Fiscal 2021 surplus could reach $1.5 billion, report says

Boston Statehouse
Boston State House

Boston State House

BOSTON (SHNS) – With the Legislature now guaranteed to miss the July 1 deadline to have an annual budget in place, a leading state policy think tank urged negotiators Monday to revise tax revenue expectations upward by a minimum of $3.8 billion and use that flexibility to cancel a proposed draw on the state’s reserves.

The Massachusetts Taxpayers Foundation, a business-backed research institute, predicted that the state would end the fiscal year in less than three days with a sizable surplus that would allow lawmakers to cover additional spending and deposit money into the “rainy day” account.

That reality, the foundation said, should give Democratic leaders the license they need to substantially revise the tax projections that were used by the House and Senate to balance competing $47.7 billion annual budgets (H 4001/S 2465) for the fiscal year that begins July 1.

“We do not know yet where final FY 2021 tax revenues will land, nor how FY 2022 will build on recent revenue trends. It is apparent, however, that the revenues collected to date warrant a major upgrade to FY 2022 and a shift in the use of the stabilization fund from withdrawals to deposits,” the MTF analysis concluded.

House and Senate negotiators, led by Rep. Aaron Michlewitz and Sen. Michael Rodrigues, have been negotiating in private since early June over an annual spending plan, and have suggested that revisiting revenue estimates would be part of those conversations.

The new fiscal year starts Thursday, but budget talks between the House and Senate remain ongoing behind closed doors. The Legislature passed a temporary $5.41 billion budget Monday that would keep government programs funded through July while negotiations continue. Even if a deal were to be struck in the next two days, the Senate does not meet again until Thursday and Gov. Charlie Baker would have 10 days to review any bill.

Sen. Cindy Friedman, the vice chair of the Senate Ways and Means Committee, called passage of the interim budget “standard procedure” while the six-member conference committee works to “finalize” a fiscal 2022 budget.

The foundation said the strength of the state’s tax collections over the last 12 months should support upgrading the current $30.1 billion revenue estimate by between $3.8 billion and $5.12 billion, depending on how high tax collections climb in fiscal 2021.

Those figures were based on rates of growth of between 1.5 percent and 3.5 percent, and would allow budget negotiators to cover all spending proposed in both the House and Senate budget plans, the MTF report said.

The foundation estimated that there was about $300 million in spending unique to both the House and Senate budgets, which would push the bottom line of a compromise budget north of $48 billion if it is all included.

MTF urged legislators to “retain a cautious approach” and “avoid new spending” that was not included in either version of the budget due to the unpredictability of the next year, and suggested that lawmakers put the state on track to have close to $5 billion, or 10 percent of spending, banked in reserves by the end of fiscal 2022.

The seven-page analysis circulated Monday by MTF President Eileen McAnneny also projected that after accounting for an automatic deposit of up to $1.56 billion in reserves from capital gains collections and $800 million in projected balances to end this fiscal year, the state could wind up with a discretionary surplus from fiscal 2021 of between $1.13 billion and $1.48 billion.

Gov. Charlie Baker has already proposed to use $900 million of the expected surplus on a two-month sales tax holiday, but that idea has been shot down by top Democrats in the Legislature.

Through May, the state had already collected $3.9 billion more than projected over the first 11 months of fiscal 2021, and midway through June the Department of Revenue reported having already collected 80 percent of what it expected for the full month.

MTF estimated that the state could end fiscal year 2021 with between $4.3 billion and $4.9 billion more in taxes than anticipated, though much of the growth is expected to come from capital gains, which get deposited into reserves once they climb above $1.3 billion.

After covering remaining spending obligations and negating a budgeted $1.1 billion draw on stabilization reserves for fiscal 2021, the foundation estimated that the discretionary surplus could get as high as $1.5 billion.

The organization recommended that plans to spend that discretionary surplus be combined in talks and hearings around how to allocate $5 billion in American Rescue Plan Act funding “in a way that maximizes the value of both for residents, employers and communities.”

After a pandemic-interrupted year that saw the Legislature wait until the winter to tackle an annual appropriations bill, this year’s budget is back on its more traditional cycle.

In addition to looking at spending and revenue, the budget conference committee is also negotiating multiple policy proposals baked into the spending bill, including the looming expiration of and proposed reforms to the state’s film tax credit program, and Senate-backed fee increases on rides booked through transportation network companies like Uber and Lyft.

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