Beacon Hill leaders, who in recent years have overestimated how much cash from taxes Massachusetts will bring in, are now facing their trickiest budget cycle since the Great Recession.
Beyond the normal unpredictability of the economy, State House number-crunchers must sort through far more fiscal question marks than usual as they calculate how much money there will be to fund government programs — and how to spend it — in the fiscal year that starts July 1.
These variables include the outcome of separate ballot questions raising income taxes on the very wealthy and lowering the sales tax for everyone; the Justice Department’s threat to crack down on Massachusetts’ fledgling marijuana industry, which could choke off a new source of tax revenue; pressure from Wall Street for the state to sock away more money in its rainy day fund; and uncertainty about federal dollars that have in past years helped state programs such as health insurance for the poor.
Crafting the budget “will be an even bigger balancing act than it has been in the past few years,” said Senator Karen E. Spilka, an Ashland Democrat and chairwoman of the chamber’s budget-writing committee.
“The federal government just enacted very large tax cuts targeted mostly at high-income taxpayers that will likely lead to cuts in federal support for programs that are important to people in Massachusetts, and revenue that is important to the state budget,” said Noah Berger, president of the left-leaning Massachusetts Budget and Policy Center.
There are other confounding factors. That just-passed federal tax bill could change how and when state taxpayers cut checks to the state. Tax revenues for the month of December far exceeded expectations, and it’s not clear whether that was a one-off from residents worried about changing federal tax law or a sign that the state is due for a revenue windfallthe rest of this fiscal year and perhaps the next.
Representative Jeffrey Sánchez, who leads the House budget-writing committee, said the immense variability in tax revenues from month to month — and its import on what state services can be funded — has left him itching to see new data from Governor Charlie Baker’s budget chief, Michael J. Heffernan.
“We’re living by that number,” Sánchez said. “I’m up to the point, every other week, I want to go to Heffernan and be like, ‘Come on man, hook me up with a number!’ ”
On top of the particular difficulties of the current moment, Baker, a no-new-taxes Republican, and the Democrat-controlled Legislature don’t have a great track record when it comes to accurately forecasting how much money the state will have to spend.
In the past two fiscal years, using estimates from top economists, they were too bullish in their original projections of how much in taxes the state would collect, forcing several rounds of adjustments and budget cuts.
For example, in January 2016, policy makers projected that tax revenue would grow by more than 4 percent in the fiscal year ended June 30, 2017.
The reality: It grew by less than 1 percent.
That type of variability has led outside budget watchdogs, like the business-backed Massachusetts Taxpayers Foundation, to urge caution, despite the state’s December haul, which was a whopping 21 percent more than expected.
‘It’s an important year to be cautious.’
Eileen McAnneny, the foundation’s president, said the recent revenue uptick is good news, but, for now, any unexpected cash should be socked away.
“Given pending ballot initiatives that could cause huge swings in revenue, uncertainty over federal reimbursements for [health care programs], transportation, and other priorities, and the need to build up reserves, the state should save all revenues above benchmark until there is more clarity on these issues,” she said.
Voters this November are poised to act on two ballot questions that would change current tax rates in the state: the 5.1 percent levy on income and the 6.25 percent tax on sales.
The first ballot question, a constitutional amendment, is being challenged in court. But should it be allowed to move forward, the language would impose an additional tax of 4 percentage points on annual taxable income in excess of $1 million starting in 2019. And that level would be tied to inflation, so the extra tax would continue to apply only to very wealthy people.
The second, an initiative petition for which organizers need to gather an additional 10,792 signatures to make the November ballot, would reduce the sales tax to 5 percent and mandate a yearly sales tax holiday weekend every August.
If voters greenlight just the so-called millionaires’ tax, it is likely to add $900 million in revenue to the budget in the fiscal year that runs through the first six months of 2019, according to the Taxpayers Foundation.
If just the sales tax cut is approved, that would cut the next fiscal year’s revenue by $630 million, the group estimates.
“It’s an important year to be cautious,” said Berger, of the Budget and Policy Center.
Tax uncertainty on so-called sin industries underscores that point.
Two massive resort casinos — one in Springfield and one in Everett — are slated to open in the next fiscal year. But delays could mean tax revenue from MGM Springfield and Wynn Boston Harbor doesn’t start flowing until later.
And while the state’s nascent marijuana industry is poised to open pot shops by this summer, with weed tax revenue set to start flowing into coffers by July, recent federal action may end up scuttling that timeline.
Massachusetts’ top federal prosecutor this week refused to rule out a crackdown on the voter-authorized marijuana industry. That followed US Attorney General Jeff Sessions’ decision last week to grant regional federal prosecutors broader discretion to enforce the longstanding national prohibition on the drug.
Then there was last year’s bad news from a top bond-rating agency. S&P Global Ratings downgraded its measure of Massachusetts’ creditworthiness for the first time in almost 30 years, saying Beacon Hill had failed to replenish the state’s rainy day fund as promised after the last recession.
That is putting new pressure on policy makers to take extra cash and plow it into the emergency savings account — a final bulwark against extreme cuts to state services when the economy tanks — instead of spending it on current programs.
But Sánchez, a Jamaica Plain Democrat who is the House’s top budget-writer, emphasized the import of funding programs that help real people now, instead of putting so much focus on the state’s bond rating.
“People don’t live by ratings, you know? DCF doesn’t live by ratings,” he said, referring to the Department of Children and Families.
Sánchez, Spilka, and Heffernan — the House, Senate, and governor’s budget chiefs — are set to release their joint estimate of tax revenue in the coming days. Then, Baker, the House (whose leader has pledged no new broad-based taxes), and the Senate will release their spending plans and, by the July 1 deadline, hammer out a new budget.Joshua Miller can be reached at email@example.com.