State revenues have fallen for the second month in a row,
setting off concern among Beacon Hill leaders that the good times are ending and programs from health care to education
could suffer because of it.
On the heels of a $38 million year-to-year drop in July, the
state Department of Revenue will announce this week that the Bay State took in $35 million less in August than it did in the
same month last year. That's only the second two-month drop since 1992, and it could indicate the economy is stalling more
than budget writers expected.
"There's a very difficult reality, a day of reckoning ahead
of us," said House Speaker Thomas M. Finneran. "The more quickly that everybody realizes that, the better off we'll be."
Soaring revenues in the 1990s allowed the state to nearly
double its budget in 10 years and brought vast expansions in local school aid, as well as ambitious health care programs,
like a prescription drug benefit for senior citizens. All of that was possible even while the state squirreled away $4
billion in a range of reserve funds and enacted about 40 tax cuts.
The first six months of the year raised hopes that the boom
would continue. The state ended the fiscal year June 30 with a $500 million surplus, despite the impact of the first step of a
$1.4 billion phased-in income tax cut. But the news of late suggests that lawmakers will have to buckle down for a rough
couple of years, said Stephen P. Crosby, the state's administration and finance secretary.
"We've been living a fairy tale life the last few years,"
Crosby said. "No question -- the salad days are over."
While two months of revenue losses may not indicate a trend,
the numbers are changing the outlook on Beacon Hill. Acting Governor Jane M. Swift, worried that the state won't be able to
afford its commitments down the line, is readying close to $200 million in vetoes to trim spending this year, Crosby
said.
Crosby, Swift's chief budget aide, is warning that the state
may have to dip into its $1.7 billion rainy day account -- built up over nearly a decade of boom times -- to make ends
meet in the budget next year.
And some in the Legislature say it may be time to find new
revenue sources, through a reinstatement of the long-term capital gains tax or a 50-cent per pack increase of the
cigarette tax.
"We benefited from an artificial bubble in the economy, and
the reaction will be an opposite but equal force," said state Senator Mark C. Montigny, a New Bedford Democrat. "I'm not
sounding the panic button yet. But if anyone thinks we're out of the woods, they're naive."
More than half the states have felt the pinch so much that
they've already begun to slash spending or use reserve funds. But so far Massachusetts has bucked the trend.
A handful of key sectors, including financial services,
health care, and tourism, have remained strong here, Crosby said, while other states have seen business activity stall. The
state also benefited earlier this year from a jump in the number of people paying capital gains taxes on stocks and bonds
they had cashed in, but that represents a one-time revenue injection, he said.
The state collects income taxes year-round through automatic
withholding, and those numbers have accounted for nearly half of the state's revenue dip over the last two months.
"It's been a real surprise that revenues have remained so
strong for so long," said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation. "But we're almost certainly
running out of running room."
State revenues are coming under a double-barreled attack,
Widmer said.
On one end is the softening economy, which results in a loss
of jobs and decreased consumer spending, he said. In July, the state lost 3,300 jobs, and the number of unemployed rose 1,500.
These economic woes are coupled with the voter-approved
income tax cut that was pushed by the Cellucci-Swift administration last fall. The measure reduced the tax rate from
5.85 percent to 5.6 percent this year.
With deeper cuts coming in future years -- the rate will
fall to 5.3 percent next year and 5 percent in 2003 -- state coffers will lose out on a total of $1.4 billion through 2003,
Widmer's group estimates.
"The Legislature will have to find areas to, if not to cut
absolutely, certainly to cut the rates of growth in the budgets that have been presented to date," Widmer said.
Legislative leaders say the revenue slowdown will have
little impact on their budgeting for the current fiscal year, even though they could still make changes because the budget is
two months late. Ironically, the much-criticized spending impasse could actually save the state millions, since spending
levels are frozen at last year's levels until a new budget becomes law.
Crosby said the fiscal policies of the past decade, which
have made the state friendlier to business, will allow Massachusetts to weather any storm with far less damage than
was suffered in the late 1980s, when the so-called "Massachusetts Miracle" collapsed.
Still, he said, it's important that lawmakers start to rein
in spending now, and Swift plans to do what she can through her veto powers.
"We have to manage our spending growth," Crosby said, adding
that Swift is committed to finding ways to pay for health care and education above all other priorities. "Everything else is
going to be squeezed," he said.
Legislative leaders tend to agree with those priorities. But
they're less optimistic that major programs can be paid for without new sources of funding.
Montigny said the downturn will heighten the importance of
an increase in the cigarette tax to pay for health care measures, such as reducing the number of uninsured residents in
Massachusetts and helping to stabilize hospitals and nursing homes. Swift has vowed to veto the tax.
"Going forward, we're going to hear more and more from
hospitals, health care agencies, and nursing homes," Montigny said. "We're in for a couple of years of belt-tightening. I
think there'll be sacrifices."
