State Budget Problems Worsen As April Tax Collections Miss Benchmarks

State Budget Problems Worsen As April Tax Collections Miss Benchmark

By Matt Murphy, State House News Service

May 04, 2017

State budget problems worsened considerably Wednesday after cratering April tax collections widened the revenue gap in this year's budget and called into question assumptions for next year's spending, setting up a major test of Gov. Charlie Baker's ability to manage through the near-term dilemma without unilateral spending cuts or tapping into reserves.

The growing issue of spending outpacing revenues and the lack of desire among the governor and House leaders to generate tax revenue to pay for it could also force legislators to reconsider the foundation used to build next year's budget just a week after the House approved a $40.4 billion spending plan.

Revenue Commissioner Michael Heffernan published the latest revenue report on Wednesday showing that collections of $2.86 billion in April -- the largest single revenue month of the year -- fell $241 million short of projections. Tax revenues were down $83 million, or 2.8 percent compared to April 2016.

While the fiscal 2017 budget assumes revenue growth of 3.1 percent for the year, so far through April the state has experienced just 1.1 percent growth in taxes. Next year's budget is being built on an assumption of 3.9 percent growth.

"These results make it unlikely that the Commonwealth will meet its FY17 revenue target with less than 20 percent of expected collections remaining in the final two months in the fiscal year, and we will also need to take a look at FY18 projections," Heffernan said in a statement.

The latest data marks a continuation of a long-running pattern in which Beacon Hill officials have overestimated the amount of tax revenue they can expect from taxpayers.

The administration and legislative leaders were hoping to see a rebound in April. "I keep on awaiting those months where I'm hoping that we're going to see some uptick and it's been quite a while since we've seen that, so I'm waiting anxiously," DeLeo told the News Service before the numbers were released.

Instead, the revenue gap for the year more than doubled to $462 million, from $220 million through March.

Tax returns with payments to the state in April performed the weakest, falling $279 million under benchmark, but the administration said at least 70,000 paper returns and possibly more had yet to be opened and would be processed within the coming week.

A spokeswoman for the Department of Revenue said the processing of paper returns has been slower this year due to new systems, but could not immediately put a number on the amount of unopened returns that could include payments to the state.

Despite the relative strength of the economy and low unemployment, the rebound from the last recession at the turn of the decade has not translated into strong revenue growth under a tax code that has not undergone major changes in recent years.

In April, sales and corporate taxes as well as estimated payments and payments with returns all came in lower than expected.

Overly optimistic revenue estimates have forced Gov. Baker and the Democrat-controlled Legislature to frequently revisit their spending plans and budgeting assumptions, and the problems are compounded by a surge in spending and enrollment in the state's largest program, the MassHealth health insurance program.

The Senate for months has been prodding the House and Baker to considering higher taxes to boost state revenues and pay for programs and services that senators say have long been underfunded. To date, the House has largely sided with Baker and kept significant tax increases off the negotiating table.

Gov. Baker has on multiple occasions suggested that while residents are working and paying taxes, their wages are not growing fast enough to generate substantial growth in the tax base. Rosenberg has floated the idea of revisiting the idea of a sales tax on services to better capture what is happening in the economy, but that idea is deeply unpopular in the business community.

Two weeks ago, Baker said his administration was drafting "reasonable and appropriate" plans to deal with the possibility that the state would finish the year with lower-than-expected revenue, but had no intention of tapping the state's "rainy day" fund.

Hinting that May and June receipts won't close the gap, Heffernan on Wednesday all but confirmed that tax collections will fall short for the fiscal year, and the administration reemphasized that it's exploring ways to respond to the shortfall.

"We are carefully reviewing all options to maintain the Commonwealth's fiscal stability," 

Administration and Finance Secretary Kristen Lepore said in a statement.

Lepore called the April numbers "part of a long recovery period of modest revenue growth that the entire nation is experiencing." Her office also produced a list of cost-saving measures the governor proposed in his fiscal 2018 budget proposal that have yet to gain traction in the Legislature, including changes to the way welfare benefits are calculated and caps on sick leave payouts for retirees.

The focus on next year's budget and Heffernan's warning that revenue projections for fiscal 2018 will need to be reviewed created a sense of deja vu on Beacon Hill. Last year around this time, Baker and legislative leaders began to realize revenues were not holding up and they scrambled for solutions after marking down their estimates of available funds and quickly rearranging their carefully crafted spending plans.

Just last week, the House passed a $40.4 billion budget plan for fiscal 2018, and the Senate is planning to debate its budget proposal later this month.

"The Committee is reviewing the recently released tax collection numbers for April. We will be assessing their impact and the need for any additional legislative action," said Chris Bennett, a spokesman for the House Ways and Means Committee.

Gov. Baker visited House Speaker Robert DeLeo's office Wednesday morning for about 25 minutes, exiting at around noon more than six hours before his team released the tax revenue news after the building had emptied for the evening. It's unclear if the revenue report came up during the meeting.

"Stuff. I can't go talk to my neighbor?" Baker said, before offering a couple of reporters M&Ms he had taken from the speaker's office. Spokesmen for both the governor and the speaker did not respond to follow-up inquiries.

Income tax collections of $2.07 billion were 11.7 percent shy of the benchmark in April, while sales tax collections of $493 million missed the state's target by $14 million, or 2.8 percent.

Corporate and business tax collections exceeded projections by $49 million in a small month for that type of tax payment with only $120 million collected in total, and withholding payments of $962 million beat the benchmark by 3.3 percent.