Tax, spending questions abound as Baker readies budget plan

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BOSTON (AP) — The monthslong process of constructing a state budget begins anew on Wednesday when Republican Gov. Charlie Baker unveils his spending plan for the fiscal year starting July 1.

While Massachusetts’ economy is strong and unemployment low, the state’s financial picture remains unsettled. Changes in federal health care policies and the fate of two prospective ballot questions are among factors that could have profound budgetary impacts for the state.

Election year politics could also open Baker’s budget proposal to greater scrutiny as he launches his bid for a second term.

The governor’s spending plan will go first to the House and later the Senate.

Here are just some of the key issues Baker and the Democratic-controlled Legislature will face as they shape the budget, likely to exceed $41 billion in spending.

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TAXING QUESTIONS

Baker and House Speaker Robert DeLeo have both ruled out any major tax hikes in the budget. Yet there is still considerable uncertainty surrounding taxes.

Much of the suspense revolves around two prospective November ballot questions: One would impose a 4 percent surcharge on annual incomes above $1 million, while the other proposes a cut in the general sales tax from 6.25 percent to 5 percent.

Massachusetts Taxpayers Foundation, an independent fiscal research group, estimates passage of the so-called millionaire tax could raise $800-$950 million during the final six months of the next fiscal year, while a sales tax cut could reduce revenue $600-$650 million.

But with no way to accurately predict what voters might do, budget-writers can only base their assumptions on current revenue projections and adjust if necessary.

Also undecided is the fate of a plan to impose the state’s hotel tax on short-term rentals, such as Airbnb.

One thing that does appear likely is that revenues will be sufficient to automatically generate a small cut in the state income tax next January, from 5.1 percent to 5.05 percent.

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CAUTIOUS FORECAST

Massachusetts may not be rolling in the dough, but tax collections are picking up steam after several years of sluggish growth.

Through the first half of the current fiscal year, revenue collections are outpacing official forecasts by $728 million, or 6 percent, according to the state Department of Revenue.

While that’s cause for optimism, officials are also preaching caution.

The Baker administration and legislative leaders have agreed to base their next budget on a projection that revenues will grow by 3.5 percent over the current year. That would be the smallest increase being forecast since the 2010 fiscal year.

Overly optimistic forecasts have led to budget cuts and other belt-tightening measures in each of the last three fiscal years.

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HEALTH CARE DECISIONS

Controlling health care expenses is always a challenge for state government and this budget won’t be any different.

If, for example, Congress fails to reauthorize the Children’s Health Insurance Program, Massachusetts could be on the hook for up to $295 million in health care costs for low-income children in the next fiscal year, according to the Baker administration.

The governor may also propose further steps to rein in costs for MassHealth, the state’s Medicaid program, which already accounts for more than 40 percent of all state spending.

Some of the governor’s previous cost-saving measures have been adopted but others, such a proposed shift of 140,000 non-disabled people from MassHealth to subsidized insurance offered through the state’s Health Connector, have floundered in the Legislature.

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POT AND GAMBLING

Two new revenue streams will likely emerge in Massachusetts during the next fiscal year: Recreational marijuana sales and resort-style casinos.

Don’t expect a huge windfall.

The foundation estimates that the state’s first commercial pot shops — expected to begin opening this summer — could generate between $32 million and $54 million in sales and excises taxes for the state.

The state could also realize a $50 million to $70 million cut of casino proceeds from the planned September opening of MGM’s resort casino in Springfield and possible June opening of Wynn Boston Harbor.

However, much of the revenue from legal weed and gambling pays for regulating those endeavors, while some is also earmarked for specific purposes and not available for general appropriation.

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