State faces possible $750 million budget gap

Governor Charlie Baker is unlikely to raise taxes or fees to close the looming budget gap.Lane Turner/Globe Staff/File 2016

Massachusetts is facing a budget gap that could force lawmakers to wipe out much of the new spending proposed by Governor Charlie Baker, the House, and the Senate on programs ranging from opioid abuse prevention to early education.

Baker’s budget office announced Tuesday that, even though the state’s economy is humming along, tax revenue for the fiscal year that starts July 1 is expected to be $450 million to $750 million less than anticipated.

That means the spending plans proposed by Baker and passed by both legislative chambers were premised on an overly exuberant tax haul estimate. And since the state must have a balanced budget, policymakers will have to cut spending and find new sources of cash — and quickly.

Eileen McAnneny, president of the business-backed Massachusetts Taxpayers Foundation, said the most prudent first step for lawmakers is to “substantially” tighten proposed spending.

The state economy still appears relatively strong: unemployment is low; sales tax revenue remains solid, showing people are buying goods; withholding taxes, taken out of peoples’ paychecks, are stable. But because of stock market volatility and lower investment returns, the amount of tax revenue growth that analysts expected for the new fiscal year — 4.3 percent — is now seen as too optimistic.

Even though a $750 million gap would be only a small part of a nearly $40 billion state spending plan, the effect of such a reduction would be magnified because a big chunk of the budget is already locked in. State officials were expecting $1.1 billion in new money for the fiscal year that begins in July. But about two-thirds of that additional revenue was already spoken for by areas such as debt service, pensions, and Massachusetts’ massive Medicaid health program for the poor and disabled.

So the projected gap could renew a tug of war between the more liberal Senate — which is seen as more open to raising taxes than making deep cuts — and the more conservative House and governor, seen as more comfortable with chopping some state services than hiking taxes.

Baker, a Republican, ran for governor in 2014 promising not to raise taxes or fees. And a top aide said, even with the gap, he is sticking by that pledge.

House Speaker Robert A. DeLeo, a Winthrop Democrat, said through a spokesman Tuesday that he is not supportive of raising taxes or fees to close the anticipated gap. And, the spokesman said, DeLeo is not inclined to use the state’s rainy day fund, meant for fiscal emergencies.

A spokesman for Senate President Stanley C. Rosenberg, an Amherst Democrat, said he was on an overseas trip and not available to comment.

In recent years, legislators have frequently looked to the rainy day fund, an emergency savings account, to bridge budget gaps. But McAnneny, of the taxpayers foundation, said taking money out of the fund “would be irresponsible at this time.”

Speaking to reporters, Baker said his administration would work collaboratively with the Legislature, praised top lawmakers’ fiscal chops, and downplayed the difficulty of filling the hole.

The timing of the announcement, which came in a formal note to Massachusetts bond investors, adds to the complexity of the fix. Both chambers of the Legislature have already passed versions of the budget, and House and Senate members in a closed-door committee are currently wrangling over a final version of the spending plan.

State law says the governor must recommend “corrective” action to the Legislature when expected revenue drops. But with the new fiscal year just over two weeks away, it was unclear how the timing of budget changes would play out.

If they need more time to create a full-year spending plan, the governor and lawmakers could agree on a monthlong temporary budget.

In a statement, Baker’s budget chief, Kristen Lepore, underscored that the state’s broader fiscal picture is solid. But she noted that the less-than-expected revenue for the current fiscal year will ripple into the next.

Representative Brian S. Dempsey, a Haverhill Democrat who is chairman of the House budget-writing committee, said his team is continuing to monitor revenue collection. “We will be working closely with the administration and the Senate to identify a variety of solutions to ensure a balanced budget,” he said.

And Senator Karen E. Spilka, who leads the Senate’s budget-writing committee, said in a statement that her committee expects the governor will file a corrective budget.

“Meanwhile, the House and Senate are actively discussing and assessing our options,” the Ashland Democrat said. “The Senate’s priority is to continue to protect the vulnerable and maintain critical services and programs for our residents.”

The state budget news comes in the context of growing worry about the national and world economies. US employment data released this month was surprisingly weak, sparking fears of a new American recession. And the specter of Britain leaving the European Union in a June 23 referendum has rattled markets across the globe.