STATE HOUSE, BOSTON, MARCH 9, 2000 ... Economic
experts advised state officials today to base budget growth next year on the assumption of
an economic slowdown -- advice that's proven off-target in each of the last few years.
In the past three years, state tax receipts have
exceeded initial projections by a cumulative $2.3 billion. The resulting surpluses have
paid for tax cuts, public works projects and this year legislators and the Cellucci
administration are eyeing the latest surplus to help pay for the $12.2 billion Central
The consensus at today's annual revenue hearing in
Gardner Auditorium was that something's got to give. A tight labor market, higher interest
rates, and surging housing and energy prices are all working against the typ of
robust economic growth that has kept unemployment falling and productivity and wages
rising. And the state's above-average stake in the suddenly lagging stock market is also a
red flag, experts said today.
State revenue commissioner Frederick Laskey said tax
revenues are up 6.2 percent this year and predicted receipts would increase 4.4 percent
next year, an estimate with which the Massachusetts Taxpayers Foundation (MTF) agrees. MTF
director Michael Widmer said the state has enacted $2.3 billion in tax cuts in the past
few years while increasing spending 6-7 percent each year. That's no longer affordable, he
"It's unrealistic to presume that we can continue
to have everything," Widmer said. The unprecedented economic boom means Bay Staters
are "living in an unreal world which can't continue," he added.
While the overall economy is in a "very positive
situation," Laskey warned of the "Greenspan factor." Federal Reserve Bank
Chairman Alan Greenspan's warnings about inflation, economic imbalances and over-leveraged
businesses are becoming "more and more regular and stronger and stronger,"
Yet lawmakers have grown accustomed to surpluses and
much of the talk today was focused on affixing a number to this year's estimated year-end
pot of money. Laskey said the size of this year's surplus depends on spending and tax
collections over the last four months of the fiscal year. The most common estimate is $500
million and Laskey, under questioning from Administration and Finance Secretary Andrew
Natsios, said a $700 million surplus would require unprecedented short-term economic
Widmer cited more uncertainty about the national
economy and the stock market and the shortage of skilled workers as potential drags on the
state's red-hot economy. "Clearly we're running out of people to fill jobs,
Widmer said. "And we are concerned very much about any falling off in the stock
Laskey offered to create a tracking system to chart
the developing surplus throughout the spring. That information will provide guidance to
Beacon Hill lawmakers trying to patch together a financing plan t address the $1.4
billion hole in the Big Dig's budget.
When questioned by Natsios about MTF's belief that the
state is in a "capital crisis," Widmer mentioned the Big Dig and the
"resurgence" of a few budget buster accounts:
A quarter of the state's $20.8 billion budget is tied
up in health care and experts are predicting sharp hikes in costs in that sector, Widmer
said. State officials on Wednesday approved a 10-percent increase in state employees'
Rising pension costs are an "open question"
pending the outcome of ongoing studies.
There is also pressure to keep ramping up education
spending substantially after seven years of investments under the 1993 education reform
Improvements to Route 128 and Route 3 South are still
on the drawing boards, Widmer said. Higher education officials are discussing a
substantial technology bond bill. Some of the state's courthouses are a
"disgrace" and in desperate need of repairs, Widmer said. And the state still
needs to find a way to fund between $6 billion and $7 billion in Weld-Cellucci-sponsored
bond bills approved in the past few years that are not included in the administration's
five-year capital spending plan, Widmer said.
The Cellucci administration recently reported that the
state spent about $20 billion on capital projects in the 1990s, rebuilding vast amounts of
the state's infrastructure.
Also today, Senate Ways and Means Committee Chairman
Mark Montigny (D-New Bedford) challenged Cellucci's income tax cut plan and his calls
against imposing a sales tax on Internet transactions. Montigny said that under
"every scenario" offered to committee members last week during a meeting with
Federal Reserve Bank of Boston officials, the state would deplete nearly $2 billion in
rainy day reserves due to lost income tax revenues over several years.
Under the worst-case scenarios, Montigny said, the
state budget, due to the tax cuts, would face "significant" deficits in 2004-05.
Natsios said the Federal Reserve's study is based on a
"serious conceptual error" in that it presumes that surplus revenues spent in
recent years were built into the annual state budget base. Robert Tannenwald, the Boston
Fed's assistant vice president, said that while some of the projections are based on
pessimistic data the general conclusions are valid. Tannenwald said the Fed's
observations were made to committee members who commonly call on Fed officials to offer
insight into the underpinnings of the economy.
"These were crude analytical exercises to give
committee members some of the rough tradeoffs that might surface under different
scenarios," Tannenwald said. "The exercises suggest that if Commonwealth spending keeps growing at 4 percent a year plus inflation and the income tax is cut to 5
percent, it runs a serious risk of depleting its reserves and incurring deficits in a few
years. Under most scenarios you can't keep spending like we have been and cut the income
tax. Such a combination would cause red ink."
Tannenwald said there is a scenario under which the
state could maintain its fiscal health and cut the income tax. "Only if the economy
continued to sparkle would such a scenario afford the Commonwealth a modicum of fiscal
comfort," he said. "To maintain a margin of fiscal comfort with the tax cut, the
Commonwealth would have to really slow down spending a lot to keep an even fiscal
Widmer said the governor's three-year phase-down of
the 5.85 percent income tax rate to 5 percent is too much too soon. MTF instead wants to
tie reductions in the income tax to inflation-adjusted growth in personal income. "We
think that it should be returned to 5 percent," said Widmer. "The only thing we
disagree with the administration on is how we get there."
Under the foundation's plan, the income tax would
probably be reduced to 5 percent in four years under a booming economy and in six years if
economic growth slowed, as is anticipated. The tax rate would cease to fall during a
recession, according to the foundation's proposal, which will be released next week.
As for Internet sales, Montigny, noting he's bought
discounted airline tickets online and made commission-free stock transactions over the
Internet, said tax policy analysts must start thinking about revenues lost to tax-free
e-tail sales. Calling e-tail a "revolution in distribution," Montigny said
"we need to talk about it and how it affects overall revenues."
Laskey said Department of Revenue economic models
don't account for e-tail sales. Under questioning from Montigny, Laskey declined to
estimate the impact of e-tail on tax revenues. "I don't know how we could possibly
calculate that," Laskey said. "We are in the midst of something that is new to
all of us. Where it all leads is the question at hand. The difficult task you all face is
to predict where it is going."
The revenue commissioner did offer his personal
opinion of e-commerce's likely effect on traditional store-based retail. "I don't
think that the local store is every going to be replaced," Laskey said. "I don't
personally think you're going to see shopping malls closing down."
Sen. Henri Rauschenbach (R-Brewster), reading from a
Clinton administration document, said it's way too early to decide whether to tax e-tail
sales. Such sales, at between $7 billion and $15 billion a year, make up only about .5
percent of all retail sales, Rauschenbach said. The e-tail industry is still in its
formative stages and there's not enough data available for policy makers to make good
decisions, he said.