FY18 budget shortfall could be $1b

Nipping and tucking won’t work in coming year

IT IS WIDELY RECOGNIZED on Beacon Hill, certainly among budget writers, that the fiscal 2018 budgets passed by the House and Senate depend on unrealistic revenue projections. But it is much less well understood that the revenue shortfall could approach $1 billion.

How could that be?

There are two parts to the answer — first, the fiscal 2017 shortfall which will reduce the revenue base going into fiscal 2018; and second, the slower rate of revenue growth in 2018 itself.

In terms of the former, tax collections through 11 months of fiscal 2017 are $439 million below the benchmark. That creates a hole in fiscal 2017, of course, but it also means that the revenue base for fiscal 2018 will likely fall between $400 and $500 million below projections. To compound the problem, tax revenues are growing at a substantially slower rate than anticipated. The consensus revenue estimate projects growth of 3.9 percent in 2018 but tax revenues have increased only 1.2 percent in the past 11 months. Extrapolating to fiscal 2018, that would produce an additional shortfall of about $700 million in tax collections.

When combined with the lower base, the revenue gap could well reach $1 billion or more in 2018. Even if the rate of tax growth doubled to 2.5 percent, the combined shortfall would be in the $750 million range.

Unless there is an unexpected surge in tax revenues, there is no way that Governor Baker’s “nipping and tucking” budget strategy can address the likely 2018 revenue gap, especially coming on top of the substantial  2017 revenue shortfall.

Ten years ago when the worldwide recession hit, legislative leaders sharply reduced their revenue assumptions in the middle of budget deliberations. But the conditions are vastly different today as the nation enters the ninth year of an economic recovery. To complicate the picture further, Massachusetts has only $1.3 billion in stabilization or rainy day reserves, which will be woefully inadequate when the next economic recession hits.

Beacon Hill is frozen, neither wanting to raise broad-based taxes nor cut spending. The only game in town is the so-called millionaire’s tax which will have to survive a likely legal challenge to reach the November 2018 ballot. The tax is supported by the Senate President and House Speaker. Governor Baker will undoubtedly oppose it publicly but, taking a page out of his mentor Bill Weld’s book in 1990, will surely be grateful if the voters approve it.

The estimated $2 billion to be raised by the millionaire’s tax, which once seemed like a windfall to finance education and transportation initiatives, now may simply fill a growing hole in the state budget. But even if it becomes law, it would not take effect until January 2019. That’s a long 18 months from now.

And none of this takes into account the potential federal cutbacks in funding for Medicaid or other health care programs. Nor the inevitable future recession.

Meet the Author
Regardless of whether one views these financial challenges as a revenue problem or a spending problem or some combination of the two, state leaders may soon look back on the good old days of “nipping and tucking.”

Michael Widmer is the former president of the Massachusetts Taxpayers Foundation.