies, which help shape the state’s ability to borrow money at a lower cost.

State Treasurer Deborah B. Goldberg said during Wednesday’s hearing that rating agencies want to see states pair the use of savings with other measures, such as spending cuts, and that state officials should avoid using the account to cover “operational expenses that can’t be replicated” should the fund dry up.

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“Clearly, we’re in a rainy day,” said Goldberg, a Brookline Democrat. “However, we do not know how long that rainy day is going to last.”


Matt Stout can be reached at matt.stout@globe.com. Follow him on Twitter @mattpstout.