State fiscal problems may worsen
Stock market plunge could widen deficit
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This week's announcement of 1,000 state employee layoffs and $1 billion in budget cuts may just be the beginning, as financial forecasters say that Governor Deval Patrick's predictions of revenue shortfalls are as much as $500 million too low.
The reason: the continuing plunge in the stock market is dragging down capital gains taxes that have kept Massachusetts flush in the boom times.
The state has already factored big projected losses into this week's budget cuts. But if the stock market continues its downward slide, the state could face an additional deficit of more than $400 million to $500 million in capital gains and income tax losses, state officials and specialists said.
"Unfortunately, I think it's going to get worse," said Representative John J. Binienda, a Democrat from Worcester and House chairman of the Legislature's Joint Committee on Revenue. "People will not be filing for profits this year, they'll be filing with losses."
A Patrick spokesman said the governor consulted with economic analysts and others to predict that tax revenues would fall by $1.1 billion. But the administration acknowledged that the extreme volatility in the stock market makes forecasting a difficult exercise and that the state's financial picture could change.
"Our approach was responsible and thoughtful and we will continue to monitor the economic situation throughout the remainder of the fiscal year," said spokeswoman Cyndi Roy.
Patrick's revenue commissioner, Navjeet K. Bal, said she is relying on a forecast that the state will lose 30 percent in capital gains taxes. Binienda predicted that revenues could drop more than 50 percent, citing the last two stock market crashes in 1987 and 2001, when capital gains collections dropped 57 percent and 71 percent, respectively.
That more pessimistic view is echoed by analysts at the Massachusetts Taxpayers Foundation, an independent nonprofit organization that closely monitors state finances.
"The governor has taken a strong first step, but I fear it is only the first step," said the group's president, Michael Widmer.
During the past four years, taxes collected on capital gains have risen steadily, from $1.49 billion in fiscal year 2005 to $1.9 billion last year, according to the state Department of Revenue. The windfall has allowed the state to increase spending on key areas like education and healthcare without dipping into the state's cash reserves, known as the rainy day fund.
But the sudden drop in the stock market - the Dow has lost nearly 18 percent of its value since Sept. 15 - has left the state veering toward a financial crisis not seen since 2003, when Governor Mitt Romney made sweeping cuts in local aid to cities and towns.
The Dow Jones industrial average yesterday rallied 401.35 points, or 4.7 percent, to close at 8,979.26, but it remains about 30 percent down for the year.
"You can't count on capital gains being a stable source of revenue this year and probably beyond that," said Karl Fryzel, a partner in the tax practice group at the law firm Edwards, Angell, Palmer & Dodge. "No one knows when this is going to end."
Gus Faucher, director of macroeconomics for
"Capital gains have been a big contributor to Massachusetts in recent years, but that's about to come to a screeching halt," Faucher said.
Economists also fear that worsening economic conditions will continue to attack other categories of tax collections. If the economy falls into the expected recession, businesses will earn less money, resulting in lower corporate tax collections.
A sharp reduction in profits could also lead to widespread layoffs, which would mean a drop in payroll taxes. The turmoil could also hit taxes on retail sales, meals, cigarettes, and gas, all revenue sources that could drop sharply.
"The question is how big this problem is going to be," said Alan Clayton Matthews, a professor of economics at the University of Massachusetts at Boston.
Thus far, Patrick and legislative leaders have avoided any talk of imposing fees or new taxes, such as an increase in the gas tax, to help balance the budget. Observers say this is because the governor and lawmakers don't want to risk angering voters who will be asked in a Nov. 4 ballot question whether they want to eliminate the state income tax - which generated $12.5 billion last year.
"With that on the ballot, any talk about raising taxes will take place after the election," predicted Senate Republican leader Richard R. Tisei. "But I am sure they are looking at ways to raise revenues."
"That's the elephant in the room that no body wants to talk about," said former state senator and 2002 gubernatorial candidate Warren Tolman.
Fees and taxes have been part of the equation in the major budget crises of the last 30 years. House Speaker Thomas M. Finneran used taxes as part of his budget balancing plan in 2002. Romney raised hundreds of million of dollars in fees to deal with the fiscal downturn he faced in his first year in office. Governor Michael S. Dukakis signed tax bills to deal with two of the state's worse fiscal crises in modern times, in 1975 and in 1989-90.
Asked yesterday about raising taxes, Patrick said during a press conference that it was not on the table.
"The time to go to the public for broad-based taxes is just not now," Patrick told a press conference Wednesday. "I don't think taxes are evil. . . . But I think people are squeezed right now."
