November 29, 2012

Fiscal cliff worries blamed for Maine revenue drop

Legislators wait to see if Gov. LePage will order spending cuts to deal with the $35 million shortfall.

By Steve Mistler smistler@pressherald.com
Staff Writer

AUGUSTA — Uncertainty over the potential for automatic federal spending cuts and rising tax rates is playing a significant role in declining revenues for Maine.

That was the message Thursday from the state's revenue forecasting committee to members of the Legislature's budget-writing committee.

Because of reduced revenue projections, lawmakers are waiting to learn whether Gov. Paul LePage will order state agencies to immediately curb spending to fill the $35 million gap created by the shortfall.

Word of the governor's potential curtailment order surfaced Wednesday when Finance Commissioner Sawin Millett told the revenue forecasting committee that the administration had begun working on an order for immediate cuts in state spending on education, Medicaid and other services.

Millett's briefing initially surprised leaders of the Legislature's incoming Democratic majority, who feared that LePage had already issued the order without meeting with them.

LePage, who was in Washington, D.C., on Wednesday, has until Monday to issue the order, but it could come as soon as Friday.

Michael Allen, the state's associate commissioner of tax policy, told lawmakers Thursday that the revenue shortfall is projected because of a convergence of events including the fiscal cliff negotiations in Congress and a Maine economy that is not growing as quickly as hoped when revenue forecasts were originally made for the current two-year budget.

Allen noted that the projections could change and include conservative, cautious assumptions about the ability of Congress to avert the fiscal cliff in a long-term, substantive fashion.

Allen said the uncertainty is contributing to lower consumer spending and declines in corporate, individual income and sales taxes.

For the budget year that will end June 30, Maine's sales and use taxes are $8.9 million off target. The largest contributors are a $23.2 million drop in individual income taxes and an $18.1 million decline in corporate income taxes.

According to the Legislature's Office of Fiscal and Program Review, about $9.75 million of the income tax drop-off is due to a package of tax cuts enacted by the outgoing Legislature.

The $400 million tax cut, the largest in Maine history, also accounts for $245 million of the projected $880 million shortfall that lawmakers could face when they begin working on the next two-year budget.

Some lawmakers questioned why sales taxes are off target, given the national reports of strong holiday spending. Allen said November revenue won't show until the next revenue forecast, in mid-December.

He cautioned against using Black Friday -- last week's major sale day for retailers -- as a barometer for holiday spending. He said he has seen weak spending on Black Friday in what turned out to be good years for holiday spending, and vice versa.

American consumers are showing concern about the fiscal cliff and adjusting their spending in response to it. A recent poll by the Pew Research Center showed that Republicans (36 percent) and Democrats (35 percent) are closely following the debate over the automatic spending cuts and tax increases that will occur if Congress fails to reach a compromise.

Those concerns include the expiration of the payroll tax cut, which affects roughly 160 million Americans, including low- and middle-income earners. Analysts have estimated that the expiration of the payroll tax cut at the end of this year would reduce the average family's take-home pay by 6 percent.

In Maine, the curtailment order would reduce spending equally among state agencies, proportional to their overall budgets.

(Continued on page 2)

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