As Mainers hunkered down during the first few months of the COVID-19 pandemic, they were spending more money on grocery store convenience foods, as well as lumber, hardware and other building supplies for fixing up their homes.

But what the state gained in sales tax revenue on those items was more than offset by sharp declines in sales tax revenue from the hospitality industry, as restaurants, hotels, inns and other lodgings were shut down to curb the spread of the coronavirus.

The bottom line: Maine is facing a $1.4 billion state budget shortfall from lost sales and income tax revenue over the next three years, according to a new report.

The report by the Legislature’s Revenue Forecasting Committee includes a $523 million drop for the fiscal year that began on July 1, a continuing shortfall of $433 million in fiscal 2022 and $449 million in fiscal 2023, as an economy plunged into recession by the spread of the COVID-19 virus slowly begins to recover.

The figures represent a significant impact on the state’s $8 billion, two-year budget, which entered its second year on July 1 and expires next June 30. For 2021, the decrease in revenue represents 12 percent of the state budget.

Key highlights in the forecast include sharp declines in sales and income tax receipts, and decreases in corporate income taxes as well.

The state’s highway fund, fueled by gasoline sales taxes, is also taking a hit because of reduced travel both by commuters and visitors to Maine.

The highway fund, which was already facing a more than $230 million shortfall, will lose an additional $30 million in 2021 and $15 million in both 2022 and 2023.

In 2021, sales tax and use receipts are projected to be down by $238 million, while income tax receipts will be down by $260 million. Corporate income taxes in 2021 are forecast to be off by $34.6 million.

David Gunter, an analyst with the Maine Revenue Service, said sales tax declines were largely being attributed to a shuttering of the state’s restaurant and lodging industry, which is now slowly reopening.

“Prepared food and lodging has just been devastated by the pandemic,” Gunter said Wednesday at a meeting of the revenue forecasting group.

Between April and June, lodging sales tax receipts were down 70 percent compared to 2019. Sales tax receipts for prepared food, or restaurants, were down 43 percent for the same period.

He said the forecast projects that sales tax receipts for lodging would remain off by 10 percent in 2021.

Other areas hit by the pandemic include revenue from Maine’s two casinos and projected revenue from a retail marijuana industry that was expected to launch this year but also has been delayed by the coronavirus.

Some of the losses were offset by gains in sales taxes collected from building supply retailers, as Mainers who were laid off or stuck working from home turned to upgrading their houses and yards. Year-over-year tax receipts for the sector were up 20 percent. The state also saw an uptick in taxable items sold at food stores and a steady rebound in auto sales as spring gave way to summer.

“It just reminds us that this is such an abnormal recession,” said Mike Allen, the forecasting committee’s chairman and the associate commissioner for tax policy with the state’s Department of Administration and Financial Services. “There’s no normal recession, but this is the extreme abnormal recession.”

However, the forecast is less dire than originally anticipated. The annual shortfalls of about $500 million are only a third of the $1.5 billion a year shortfalls projected by the financial research firm Moody’s Analytics earlier this year. The figures are also significantly smaller than those projected by nonprofit and nonpartisan think tanks like the Washington, D.C.-based Center for Economic Priorities.

The course of the pandemic is unpredictable, the committee agreed, but ultimately the forecast suggests a steady, if slow, economic recovery with employment levels and incomes returning to near pre-pandemic levels by the end of 2023.

In Maine’s tourism sector, hardest hit by travel restrictions to prevent the spread of COVID-19, employment is down to 50,000 workers compared to about 70,000 in 2019. The forecast suggests employment in the sector will reach 63,000 workers in 2021.

“It doesn’t get back to all of those jobs that were there in 2019, but it brings back a good chunk of them,” Allen said.

Among the factors driving the assumptions of a rebound is the hope that a COVID-19 vaccine will be ready for widespread distribution by the summer of 2021, said State Economist Amanda Rector, a member of the committee.

Gov. Janet Mills and the Legislature’s budget-writing Appropriations and Financial Affairs Committee will use the forecast as they begin their work to assemble a balanced state budget, as required by the Maine Constitution. Allen will present the forecast to the committee on Monday.

“We know that we will face difficult decisions in the future,” Mills said in a statement, “but these projections make one thing clear: additional aid and flexibility from the federal government for the states is necessary in order to preserve basic services and ensure the strongest possible economic recovery.”

Mills said she had yet to make any decision on a supplemental budget, which would require her to call lawmakers back for a special session. She noted that the state’s budget stabilization fund, also commonly referred to as the “rainy day” fund, had a balance of $258 million, $50 million more than when she took office.

Another $106 million in unappropriated surplus revenue would be applied to the shortfall, leaving it at just over $418 million for the state’s two-year budget cycle.

The co-chairs of the Appropriations and Financial Affairs Committee, Sen. Cathy Breen, D-Falmouth, and Rep. Drew Gattine, D-Westbrook, also said Congress needs to provide more help for states, together with increased flexibility in using about $1.25 billion already sent to Maine as part of the federal CARES Act.

“While we aren’t out of the woods yet, both Maine’s COVID-19 response and responsible spending decisions made in the Legislature over the past two years have left our state better equipped to get back on our feet,” Breen said.

Democrats and Republicans disagree on what should be dealt with in a special legislative session. Democrats want to finish work on most of the 400 bills that were shelved when the Legislature adjourned abruptly in mid-March because of the pandemic. Republicans have said any work should be limited to the state’s response to COVID-19, the state budget and an effort to curb Mills’ executive powers.

Republicans have refused to put up the necessary votes for lawmakers to call themselves back to work, but Mills has the authority to call a special session.

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