Federal uncertainty clouds state revenue forecast as budget work resumes

Yahoo

30-04-2025

Christopher Nolan, director of the nonpartisan Office of Fiscal and Program Review, updates the Appropriations and Financial Affairs Committee on the revenue forecast on April 29, 2025. (Photo by Emma Davis/ Maine Morning Star)
The revised revenue forecast legislators have been waiting for to help drive policy and funding decisions isn't providing much more clarity than before. It also means legislators still have a relatively small amount of money to work with this session.
Maine's Revenue Forecasting Committee only made minor changes to its predictions for state revenue for the next several years. However, the lack of serious revisions was not due to what's known but rather what's not: uncertainty with federal funding and the economy, specifically impacts from tariffs.
While the committee's report is not due until Thursday, it previewed the reforecasting for the Legislature's Appropriations and Financial Affairs Committee on Tuesday, whose members' questioned whether the uncertainty was inherently negative.
'At this point, the risk really is primarily on the downside,' said State Economist Amanda Rector, who chairs the Revenue Forecasting Committee, implying that revenue is more likely to see losses than gains.
However, she noted that it's possible the economic outlook could be resolved in a way that ultimately boosts consumer and business confidence.
While stating the revenue prediction is the best the committee could do based on the current economic forecast, Rector acknowledged, 'I would say that certainly it's not the highest level of confidence probably in a forecast they've ever done.'
With all of that uncertainty in mind, the state is still expected to bring in roughly $11.2 million in the next biennium, 2026 and 2027.
After factoring in the updated revenue forecast and laws enacted so far this session, the state is now expected to end fiscal year 2027 with $125,278,261, according to Christopher Nolan, director of the nonpartisan Office of Fiscal and Program Review.
That's essentially the pot lawmakers now have left to fund legislation, though taxes and other revenue generating options are also being considered.
In March, Democrats pushed through a roughly $11.3 million, two-year budget plan without Republican support after Senate Republicans refused to back a change package for the current fiscal year to address the immediate funding deficit for MaineCare, the state's Medicaid program, unless it included structural reform to the program.
At the time that budget passed, the state had expected to be left with about $127 million at the end of fiscal year 2027. The lower figure that Nolan shared is largely due to the cost — about $3.2 million — associated with a law passed earlier this month that aims to address the limited availability of indigent defense in the state.
The two-year budget passed so far only continued baseline spending and funded the emergency measures initially attempted in the change package, so Democrats said it was only 'part one.'
That budget also did not fund another expected shortfall for MaineCare, the state's Medicaid program, which Democrats said was intentionally left out while they waited for the updated projections and any changes coming from Washington, D.C..
Republicans have argued that Democrats passed an unbalanced budget because it didn't include that or any of the policy changes legislators may be looking to adopt in a 'part two' budget.
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Gov. Janet Mills proposed some tax increases and program cuts for the next biennium and those recommendations appear to remain the same for this next budget, as Mills' press secretary Ben Goodman said on Tuesday, 'We are not anticipating the release of any new budget proposal.'
Earlier Tuesday during a press conference, Senate Republican Leader Trey Stewart (R-Aroostook) said what the minority party in Maine is able to get into the state budget may also depend on what's ultimately included in the congressional budget.
Stewart and his caucus will continue to call for structural reform to MaineCare. In particular, legislative Republicans want the state to request a waiver to institute work requirements for able-bodied, childless adults to access Medicaid, a restriction the federal government is also weighing.
'Clearly, legislative Democrats don't want to move on any of those issues,' Stewart said, 'but they might be forced to.'
The phrase 'considerable uncertainty' came up in the committee's deliberations time and time again, said Megan Bailey, senior economic analyst in the Maine Office of the State Economist, during the latest revenue forecasting committee meeting on Monday.
This phrase was uttered when it came to economic policy, government spending, consumer sentiment, geopolitical tensions and consumer sentiment, Bailey said.
The commission also made a specific assumption about Maine likely being at a greater risk from federal funding uncertainty, given that it's already faced what's widely considered retribution from the Trump administration over the state's protections for transgender people, as well as tariff policy changes, given that Canada is Maine's largest trading partner and that the state relies on Canadian tourism.
'Until there is better knowledge about how some of these federal policies and changes will settle out, they didn't see much of a compelling reason to change much of their forecast,' Bailey said, noting in that way the commission followed the lead taken by the Federal Reserve and Federal Open Market Committee.
Until there is better knowledge about how some of these federal policies and changes will settle out, they didn't see much of a compelling reason to change much of their forecast.
– Megan Bailey, senior economic analyst in the Maine Office of the State Economist
If conditions change 'enough to warrant a revised forecast,' Bailey said the commission is discussing the possibility of revising projections ahead of its next scheduled update on Nov. 1.
Members of the Legislature's Appropriations Committee pressed Rector Tuesday on what specific conditions would warrant an earlier revision. Rector said there would need to be 'pretty significant evidence' that economic conditions or revenue positions were sufficiently different from the existing forecasts and, specifically, reliable data for them to base any such changes on.
'This is, in some ways, similar to the early stages of the pandemic,' Rector said, 'where things were changing very, very rapidly, but at that point, there was no evidence to sort of say, 'Ah, this is how we need to update the forecast,' so the commission had to wait long enough to get some data to look at before they came back.'
In other ways, this moment is markedly different from the COVID-19 pandemic.
The two-year budget was 'not the last word.' Here's what comes next.
Forecasting Committee member Michael Allen, who is associate commissioner of tax policy for the state, said the Federal Reserve played a significant role in mitigating the economic downturn then. But in a 'normal' recession, it takes time for people to feel the effects. It took almost a year for anyone to really feel the impacts of the Great Recession around 2008, Allen said as an example.
'If there's a problem, it's probably something that's slowly building,' Allen said. 'I think all of this reflects the fact that, at the moment, the information coming in is still pretty good.'
As Rector noted earlier, a lot of the uncertainty hinges on frayed consumer confidence, while fears of tariffs and spending cuts have yet to show up in the numbers.
Inflation growth has remained somewhat elevated and the commission is expecting more upward pressure from tariffs.
Annual inflation according to the Consumer Price Index was 3% in 2024, which was slightly higher than the commission's forecast of 2.7%. Because of that, as well as the expected impact of tariffs, it increased its inflation predictions for the 2025 fiscal year from 2.4% to 3.2% and 2026 from 2.3% to 2.8%.
The commission left its inflation prediction for 2027 unchanged at 2.2% and slightly decreased its predictions for 2028 and 2029, both from 2.2% to 2.1%.
The commission also updated its predictions for two components of personal income, reducing the forecasted growth for 'dividends, interest, and rent' as well as nonfarm property income, because growth for both in 2024 was smaller than expected.
Aside from federal uncertainty, the commission noted some of the continued pressures on the state level, including a tight labor market, aging workforce, strained housing market and climate-related disruptions starting to impact the hospitality industry.
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