Slow sales tax returns cut projected state revenue King faces $46 million hole in budget proposal

AUGUSTA – Budget writers on the Legislature’s Appropriations Committee will have to wait until next week to learn exactly how Gov. Angus S. King will plug an estimated $46 million hole in his proposed $5 billion state budget for the next biennium.

Members of the state’s Revenue Forecasting Committee may meet as soon as today to determine how far state revenues are expected to decline over the life of the two-year budget package.

In January, King submitted to the Legislature a balanced budget that accounted for a $253 million gap between projected revenues and expenditures at the time. His proposal included taking a larger share of the tobacco settlement for Medicaid increases, extending the debt payment schedule for the state retirement system, and increasing taxes on meals and lodging and cigarettes.

King told reporters Wednesday that sales tax revenues definitely were not keeping up with revenue projections.

In the current fiscal year that began July 1, sales tax revenues came in 2 percent below what was projected. In January alone, revenues were 9 percent below projections for the month.

The decline in revenues has created a $58 million shortfall that includes $12.5 million in the current fiscal year and $46 million in the next budget cycle. Most of the losses were attributed to a slowdown in car and truck sales and, to a lesser degree, building material purchases.

“We’re going to have to go back and go through the budget once again and suggest areas to find savings,” King said as he assessed the state budget dilemma. “We’re going to have to go back and look at everything all over again.”

And for the first time, King hinted that he might be inclined to dip into the state’s $143 million Rainy Day Fund should state finances worsen.

“I think it’s cloudy, but I don’t think it’s raining,” he said. “A clear definition [of a ‘rainy day’] would be a downward forecast of revenue after the adoption of the budget in the middle of the fiscal year. I’m nervous about using it in a major way. I’d prefer to deal with a shortfall in a responsible budgetary way.”

Exactly how King will achieve that remains to be seen. Because the $12.5 million shortfall in the current budget is expected to be recovered through contingency funds, he may only have to find a way to cover the additional $46 million in lost revenues for the next biennium.

The governor is expected to compensate for the lost revenues with additional department cuts and possibly increased taxes on cigarettes or meals and lodging. A single penny added to the already proposed 26-cent per pack cigarette tax increase would generate about another $1.7 million over the two-year budget plan.

While some lawmakers have balked at King’s plan to raise cigarette taxes, to extend the retirement system payment schedule, and to grab a larger share of the tobacco case settlement, the governor agreed that his proposal may start looking better to critics in light of decreasing state revenues.

“The psychology of the budget is difficult because we’ve had so many good years,” he said. “I would tell people money was tight and try to be conservative and then more money would come flowing in in February. Well, this February it’s flowing out. It may be a little bit of a shock to those who didn’t expect it.”

Just returning from the National Governors’ Association winter meeting in Washington, King said Maine is doing better than many states that are also coping with declining revenues. According to Jim Costa, president of the National Conference of State Legislatures, 17 states do not expect revenue collections to arrive at forecast levels. Strongest revenue growth, he said, was reported in the Western and Middle Atlantic states with the largest declines occurring in the South and Great Lakes regions. States hardest hit by revenue shortfalls include Alabama, Delaware, Florida, Mississippi, North Carolina and Virginia.

“What we’re doing here is mild compared to what’s going on in other states,” King said. “In North Carolina, they did a 15 percent across-the-board [cut and] laid people off. The states that are really in trouble are those that are really dependent on their sales taxes.”

While the sales tax is an important component in the state’s overall picture, personal income and corporate income taxes also play major roles and have helped to soften the blow other states are experiencing. King said the administration would find a solution to the current shortfall, which he said could certainly be much worse.

“We’re talking about less than a 1 percent change,” he said. “So it’s a challenge, but I don’t think it’s the end of the, world given the fact that most of what we’re talking about is reducing expected growth as opposed to actual cuts. That doesn’t mean it will be easy, we’ll just have to work through it.”