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MA State Deficit Could Crush Economic Recovery

Tuesday, November 27, 2012

 

With state revenues already trailing projections for the fiscal year, experts said any solution to the Commonwealth's budget deficit is going to be painful for taxpayers.

Earlier this month, Revenue Commissioner Amy Pitter announced that preliminary revenue collections for October 2012 totaled $1.4 billion, down $48 million or 3.3 percent below what the state took in last October. Due to weak performance in most revenue categories and higher than expected income and corporate tax refunds, October collections were $162 million below the monthly benchmark based on the FY13 revenue estimate of $22 billion.

“October is a relatively small month because no quarterly estimated payments are due for individuals or corporations and it is traditionally the largest corporate and business refund month of the year,” Pitter said, noting that Massachusetts, like many other states, is beginning to see a slowdown in the pace of recovery from the recession.

"No Good Route Out of Here"

Those lagging numbers have fallen short of the levels required for an automatic reduction of the state's income tax rate from 5.25 percent to 5.20 percent that was set to kick in on January 1, 2013. However, keeping income taxes at stable at their current rate will not be enough to compensate for the shortfall in the Commonwealth's revenues.

When it comes to state and local budgets, said Victor Matheson, an associate professor of Economics at Holy Cross, officials must balance their books on an annual basis, unlike the federal government, which can run big deficits during bad economic times and then accumulate large surpluses during the good ones.

Unfortunately for states like Massachusetts, currently entering its fifth year of poor economic conditions, that's not an option.

"You really don't have a good way to weather economic downturns at the state and local level," Matheson said.

The Bay State has plugged its deficits over the past four years by raising taxes, as opposed to making significant budget cuts. Now officials are again facing the choice of cutting government jobs when so many people are battling long-term unemployment or raising taxes when the government wants to encourage consumer spending and economic activity to climb out of the shadow of the recession.

"It's going to be painful either way you do it," Matheson said. "From an economic standpoint, there's no good route out of here."

The federal stimulus of 2009 may have offered the best hope of getting out of the state's financial mess relatively unscathed, but those dollars have now dried up. The state's so-called "rainy day" fund, while the country's third largest at $1.6 billion, is still less than 5 percent of the Commonwealth's annual budget. It could potentially close this year's gap, but such a solution would offer little for future years.

The Different Roads to Recovery

Michael Widmer, president of the Massachusetts Taxpayers Foundation (MTF), said that the shortfall in projected tax revenue was not horrible news, representing a relatively small percentage of total tax revenue, but in the context of a fifth straight year of tight budgeting, the prospect of another round of cuts is disheartening.

"Surely there are going to be additional budget cuts this fiscal year. No one's talking about raising revenues to help close this deficit."

Going forward, however, increases to revenue may be necessary.

"There's a broad discussion to raise transportation revenues to meet the huge shortfall in transportation needs," said Widmer. "In the end, that probably means one lead item for consideration would be increasing the gas tax."

There are also a number of groups, rallying behind the Campaign for Our Communities, that are seeking to restore the state's income tax rate to 5.95 percent.

"They should not be raising taxes because that isn't going to help with the economic structure of the Commonwealth," said Barbara Anderson, executive director of Citizens for Limited Taxation.

Raising taxes, said Anderson, would be taking the easy way out and avoiding the more difficult work of cutting back and reducing the state's per capita tax burden, which, at around $1,800, is the fourth highest in the country.

The state has already begun to freeze hiring and telling agencies to scale back their budgets for this year and build cutbacks into the budgets they are currently working on for the 2014 fiscal year. Anderson took issue with Governor Deval Patrick's announcement that illegal immigrants with work permits would be eligible for in-state tuition at the Commonwealth's colleges and universities.

"I don't see how they could afford new programs," she said.

"I think they didn't quite grasp the concept of what's going on in this country, especially the major poblems with the national debt."

The biggest problem with raising taxes, Anderson said, is that it brings reform efforts to a halt.

"The only time you can get anything done in government is when there's a fiscal crisis," she said. "As long as you don't take the easy way out." 

 

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