State deficit may hit $1b again

Senate budget leader, fiscal group sound alarm

By Frank Phillips
Globe Staff / March 12, 2009
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As tax revenue continues to dwindle, Beacon Hill leaders are confronting an additional budget gap of as much as $1 billion this year, forcing lawmakers to choose between deep spending cuts and broad-based tax increases.

The new estimate by a Senate budget leader, which was confirmed by a state fiscal watchdog group, is the latest in a cascading series of grim revenue forecasts, which has already compelled Governor Deval Patrick to close a $1.4 billion shortfall in the state's $28 billion budget in October and an additional $1.1 billion little more than a month ago.

Senator Steven C. Panagiotakos, chairman of the Ways and Means Committee, said that tax revenues have fallen well below expectations for the first few months of the year and that the fall-off could be a harbinger of a major slump between now and June 30, the end of the state's fiscal year

"We have a potential $700 million to $800 million deficit facing us," said the Lowell Democrat. "It's a real possibility. It has the potential to come close to $1 billion."

His estimate is nearly twice as high as the current figure circulating around the State House. It also augurs for an almost unmanageable deficit in the next three years that can only be closed with a combination of painful spending reductions and new sources of revenue, primarily from broad-based taxes such as income and sales levies, said legislative leaders and budget specialists. The local aid account, which Patrick has already trimmed, could face even deeper cuts next year than proposed as part of his budget.

Panagiotakos said he was prompted to revise his estimate of the deficit because he was alarmed over the February slump in revenue, which came in $86 million lower than predicted. He said he feared it could foreshadow an equally poor showing for March and April, when the state depends on a large influx of tax revenue.

Outside budget analysts agreed.

"It's a free fall," said Michael Widmer, the president of the Massachusetts Taxpayers Foundation. "The world economy is tanking faster than we can comprehend."

Both he and Panagiotakos said that the Legislature's only option at this point is to pull more money out of the stabilization fund to deal with the deficit in the current budget because most state accounts are close to depletion as the fiscal year draws to a close.

That fund, which held $2.62 billion eight months ago, will probably be less than $1 billion by the end of June if the decline in state tax revenue continues. In addition, Massachusetts is expected to get another $247 million in federal stimulus money that can be used to help cover the gap. Already $533 million in stimulus funds has been factored into the budget plans.

Panagiotakos and other legislative leaders are also predicting that the gap between expenses and revenues in the next fiscal year could exceed $4 billion, a level that can only be dealt with by finding new revenues sources and use of the state's dwindling rainy day fund if Draconian cutbacks in state service are to be avoided.

"The Legislature faces a huge dilemma," Widmer said. "With no new taxes, they would have to decimate state programs. Even with a major tax increase, there will be major cuts."

Patrick's fiscal aides, while acknowledging that the fiscal outlook is becoming increasingly dire, said they are undertaking a mid-year budget review and will not come to any firm conclusions until the end of this month..

"We know already that we have some deficiencies that will likely require additional budget solutions this year, thanks in part to faster-than-expected deterioration of the economy," said Cyndi Roy, a spokeswoman for Patrick's budget office.

Representative Charles A. Murphy, chairman of the House Ways and Means Committee, cautioned that the predictions coming out of the Senate are just projections and said he is waiting for March and April revenue figures before revising budget estimates.

"It is all about trying to predict the future, and no one can at this point," said Murphy, a Burlington Democrat. "I can't say if it is understated or overstated. We just at this point differ on projections."

Following a caucus where House lawmakers listened to economists and other fiscal specialists outline a bleak fiscal future for the state, House Speaker Robert A. DeLeo, who this week pegged the current budget deficit at $50 million to $500 million would not rule out a major tax hike to help balance next year's fiscal plan. He said lawmakers must first cut as much as they can from state programs.

"In light of the situation, I don't think you can consider anything off the table," DeLeo said when asked whether a broad-based tax increase will be necessary.

But it would be extremely difficult to persuade lawmakers to back a tax package, particularly one that includes an income tax hike, he added. "We're caught between a rock and a hard place."

DeLeo said there is little support among House members for an income tax hike, particularly after voters had called for cutting the rate from 5.5 percent to 5 percent in a 2000 referendum. Despite continued pressure from activists, the Legislature has not dropped the rate below 5.3 percent. Some legislators have suggested raising it to 5.4 percent, a hike that could raise $1.5 billion to $2 billion annually.

Panagiotakos said that winning political support for an income tax increase would be nearly impossible. He said cutting spending is the first alternative, but was not sure it would be enough to solve the problem without devastating state programs.

He suggested that a one percentage point hike in the 5 percent state sales tax could be preferable to an income tax hike. That would produce about an extra $750 million in state revenue.

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