State tax revenue on the rebound, officials now say

State Treasurer Timothy P. Cahill said yesterday that the lottery will bring in $35 million more than originally projected this year. State Treasurer Timothy P. Cahill said yesterday that the lottery will bring in $35 million more than originally projected this year.
By Matt Viser
Globe Staff / December 17, 2009

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State tax revenues appear to be bouncing back and will begin to grow next year, providing a long-awaited glimmer of good news after two years of falling tax collections, according to state officials and economic specialists.

The new estimates, along with some one-time tax settlements, make it more likely that Governor Deval Patrick will not have to make further midyear budget cuts that seemed almost certain several weeks ago.

“The recession is over,’’ said David G. Tuerck, executive director of the Beacon Hill Institute at Suffolk University, echoing an increasingly prevalent view. “We are, in fact, in recovery mode and a fairly brisk one at that.’’

Still, the budget woes that have led to deep cuts in state services in recent months are hardly over, as state officials wrestle with how to make up for federal stimulus funds and other one-time revenue sources that bolstered the budget over the past year. The state’s reserve account is also dwindling, leaving little room for error. Even with the improved revenue estimates, specialists say that cuts will probably still be needed to balance the budget.

The improved outlook is the result of factors including a stabilization in job losses that had drained state income taxes in recent years. Corporate profits are also expected to increase, which will bring more corporate tax revenue, and state sales tax revenue has also been growing, in large part because of a controversial increase in the sales tax rate the Legislature approved earlier this year.

State economists and revenue officials provided lawmakers yesterday with a detailed look at their tax revenue estimates for the next 18 months, which will be used as a foundation for Patrick’s budget proposal next month.

The predictions were the latest piece of good economic news, which until recently had seen revenues consistently fail to meet estimates.

Patrick announced earlier this month that a tax settlement and higher-than-expected tax collections in November would allow the state to close a $120 million budget gap without further midyear budget cuts.

State Treasurer Timothy P. Cahill said yesterday that the lottery is performing better than expected and that the state will see another $75 million in new revenue by selling abandoned stocks that the state has accumulated over the past several years.

The budget developments were part of a chaotic day on Beacon Hill as House lawmakers interrupted their holiday recess to hold a closed-door caucus on education legislation, and as Speaker Robert A. DeLeo tried to quell ongoing dissent over more than $350,000 in taxpayer-funded legal bills stemming from the federal investigation of former speaker Salvatore F. DiMasi.

The education bill, as originally proposed, would give superintendents unprecedented authority to ignore union rules as they overhaul troubled schools. The Senate has already approved a version of the legislation, and the House would need to follow suit by mid-January for Massachusetts to meet new federal requirements and become eligible for fresh federal funds.

During the meeting, which lasted several hours, union lobbyists were stationed by the door, cornering lawmakers and passing out letters expressing concerns with the legislation.

“I’m not going to let down the people or the children of the Commonwealth of Massachusetts any further,’’ DeLeo told reporters after the caucus.

As House members filed into one conference room, economists and other lawmakers met in an auditorium for four hours of testimony on the state’s economy.

“I do feel that we have reached, or are close to reaching, the bottom,’’ said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation. “It’s been a long slide, to say the least.’’

Revenues plummeted last year, causing several rounds of midyear budget cuts. There were times when the state could barely pay its bills.

The problems were triggered by the national meltdown in credit markets, plummeting stock and real estate values, and an economy that was tumbling into a recession. The state was faced with declining tax revenues, with corporations making fewer profits, businessmen paying less on their capital gains, and residents spending less at stores.

“We are fairly confident that the bottom has been reached, and we will begin to grow,’’ Alan Clayton-Matthews, a Northeastern University economics professor, said at yesterday’s revenue hearing. “By my best estimate, the state hit the bottom . . . in October.’’

State officials approved a budget in July estimating that revenues for this fiscal year would be $18.879 billion. After taxes started coming in lower than expected, the Patrick administration reduced that estimate in October by $600 million and announced a series of budget cuts. Since then, numbers have begun to improve, leading to Patrick’s more optimistic outlook earlier this month.

Most of those testifying yesterday said further cuts were unlikely, and they began to focus on projections for fiscal 2011, which will begin July 1, 2010.

Estimates still vary widely, but suggest an increase anywhere from 1.4 percent to 6.4 percent over the current fiscal year.

Patrick administration officials will work with legislative leaders over the coming days to come up with a more precise figure, which Patrick will use to craft his budget proposal next month.

Even as state officials showed optimism that the economy is improving, they expressed a fair amount of caution over its lingering impact on the budget.

No one is projecting job growth until later next year, which is a key to a full recovery because of its impact on tax revenues and on state unemployment costs.

And the state has relied heavily on one-time revenue sources to solve the past two years of budget problems. Most of that revenue, including federal stimulus dollars, will disappear next year and will require additional cuts.

“We are seeing positive signs in the economy,’’ said Jay Gonzalez, the secretary of administration and finance. But, he said, “we’re going to face real budget challenges in fiscal ’11.’’

The revenue improvements could help the state, but could hurt the political fortunes of Cahill, who has banked much of his independent candidacy for governor on making the case that he would be a better steward of state tax dollars.

“It would make it more difficult, but I’m not wishing the economy to do worse,’’ Cahill told reporters after the hearing. “I’m just trying to get us to do a better job of budgeting.’’

Cahill said yesterday that the lottery will now bring in $35 million more than original projections. The increase is largely attributed to sales in sports-themed lottery tickets through partnerships with the Patriots, Bruins, Celtics, and Red Sox.

He also said the state would reap $75 million through selling off abandoned property that no one has claimed.

The state has to wait three years before selling off things like stocks and bonds that has gone unclaimed, and that money can now be used for either this year’s budget or next year’s, according to Cahill.

“We’re not out of the woods yet,’’ Cahill said of the state’s financial picture.

“Our spending is still in some ways more than what our revenues are bringing in. It’s better than it was last year, but it is still precarious.’’

Matt Viser can be reached at