BOSTON (AP) — Republican Gov. Charlie Baker is preparing to submit his latest state budget to the Legislature amid signs of a looming economic slowdown and calls by some on Beacon Hill to raise taxes for education and other initiatives.
With a booming economy and record jobs growth, Massachusetts ended its most recent fiscal year with a more than $1 billion surplus. About half the extra cash was used to replenish the state’s reserves, better known as the “rainy day fund.”
Robust revenues continued through the early months of the fiscal year that began July 1, triggering an automatic reduction in the state income tax.
Then December happened.
A volatile stock market, rising interest rates and trade tensions fed global economic jitters and sparked fears of a recession. A political stalemate in Washington led to the partial shutdown of the federal government. State tax receipts missed projections by more than $500 million. And confidence among Massachusetts employers weakened, according to a leading business group.
“The warnings are all still out there,” said Andrew Bagley, vice president of policy and research for the Massachusetts Taxpayers Foundation, a fiscal watchdog organization that has urged state officials to be cautious about spending in light of pre-recession warning signs.
“We all said you should be monitoring this stuff because it might unravel even faster,” he said.
At the same time, demands are coming from many quarters to boost state spending on education and transportation, adding to the pressure the governor and lawmakers will likely face during budget deliberations.
Complicating matters further is the uncertainty over who will guide the Democrat-controlled Legislature through the budget-writing process in the coming months. For the first time in recent memory, both the House and Senate Ways and Means Committees began the year without permanent chairs in place.
House Speaker Robert DeLeo has yet to name a replacement for Rep. Jeffrey Sanchez, who lost his re-election bid in November. Senate President Karen Spilka, who served as Senate Ways and Means chair until being elected president in July, likewise has yet to name a successor for the key committee post.
Baker is scheduled to file his roughly $42 billion spending blueprint with lawmakers on Wednesday. The plan will be based on a projection of 2.7 percent growth in tax revenues, an estimate agreed upon by administration officials and legislative leaders. The projected increase is lower than in the two previous years and was made prior to the December report that showed tax collections were nearly 15 percent below December 2017 levels.
State officials attributed the sharp drop to many taxpayers delaying quarterly state income tax payments until January because of federal tax changes that limit annual state and local deductions. They expect an offsetting rise in January tax collections and haven’t lowered an earlier forecast of 3.4 percent revenue growth in the current year.
A bigger challenge may be deciding whether new taxes are needed to pay for education reform and other initiatives, as some Democrats and activists have strongly suggested.
Spilka opened the new two-year legislative session by imploring lawmakers to “create an economic development and tax framework for the 21st century where innovative, technology-driven businesses can develop and thrive here, but where we also capture new revenue to continue providing essential services, and fund our vision for our future.”
Days later, Democratic lawmakers led by Sen. Sonia Chang-Diaz, of Boston, filed a bill to revamp the state’s education funding formula to provide more resources for public school districts that serve large numbers of low-income and special needs students. Chang-Diaz, who co-chairs the Legislature’s Education Committee, said the reforms could cost $900 million to $2 billion to implement.
A separate bill calls for a $500 million increase in funding for public colleges and universities.
No specific tax proposals have been offered as yet, but supporters of a surtax on incomes above $1 million have been seeking alternatives since the so-called millionaire tax ballot question was ruled unconstitutional by the state’s highest court. Everything should be on the table, says Spilka.
Baker has promised to file his own education plan as part of the budget, but the Republican remains opposed to broad-based tax increases.
On Friday, however, Baker proposed an increase in the state excise tax on real estate transfers to help Massachusetts communities better prepare for the effects of climate change.
Baker is also proposing a change in Medicare eligibility in Massachusetts to help give low-income seniors a break in how much they spend on health care.
For his part, Speaker DeLeo isn’t ruling anything out.
“As you all know, I’m not a fan of any broad-based taxes, but what the final answer may be will take some time. I don’t have an answer yes or no,” he said when asked by reporters if the generally more moderate House of Representatives might consider tax hikes.
Under the state constitution, tax proposals must originate in the House before going to the Senate.