Forecast deepens fiscal gloom

State's shortfall put at over $2b this year

A panel of economists discussed state revenues yesterday at a hearing in the State House. The governor indicated that more budget cuts are likely. (Globe Staff Photo / David L. Ryan)

State forecasters said yesterday that tax revenues will plunge by up to $750 million more, making it extremely likely that Governor Deval Patrick will be forced to cut state services again to balance the budget.

The new estimate, which comes just two months after the last revision, puts the total midyear shortfall as high as $2.1 billion, which is nearly 8 percent of the total state budget.

The projection, issued by the state Department of Revenue, will send state officials back for more private meetings on how to respond to the deteriorating situation, as the state confronts a growing unemployment rate and declining revenues in everything from the state lottery to capital gains taxes. Patrick is expected to develop a new plan to balance the budget as soon as next month, when the Legislature returns from a holiday break.

"We've got some big, big challenges ahead of us," Patrick told reporters yesterday outside his office. "We have a plan for several different contingencies, and we're looking at which of those plans to pursue come January."

Patrick declined to discuss those plans, saying, "I don't want to set off a panic."

Among options discussed yesterday during a four-hour revenue hearing were raising the state's gasoline tax, tapping the $1.7 billion in the reserve account, and making deep cuts in spending. State officials, who said Massachusetts probably entered a recession this summer, are also hoping a stimulus package from the incoming Obama administration could help alleviate some of the revenue problems.

Patrick closed a $1.4 billion budget gap in October without cutting local aid, but whether municipal leaders could escape a second round of cuts is unclear. House Speaker Salvatore F. DiMasi last week projected a local aid cut of up to 10 percent for next year's budget, but in light of the latest revenue forecast, a cut this year could also be in the cards. Administration officials would not rule anything out.

"The problem is so large, there's going to be a lot of damage," Michael Widmer, president of the Massachusetts Taxpayers Foundation, said during testimony yesterday. "Damage to the economy. Damage to human beings. Damage to institutions."

The fiscal year 2009 state budget was initially built on estimates that $21.4 billion would come in. On Oct. 15, after national economic woes began hammering Massachusetts, top lawmakers and administration officials revised that figure to $20.3 billion. Yesterday was the first time state officials said the revenue estimate would go lower.

During an annual hearing yesterday to devise new revenue estimates, the Department of Revenue estimated that the state would take in $648 million to $749 million less than lawmakers had anticipated just two months ago. State officials are operating on two different tracks on the budget: trying to solve shortfalls for the current budget year, and creating revenue estimates to begin crafting the budget for fiscal year 2010.

"The figures today were very sobering," said Leslie Kirwan, the governor's top budget official. "We're going to have to work with our colleagues in the Legislature to decide how to react. I think everything will be on the table."

Nearly all revenues collected by the state are declining, but the biggest dropoff is expected in capital gains taxes. Because most of the stock market has plummeted in recent months, it is still difficult for state officials to determine how large that dropoff will be before taxpayers file estimated payments next month.

"I can't stress too much the uncertainty right now," said Alan Clayton-Matthews, an economics professor at the University of Massachusetts. "One thing is certain: Things are bad now, and getting worse quickly."

The national economy is pummeling state budgets nationwide. More than half of states have reported additional budget gaps, totaling $29.7 billion, according to a report released yesterday by the National Governors Association and the National Association of State Budget Officers.

State Treasurer Timothy Cahill offered a dismal picture of lottery revenues, which have traditionally been a sure bet to fill state and local coffers.

Overall lottery sales are down nearly 4 percent for the first five months of the current fiscal year, and the proceeds used by the state could come in $14 million to $30 million less than expected, Cahill said. The ice storm last week cut power to about 800 of the state's 2,000 lottery vendors, which resulted in a $2 million hit, Cahill said.

As an example of impacts, Cahill mentioned school construction. The Massachusetts School Building Authority is funded through state sales taxes, which are declining, and the agency may have to focus on renovating existing schools rather than building new ones, he said.

"It will get worse before it gets better; 2009 will be the most challenging and difficult year that we face," Cahill said.

The Department of Revenue also estimates that this year's unemployment rates - between 0.5 percent and 1.1 percent - will double next year. Navjeet Bal, the state's revenue commissioner, said Massachusetts entered a recession this summer, and it will last through the first half of next year.

Retail sales are projected to decline, as are corporate profits.

While the administration estimated the revenue shortfall this year could be $749 million, some outside budget observers put the figures even higher. The Massachusetts Taxpayers Foundation estimated that tax collections would drop $900 million further this year. The business-funded watchdog group also estimated a further decline of $800 million for fiscal year 2010, which begins July 1, 2009. The Beacon Hill Institute pegged the additional losses this year at nearly $740 million, with an additional loss of $584 million next year.

Matt Viser can be reached at maviser@globe.com.