State revenue shortfall could reach $3 billion

MASSACHUSETTS IS FACING a revenue shortfall of up to $3 billion over the next 15 months, according to a new analysis by the Center for State Policy Analysis. Of that, between $500 million and $750 million of the falloff in revenue will materialize in the current fiscal year, which ends June 30.

Evan Horowitz, executive director of the center, said state budget writers “need an immediate plan because the shortfall’s going to be dramatic and quick.”

The analysis is the first one produced by the new policy center, which is a project of the Jonathan M. Tisch College of Civic Life at Tufts University.

The COVID-19 pandemic is expected to take a serious toll on the state’s finances. The virtual shutdown of the economy means the state is taking in less revenue, while state government is likely to incur additional expenses providing health care and economic aid.

The analysis is based on the historically strong correlation between Massachusetts tax revenues and national gross domestic product. Using various national models to predict GDP, the center estimates that tax revenue in Massachusetts will drop by between $540 million and $753 million in fiscal 2020 and another $1.2 billion to $2.6 billion in fiscal 2021.

Some of this shortfall may be made up by federal money. The federal government already increased funding for MassHealth, the state’s Medicaid program, and passed a stimulus bill that will send additional economic aid to the states.

In total, Horowitz said, the new federal dollars could amount to between $2 billion and $3 billion. But he cautioned that a lot of the money will be restricted for certain purposes related to the COVID-19 response and will not necessarily be sufficient to fill all the holes in the state’s operating budget. There are also open questions about the longer-term economic impacts of the pandemic and how fast the recovery will occur.

While the state has a robust rainy day fund, which now contains around $3.5 billion, Horowitz said lawmakers also need to look for savings, potentially by identifying accounts where the money is not able to be spent due to the pandemic. For example, there might be some health-related savings connected to not paying for elective medical procedures, which are not currently being performed.

The analysis by the center is similar to a report released March 17 by the business-backed Massachusetts Taxpayers Foundation. The foundation analysis estimated a lower revenue falloff — $300 million to $500 million – in the current fiscal year. But it estimated a similar impact — $2 billion to $3 billion — for fiscal 2021.

Mass. Taxpayers suggested that lawmakers should focus on the COVID-19 response and curtail all other non-essential spending through fiscal 2021.

Compounding the state’s fiscal difficulties is the decision by both the federal and state governments to push off the income tax filing deadline from April 15 to July 15. While most people pay income taxes through payroll withholdings, the state collects around $3.6 billion in final and estimated payments that taxpayers pay throughout the year, the biggest chunk of which comes in April. The state had expected to collect around $3.2 billion between March and June 2020, according to an analysis released Monday by the Massachusetts Taxpayers Foundation.

MTF says shifting some of this revenue from April to July could cause problems with the state’s cash flow and its ability to pay bills beginning in May.

The same legislation that pushed off the tax deadline did include provisions allowing the state to borrow more money in the current fiscal year and pay it back next year, once the deferred tax revenue comes in.

The fiscal 2021 state budget is now in the House Ways and Means Committee, which typically releases its version of the state budget in April. State budget writers said in mid-March that they were still figuring out what the coronavirus outbreak means for the process of developing the state budget.