BOSTON (State House News Service) – State tax revenues have defied expectations throughout the pandemic and federal aid has helped to keep Massachusetts fiscally healthy over the last two years. But uncertainty about the sustainability of recent positive economic trends and unknowns surrounding the latest mutated form of the coronavirus made trying to predict tax collections for the next 18 months a daunting task Tuesday.
House Ways and Means Chairman Aaron Michlewitz, Senate Ways and Means Chairman Michael Rodrigues and Administration and Finance Secretary Michael Heffernan called economists and budget experts to testify on what they expect to see in fiscal year 2023 from state tax collections, the first step in building a spending plan for the budget year that begins July 1, 2022.
Trying to predict something as fickle as tax revenue seven months to a year-and-a-half out is inherently challenging, and Beacon Hill has so far struggled to wrap its arms around the changes brought upon by the pandemic. At one point early in the pandemic, some state budget watchers predicted that tax revenues could end up as much as $8 billion short of expectations. Instead, Massachusetts generated a surplus of about $5 billion in fiscal year 2021 and is on track to significantly exceed revenue expectations this budget year as well.
“For nearly two years, the commonwealth has gone through some of the most turbulent budgets that this building has ever seen. Throughout these unprecedented times, the commonwealth has seen historic highs in terms of our revenue numbers. One of the main drivers of this has been the unprecedented amount of assistance the federal government has given,” Michlewitz said. “Unfortunately, this level of support is not permanent and, going forward, we must keep that in mind as we plan for the future of the commonwealth.”
Despite all pointing to a number of factors that could undermine their estimates â€“ like yet another COVID-19 surge, ongoing labor shortages and supply chain glitches, and persistently high inflation â€“ â€“ the experts assembled Tuesday largely agreed that Massachusetts can expect to collect at least about $36.48 billion and possibly as much as nearly $40.8 billion in tax revenue next budget cycle, which would be between 6 percent and 18.6 percent more than the Baker administration’s official expectation for the current budget year.
Department of Revenue
Revenue Commissioner Geoffrey Snyder said Tuesday that the current year’s tax collections have been solid enough so far that he now projects fiscal year 2022 will end with DOR having collected between $35.726 billion and $36.623 billion — between $1.325 billion and $2.222 billion more than the consensus revenue agreement reached a year ago. The fiscal 2022 benchmark could be updated when the fiscal 2023 agreement is announced.
For fiscal year 2023, the primary focus of Tuesday’s hearing, Snyder said that DOR forecasts that state tax revenue will land in the range of $36.484 billion to $37.684 billion, which would be between 2.1 percent and 2.9 percent higher than the agency’s revised fiscal 2022 forecast.
Snyder also flagged for the budget managers DOR’s expectation that capital gains taxes, a source of revenue that has helped Massachusetts bulk up its reserves during the recent years of strong stock market performance, will tail off in fiscal 2023.
“Capital gains taxes are a volatile revenue source. With years of rising capital markets, we recognize the potential for growing reserves of unrealized gains. However, capital gains revenue collections have been very strong over the past several years, hitting an all-time high in FY21, which leads to uncertainty about how much more unrealized gains remain,” he said, referring to the $2.584 billion in capital gains tax revenue last fiscal year.
DOR is forecasting that fiscal year 2022 capital gains will be between $2.409 billion and $2.713 billion, roughly in line with the capital gains-specific benchmark of $2.615 billion. For fiscal year 2023, however, Snyder said that DOR is projecting that capital gains revenue will sink to between $2.198 billion and $2.356 billion.
As did most of the experts who testified Tuesday, Snyder said DOR’s forecast is clouded with “a significant degree of uncertainty” related to the future course of COVID-19, labor and supply chain constraints, and inflation’s impacts on the global economy.
Mass. Taxpayers Foundation
The Massachusetts Taxpayers Foundation offered a mixed outlook, with President Eileen McAnneny forecasting that revenue growth will “remain robust” this fiscal year before flipping to a “completely different story” next year when the situation will revert “back to a period of stalled growth.”
McAnneny projected the state will end fiscal 2022 with $37.2 billion in tax collections — $3.1 billion or 9 percent above last year, growth that she said would be fueled by “employment bouncing back, wage increases, asset value spikes, increased spending on durable goods and motor vehicles with higher prices due to inflation, and healthy profits for corporations.”
After that, though, McAnneny said revenues would grow only 1.1 percent or $411 million in fiscal 2023, giving budget-writers $37.6 billion to work with. She said more workers, earning higher wages as employers compete for labor, will drive up withholding income tax revenues by nearly $600 million next year, but those gains will be offset by a “steep decline” in capital gains and other non-withholding income tax revenues.
Sales tax growth will moderate to 1 percent in fiscal 2023 as spending shifts back from durable goods to services and inflation rates slowly decline over the next 18 months, McAnneny said.
Northeastern University economist Alan Clayton-Matthews had the rosiest forecast for fiscal year 2023, projecting that Massachusetts could collect as much as $40.795 billion based on “a very sanguine economic outlook.” That would represent 6.5 percent growth over his fiscal year 2022 forecast of $38.301 billion, he said.
Clayton-Matthews reviewed how withholdings from unemployment insurance programs helped prop up state tax revenues during the pandemic. He said that impact is tailing off and should get back down to normal pre-pandemic levels during fiscal 2023.
Withholding from unemployment insurance added $258 million to fiscal year 2020 revenues and $557 million to revenues in fiscal year 2021, he said, and is expected to contribute $137 million to state revenues in fiscal year 2022. For fiscal year 2023, he projected that unemployment insurance withholdings would provide about $58 million to state coffers.
“That’s a normal level, $58 million. So we are seeing the waning effects of unemployment assistance support to revenues,” Clayton-Matthews said. “On the other hand, of course, if unemployment is falling, employment and therefore wage and salary income and income revenues are rising.”
Center for State Policy Analysis
Higher-than-expected inflation creates a “dark cloud” over the state’s revenue picture, cautioned Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University.
Horowitz is projecting $36.5 billion in revenue collections for fiscal 2023, and said he thinks it makes sense to raise this year’s benchmark by $1 billion, to $35.4 billion.
Accounting for inflation, Horowitz said next year’s growth could actually work out to “a slight decline in revenue, meaning the state could have fewer real dollars to work with for FY23.”
Because the cost “of running state government has risen more rapidly than we’ve seen in a generation,” he said that even a “maintenance budget” for next year “will have to reckon with the fast-growing cost of hiring people, procuring materials, providing housing support, and a great deal besides.”
Horowitz said the uncertainties arising from the pandemic have created a mix of risks and “hopeful possibilities” on the economic front. Right now, he said, consumer spending levels above long-term trends, the job market near its pre-pandemic highs, “extremely” high valuations for asset prices and the Federal Reserve’s plans to raise rates combine to mean “there are a lot more ways for our economy to stumble and a lot fewer chances to accelerate from here.”
“In terms of state tax revenue, Massachusetts may already be overdue for a correction, with the volatile parts of our tax system, like capital gains and estimated taxes, having outrun the more stable parts, like income withholding and the sales tax,” he said.
Monitoring Fiscal Year 2022 and Next Steps
When the same trio assembled last year to forecast fiscal year 2022 revenues, they settled on an estimate of $30.12 billion. At the time, they said it represented 3.5 percent growth in state tax revenue compared to their then-current estimate of $29.09 billion in fiscal 2021 revenue.
About six months later, fiscal year 2021 ended with DOR having collected $34.137 billion — well in excess of the initial pre-pandemic estimate of $31.15 billion.
Five months in, fiscal year 2022 tax collections are more than $900 million ahead of consensus revenue expectations to this point in the year and are trending more than $2 billion ahead of actual fiscal 2021 collections through the same period of time.
“I certainly appreciate the difficulty of projecting tax revenues over the past two years, and for the upcoming one as well,” MTF’s McAnneny said Tuesday. “We were talking prior to the start of this, some of the presenters, and we were all saying just how difficult it has been. I liken it to a roller coaster ride, complete with dips and turns, and unfortunately I think we have one more loop before this ride is over.”
After the hearing, the Joint Ways and Means Committee and Heffernan will work up an agreed-upon tax revenue forecast for fiscal year 2023. They have until Jan. 15 to arrive at that number. The figure will become the state revenue-side anchor in Gov. Charlie Baker’s final budget filing, which is due to the Legislature by Jan. 26.
The House will roll out and debate its own version of a fiscal year 2023 budget in April and the Senate will follow suit in May. Because it is their “consensus” number, both branches generally rely upon the same revenue estimate when they assemble their budgets even though the estimate is months old by that point.
June is typically when a six-member conference committee hammers out an agreement between the branches on a single budget bill before the governor gets his chance to sign, amend or veto its provisions. Fiscal year 2023 starts July 1, 2022.
Still Having Technical Difficulties
Tuesday’s hearing got off to a dubious start when the chairmen of the House and Senate Ways and Means committees and Baker administration finance officials huddled to go over their tax revenue forecasts without providing access to the public, press or even to lawmakers assigned to sit on the Ways and Means committees.
Rodrigues’ office said a technical glitch kept the start of the hearing from being broadcast on the Legislature’s website. Only Rodrigues, Michlewitz and Heffernan were allowed to participate in the hearing in person from the State House, which remains wholly closed to the public.
By the time the public broadcast became available at about 10:20 a.m., Revenue Commissioner Geoffrey Snyder was already partway through his testimony, which generally follows opening remarks from the chairmen and secretary, comments that sometimes set the tone for the upcoming budget cycle.
A Rodrigues aide said that the committee staff was not alerted to the fact that the hearing was not available to the public or press until about five minutes in.
“As an unintended consequence, Chair Rodrigues commenced the hearing without this knowledge and opening remarks were well underway before he was informed by staff that we were experiencing technical difficulties,” the aide said. “Fortunately though, the technical difficulties with the live feed were resolved and public access has been preserved thanks to the fact the hearing is being recorded.”
Michlewitz’s office did not respond to questions from the News Service.
Early in the pandemic, when virtual hearings were still relatively new to lawmakers, Rodrigues and Michlewitz had to postpone a virtual summit with many of the same economic experts they heard from Tuesday because they were not able to livestream the proceedings.
“We could have held this but for it to not be broadcast live, for it to not be transparent, it’s not worth it. We’d rather do it the right way,” Michlewitz said at the time.