Deteriorating economic outlook dims state budget picture
Photo | Courtesy of Commonwealth of Massachusetts
Massachusetts State House
Soaring unemployment and the expectation among public health experts that a second wave of the coronavirus could land in the fall has prompted a leading Beacon Hill watchdog group to revise its tax revenue forecast for next year, now predicting the state could collect $6 billion less than anticipated just five months ago.
The Massachusetts Taxpayers Foundation released its updated economic outlook on Monday, the same day Gov. Charlie Baker detailed his administration's plans to slowly allow the economy to begin to reopen from its COVID-19 shutdown.
The nonpartisan, business-backed think tank said that even if consumers go on a spending "spurt" as retail and restaurants reopen later this summer, it's likely that discretionary spending will be limited by people's "confidence in their financial well-being – a task that could take years depending on the length and severity of the pandemic."
MTF President Eileen McAnneny testified before lawmakers and the administration in April about the changing dynamics of the state's budget picture, predicting a drop-off of $4.4 billion in estimated tax revenue collection in fiscal 2021 due to the pandemic.
McAnneny now says that prediction was "overly optimistic," and that revenues could miss targets set in January by more than 19 percent as unemployment in the state swells to 22 percent by June. That level of job loss, the group said, would cause withholding taxes to fall by $1.9 billion and cost the state $2 billion in sales taxes.
"More current data indicate that the economy is unlikely to ramp up quickly and the job loss will be far greater than originally expected. As the size, scope, and duration of this public health crisis grow, we have revised our forecast to reflect the deteriorating economic outlook. With rapidly-changing economic and fiscal conditions this may not be the last time a revised forecast becomes necessary," McAnneny said.
The uncertainty and volatile nature of the state's economic climate is why House Ways and Means Chairman Aaron Michlewitz said it is becoming "less and less likely" that the state will have a "full calendar budget" in place by the start of the new fiscal on July 1.
"This shows you, that MTF is changing its number, the uncertainty from an economy standpoint of what lies ahead," Michlewitz told the News Service. "One of the things I took from the April 14 roundtable was that there were factors that could change. I still think as we sit here today that is still the case."
Michlewitz added, "We have a number of mitigating issues we can't address right now, and one of them is what is going to happen with the federal government with this new stimulus package that the House passed on Friday."
Since inviting multiple economists and outside budget analysts last month to offer predictions on the depth of the fiscal crisis caused by the COVID-19 outbreak, legislative Democrats and the Baker administration have said little about how they intend to update the revenue estimates that they will use to build a budget for fiscal 2021.
The new fiscal year starts on July 1, but House and Senate leaders have already floated the idea of using one-month budget extenders to buy more time as the state lets the pandemic play out and tries to gauge how quickly the economy might rebound.
Michlewitz said the idea of month-to-month budgeting is "an option being discussed," but added that it's "too early to predict how that will play out."
"We'd rather be able to do something that has more concise information and understanding before we do something that heads us in the wrong direction. So we're trying to be careful at this point in time," Michlewitz said. "The reopening and the recovery will have a huge impact on our FY21 prospects, so as we sit here May 18 there's obviously a lot of uncertainty where we're headed and that is being reflected in how we're handling the budget."
The new MTF analysis cites the loss of 20.5 million jobs nationally through April, including close to 1 million in Massachusetts, as one of the reasons for its more pessimistic outlook. The new report says the national total reflects about 5 million more jobs lost than MTF had anticipated when it made its April prediction.
The organization also said the pandemic is "lasting longer" in Massachusetts and around the country than anticipated, and medical experts are increasingly pointing to the likelihood of a resurgence of the virus in the fall that could force more business closures.
The group now predicts that Massachusetts will lose 725,000 jobs from April through June, which would push the unemployment rate to 22 percent and reduce annualized wages by $42 billion.
While the tax and budget group predicted the state will regain 323,000 of those lost jobs in fiscal 2021, MTF does not see Massachusetts returning to pre-pandemic employment levels until 2024.
The U.S. House last Friday passed a new $3 trillion relief package that would send $500 billion in direct aid to states like Massachusetts, but Senate Republicans have questioned the scope of the spending and President Donald Trump called the bill "dead on arrival."
MTF said the federal relief approved in early bills is not enough to mitigate the virus's impacts, and is restricted in how the state can spend it on coronavirus response efforts.
"Without further federal relief, states and municipalities will be challenged to balance their budgets and recovery will take longer than previous estimates," the MTF report stated.
MTF also predicted a tax revenue shortfall of between $700 and $800 million this fiscal year, and has already suggested that Beacon Hill lawmakers consider delaying implementation of the landmark $1.5 billion education funding reform bill passed last year, or put off a planned increase in the state's contributions to its pension fund.
Senate Ways and Means Chairman Michael Rodrigues's office did not respond to a request for comment, and the governor's budget office said it continues to monitor revenue expectations.
Northeastern University professor Alan Clayton-Matthews, one of the economists who presented to legislators last month, said he has not yet updated his revenue projections as MTF had, but Michlewitz said it was likely that lawmakers would go back to people like Clayton-Matthews to have another discussion.
"We haven't formally asked others to update, but we may want to go back to having some follow up discussions," the chairman said. "When that will be is not yet solidified, but we may have to have further discussions."
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