Income tax cut at risk, temporary budget filed amid search for fixes

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STATE HOUSE, BOSTON, JUNE 20, 2016….Amid new speculation that a planned income tax cut might not be triggered, Gov. Charlie Baker on Monday filed a $5.3 billion spending bill to keep state government running for one month while lawmakers continue to work on a fiscal 2017 budget accord that’s become intertwined with significant doubts about anticipated tax revenues.

The new fiscal year is set to open in 11 days and $39.5 billion spending bills are still pending before a six-member legislative conference committee, so the temporary budget was filed to keep funds flowing in state government during July in the absence of an agreement on an on-time budget. Lawmakers are likely to pass the interim budget since it will buy them more time to work on an annual spending plan.

After spending the spring crafting their $39.5 billion spending plans, House and Senate leaders officially learned from the Baker administration last Tuesday that $450 million to $750 million in anticipated tax revenues are now unlikely to materialize, removing a major revenue-side support for their proposals.

Over the past several days, Baker and legislative leaders have not outlined a path forward to address the revenue shortfall, but say they are working cooperatively and exchanging ideas. State officials say tax collections reflect a healthy economy and attribute the markdown in revenues to capital gains tax collections that in February began missing estimates due to the stock market’s performance in 2015.

However, the Massachusetts Taxpayers Foundation (MTF) on Monday said the 4.3 percent fiscal 2017 tax revenue growth estimate was on the high side “from the outset,” noting that five of the six revenue estimates offered at a hearing last December assumed revenue growth of lower than 4.3 percent.

The foundation said fiscal 2016 tax revenues are likely to exceed fiscal 2015 tax revenues by just 2.6 percent. Looking ahead, lawmakers should downgrade their tax revenue growth projection for fiscal 2017 to 3.8 percent, which would reduce available revenues by $521 million, according to the MTF.

Calling the fiscal 2017 capital gains tax estimate of $1.484 billion “greatly inflated,” MTF wrote in a bulletin on Monday, “The next steps for how to address the FY 2017 revenue shortfall are somewhat unclear. Under statute, the January consensus revenue agreement represents the maximum level of tax revenue to be approved in the upcoming budget, but it is silent about the process for a revenue reduction.” State finance law directs the administration to amend budget recommendations in light of new revenue information, according to the foundation, “but there is no requirement that budget conferees take this information into account or agree to the same revenue assumptions.”

Foundation officials also said revenue growth may not be robust enough to force a Jan. 1 reduction in the income tax rate from 5.1 percent to 5.05 percent. The reduction, assumed in pending budget proposals, is “much less certain now” and would keep $80 million in the fiscal 2017 revenue column if it does not occur. Voters approved a 5 percent income tax rate in a 2000 statewide ballot referendum and have seen it slowly rachet down under a series of gradual tax rate decreases approved by the Legislature.

MTF noted it’s also possible that non-tax revenue estimates might be revised upwards, which would on paper put more money into the budget, and said sales tax revenue transfers to the MBTA and school building efforts might also be reduced if the tax revenue estimate is lowered.

Adopting the lower of House or Senate line items could generate $200 million in fiscal 2017 savings, according to MTF, and budget negotiators might be able to achieve spending reductions without cutting programs by obtaining updated caseload and staffing information from the executive branch.

The temporary budget bill allows Treasurer Deborah Goldberg to make advance local aid payments to cities and towns that can demonstrate an emergency cash shortfall in July and extends capital accounts that would otherwise expire.

Temporary budgets have become routine on Beacon Hill and generally are not controversial. The mini-budgets attract more attention if more than one is needed.

In a letter to lawmakers, Baker asked that they pass the temporary budget by Tuesday, June 28.

Copyright 2016 State House News Service

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