Economists say a $1b state budget cut may be needed

Top Massachusetts economists are warning that sluggish tax revenue growth means policy makers will have to chop as much as a billion dollars out of next year’s budget — cuts that could squeeze programs for the poor and the sick and increase calls for raising taxes.

The top budget officials from the Senate, House, and governor’s office huddled with economic experts in a closed-door meeting Wednesday, trying to reckon with years of less-than-projected tax revenue.

Already the state is facing a budget gap of nearly half a billion dollars this fiscal year, which ends June 30. That will ripple into the fiscal year that begins in July, probably requiring cuts to the bottom lines of the spending plans already passed by the Senate and House.

Eileen McAnneny, president of the business-backed Massachusetts Taxpayers Foundation, predicted legislators will have to slice between $750 million and $1 billion from their $40.3 billion budget. That won’t all be in program cuts, she said, but it won’t be painless.

“Eight years into an economic recovery, we have seen state tax revenue slow down considerably. And it looks like more than a blip,” she said. “So we have to adjust the budget accordingly, and make sure spending aligns with revenues.”

Policy makers based their budget on the expectation that tax revenue would grow by 3.9 percent in the fiscal year that begins in July. But that prediction now appears to have been far too optimistic.

(It is, after all, easier for elected officials to split up a bigger pie than a smaller one.)

In the first 11 months of this fiscal year, tax revenue has grown 1.2 percent. Last fiscal year, it grew 1.9 percent.

Lawmakers may be tempted to use fiscal sleights of hand and to explore other avenues to avoid making difficult or deep cuts, as they have done in past budget crunches. For example, lawmakers could reduce their expectations about how many poor people will end up using state health care. Or they could take money from trust funds meant to address problems like cleaning up underground gas tanks.

Still, cuts to the budget for next year may be unavoidable.

“The state is going to have to start tightening its belt,” said economics professor David G. Tuerck, president of the conservative-leaning Beacon Hill Institute and one of the experts who spoke in Wednesday’s closed-door meeting.

He said that is likely to mean cuts in health and human services programs, which make up more than half of state government spending. Those include Medicaid, the joint state-federal health program for the poor and disabled known as MassHealth.

“We spend pretty lavishly on poor people in the state,” he said. “How much will the poor suffer? It’s impossible for me to guess. We have huge budgets that provide medical care and other services to the poor, and we may have to pull back around the edges.”

He said he expected the total Massachusetts economy to grow by about 2.8 percent this year through December, but warned that is just “sputtering growth” by historical standards and would mean weak tax revenue receipts.

So, he said, legislators may start looking for new sources of money — higher taxes.

Advocates warned against making cuts.

“We think it would be foolish to cut MassHealth,” said Brian Rosman, policy director at Health Care for All, an advocacy group. “This is people’s health we’re talking about. It’s not a luxury. It’s critical for the economy to function for people to be healthy.”

Meanwhile, economists said there’s no crystal ball for seeing the state’s fiscal future.

Alan Clayton-Matthews, an economics and public policy professor at Northeastern University, said that when it comes to Massachusetts’ future tax revenues, there’s a huge amount of uncertainty.

Much of it has to do with “what investors are doing with disposing of their assets or keeping them in anticipation of a favorable tax-law change,” said the professor, who was one of the experts at the State House meeting. He was referring to a prevailing theory that weak revenue from capital gains taxes — levies on investment profits — in several states has to do with investors waiting for the GOP-controlled Congress to pass tax changes before cashing out.

One way to look at revenues going forward is to be cautious, predicting that the fiscal year ahead will be like the last two, he said.

Another: People may change their investment behavior, leading to a boost in capital gains taxes and more money for the state to spend overall.

“Who knows?” he said.

Coming out of the meeting, Representative Brian S. Dempsey, chairman of the House’s budget-writing committee, offered words that seemed aimed at tempering the expectations of both lawmakers and members of the public who are hungry for more or new funding on programs across the government.

“This [economic] recovery has been very, very modest,” said Dempsey, a Haverhill Democrat.

But just as Beacon Hill leaders have adjusted spending to match revenues in the past, so, too, will they this time, he said.

Does that mean residents should expect more modest upticks in funding from their state government?

“We’re going to have to make some adjustments,” he said, “so certainly, in terms of level of expectation around budget items, certainly they should be adjusted, based on what our revenues actually are.”

One translation of which might be: The likely belt-tightening won’t be without some discomfort.