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June 15, 2016

Lawmakers searching for answers in the face of revenue slowdown

Courtesy Photo

As revenues counted on by House and Senate lawmakers to build next year's budget appear to be drying up, Democratic legislative leaders say they plan to work with Republican Gov. Charlie Baker to deliver a balanced budget by the end of the month that accounts for as much as $750 million in taxes falling off the ledger. One key senator said a corrective budget may be needed.

The downgraded revenue estimates from the administration for next year, combined with an updated projection of a $320 million to $370 million revenue hole in the current state budget, delivered a blow to legislative negotiators who have until the end of June to come up with a plan for dealing with the problem if they hope to complete an on-time and balanced budget for fiscal 2017.

The problem could also force lawmakers to retreat in an election year from some of the budget-related investments they have been touting since the early spring, though the politics might be somewhat cushioned by the fact that many incumbents face no opposition this summer and fall.

"We have a full year here to deal with this," Baker said Tuesday, hours after his administration disclosed the updated fiscal projections. "This isn't like we're coming back and dealing with it in December or January when we only have six or seven months left in the fiscal year to make decisions and I think we're just going to have to work with them to make sure the budget they send to us and the budget we sign is balanced based on that reality."

The administration filed an updated financial disclosure statement on Tuesday predicting for state investors that tax collections will finish the current budget year $320 million to $370 million below benchmarks, and expected tax revenues for fiscal 2017 are now likely to run $450 million to $750 million below the expectations that Baker and the House and Senate budget writers have been using all year.

While neither Baker nor senior House and Senate budget officials would discuss options on Tuesday, Lt. Gov. Karyn Polito tried to reassure mayors and local government leaders at the State House for a meeting with the administration that local aid and assistance to the "most vulnerable" would be prioritized in decision-making.

Senate Ways and Means Chairwoman Karen Spilka, in a statement, also said the Senate's priority will be to "protect the vulnerable and maintain critical serves and programs for our resident." Spilka also said she expects Baker to file a "corrective budget" for fiscal 2017 with recommendations for how to deal with the new revenue estimate.

"For this current budget obviously we're looking internally to see what accounts have not fully been expended and where we can look to that will have the least amount of impact and pain if you will," Polito told reporters after the meeting with local officials. "Certainly our priority remains to our cities and towns relative to unrestricted aid and school aid and to the most vulnerable in our community, and I would think that our legislative counterparts would share our common ideas around that."

Spilka, in an interview while walking back to her office for a meeting, told the News Service, "We are discussing it, the House, the Senate and (Administration and Finance) so we are actively working on it right now."

Asked whether reopening the budget for each branch to reconsider its spending proposals was an option, Spilka said, "We are discussing options, so we're working together on this issue."

Massachusetts Taxpayers Foundation President Eileen McAnneny said it was "too soon to say definitively" whether the revenue slowdown is minor hiccup or a sign of broader economic trouble. The administration pointed the finger at a "volatile stock market" and lower investment returns that start to turn downward in February.

"Most of this has to do with the flat stock market that we had, which just didn't impact us. It impacted a lot of people. In fact when we were down in New York last week meeting with the rating agencies and talked about this they referred to it as an April surprise and said it was something they saw that happened in a lot of states," Baker said told reporters on June 6. "It certainly is something that we noticed a few months ago and started to make adjustments to where year-end spending was going."

McAnneny said the foundation has done its own preliminary analysis and is in the "same ballpark" as the administration with revenue estimates for fiscal 2017. Despite the lowering of expectations, McAnneny said, "One place we don't think they should be looking at this point is the stabilization fund because we are not in a recession."

"It's premature to say that we're entering a recession certainly, but it bears watching and we should err on the side of caution and substantially adjust fiscal year '17 revenue growth projections," McAnneny said, noting that job growth and withholding tax collections remain "strong."

The taxpayers foundation predicted in testimony before a panel of the Legislature and administration that revenues would grow 3.8 percent. While budget leaders may have been "optimistic" in settling on a benchmark of 4.3 percent growth, McAnneny said, "None of us predicted this slowdown in revenue over the last four months."

She also did not second guess the administration's decision in January to partially close a $320 million budget gap by raising revenue expectations by $140 million, which has exacerbated the fiscal 2016 budget problem.

"Hindsight is twenty-twenty," she said.

Midyear spending cuts were undertaken in both budgets that Baker has overseen so far in his administration - one of which he signed and one of which he inherited. Polito said it is best to address the shortfall early.

"It does signal to us that as this budget is formed for fiscal year 17 we've got to be aware of the revenue shortfalls of this year and think of those as we plan the budget for the next fiscal year," Polito told reporters. "It's not in anyone's best interest for the budget to be set up to fail. And we certainly wouldn't want to be in a situation midyear to have to make adjustments. So getting it right from the outset is the goal and that's something that all of us are working together on."

House Ways and Means Chairman Brian Dempsey responded to questions about the latest revenue estimates by issuing a statement to the News Service through his office.

"We are continuing to monitor the FY16 revenue collections and assess for any impacts on FY17. We will be working closely with the Administration and the Senate to identify a variety of solutions to ensure a balanced budget," Dempsey said.

Carolyn Ryan, vice president of research and data analytics at the Greater Boston Chamber of Commerce, said state revenue figures show collections have fallen behind in "other income taxes," which leads her to believe the problem is associated with income not related to wages, such as capital gains taxes paid on investment gains.

Stock market indexes finished down at the end of 2015, compared to 2014, she said, and the lack of investment gains may have been reflected in tax returns filed in April and May. The volatility of the market makes predicting capital gains collections difficult, Ryan said, and it's further complicated by variables such as whether investors sell or hold assets and whether companies pay dividends.

"It's such a volatile thing. That's a tough one to predict," Ryan said of capital gains and tax collections stemming from investment gains. The situation highlights the need for Beacon Hill to adhere to laws designed to place into savings funds any capital gains revenues over $1 billion per year, she said.

The 11,000-member Massachusetts Society of Certified Public Accountants also released on Tuesday the results of a survey of 46 CPAs who agreed estimated payments from capital gains were strong in 2014 but tailed off in the second half of 2015 and in 2016, leading to lower tax payments to the state.

"CPAs have a unique window into trends in taxpayer behavior that can provide much needed nuance into critical revenue projections provided by the DOR and the Executive Office of Administration and Finance. We are happy to offer our insights and will continue to work with our members to provide this information in the future," Amy Pitter, president and CEO of MSCPA and revenue commissioner under Gov. Deval Patrick, said in a statement.

The society launched its survey of members after April tax collections were down by $92 million compared to April 2015, and missed benchmarks by $172 million.

CPAs who responded to the survey overwhelmingly said the patterns that led to the April shortfall will continue into 2017, and be reflected in June tax data set to be released in early July. CPAs also reported seeing lower business profits, a drop in retail sales, and a decrease in mergers and acquisitions.

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