The Maine State House in Augusta. Credit: Linda Coan O'Kresik / BDN

AUGUSTA, Maine — Better-than-expected Maine tax revenue numbers led a state panel to lower its key budget shortfall projection by hundreds of millions of dollars this week, but the situation is still dire as lawmakers prepare to negotiate a new spending roadmap.

Revenue has outperformed dire projections from earlier in the coronavirus pandemic, though the trajectory of the virus and the scope of any new federal aid package could change Maine’s budget picture in the coming months and determine the depth of spending cuts or new sources of funding policymakers will turn to when they come back to Augusta in early 2021.

The Maine Revenue Forecasting Committee revised its revenue predictions upward by $764 million this week after issuing a dismal July projection of a staggering $1.4 billion shortfall over three budget years. The rosier forecast is only good news in relative terms. Revenues are still lagging year over year during the pandemic recession, sharply down from pre-pandemic estimates, with the shortfall similar to the one the state faced during the Great Recession.

In July, the committee had forecasted a $883 million shortfall for the 2021-2023 budget period. An upcoming report, which will be released after Thanksgiving, revises that number to less than $400 million, said Michael Allen, the state’s associate commissioner of tax policy and chair of the forecasting panel. A shortfall of more than $500 million projected for the rest of the fiscal ending in June 2021, was similarly cut in half.

Those projections follow several months of stronger-than-expected revenue that has led Maine to exceed budget projections by $146 million since the start of July. It was driven by sales and income taxes, with online sales picking up sharply while business at restaurants and hotels declined by less than predicted. Federal stimulus programs also led Maine families to spend more. Enhanced unemployment benefits were taxable and buoyed the state despite layoffs.

“There’s a lot at play in all of this,” Allen said. “No one has any experience with a pandemic-induced recession.”

Whether those trends will continue is uncertain. Coronavirus cases in Maine are up more than fivefold from a month ago, which could reduce economic activity even if the state does not impose strict business restrictions. Federal unemployment programs are also set to expire at the end of the year, with prospects of additional aid unclear. That makes it tough for lawmakers to predict where revenue will stand when Gov. Janet Mills submits a two-year budget in January.

“I suspect those numbers are going to change again before we finalize a supplemental or biennial budget,” said Sen. Cathy Breen, D-Falmouth, who co-chairs the Legislature’s appropriations committee.

Lawmakers also do not know what funds they might have at their disposal. Mills and members of Maine’s congressional delegation have advocated for federal funding that would allow Maine to backfill revenue lost due to the pandemic. The Democratic governor’s economic recovery committee released a report on Tuesday calling for additional stimulus funding “without delay.”

But Allen said the revenue forecasting committee, which is generally cautious in its predictions, was not anticipating another relief bill until after President-elect Joe Biden’s inauguration in January. He added that it would take a few months after a bill was passed for stimulus money to make its way into Maine’s economy.

Even with federal aid, a $400 million shortfall would require lawmakers to cut spending, tap reserve or find a way to raise revenue. Rep. Sawin Millett, R-Waterford, a member of the budget committee and former budget commissioner, said he expected Republicans to prioritize spending cuts, pointing to some of Mills’ temporary cost-cutting orders — such as hiring freezes — as potential starting points for more permanent reductions.

Leading lawmakers in both parties have been averse to tax hikes amid the economic downturn. Breen said she would expect to look at tapping the state’s rainy day fund of more than $250 million, but Mills has avoided using it during the pandemic although she proposed using $70 million from a liquor reserve fund as part of curtailment efforts.