Mass. lawmakers again try to gauge revenues

Ways and Means Chairs Sen. Karen Spilka and Rep. Jeffrey Sanchez and Administration and Finance Secretary Michael Heffernan listened to forecasts for fiscal 2019 at Wednesday's consensus revenue hearing.

BOSTON — Keeping their fingers crossed that tax collection growth this fiscal year won't disintegrate as it has the last two years, lawmakers and Baker administration officials on Wednesday turned their sights to fiscal 2019 and the unknowns that could threaten state finances.

"As a noted New York economist, Yogi Berra, once said, 'It's tough to make predictions, especially about the future,'" Administration and Finance Secretary Michael Heffernan said in his introductory remarks at the annual consensus revenue hearing, referring to the late New York Yankees catcher.

Wednesday's hearing held by the Joint Committee on Ways and Means and the Executive Office of Administration and Finance gave state budget managers a chance to probe the state of the local economy and ascertain the availability of tax revenues for fiscal 2019 budget-building purposes.

At a recent New England Economic Partnership event, economists said they did not see a recession in sight, noted the region is in the midst of a prolonged economic recovery, forecast continued low unemployment, and said employers may struggle to find enough qualified workers who can afford to live here.

Lawmakers heard a range of projections from the Department of Revenue, budget-tracking think tanks and Massachusetts economists. The growth estimates came in as low as 2.8 percent and as high as 6.1 percent. By Jan. 15, state officials must pick a growth number and base their spending bills off it.


Forecasted fiscal 2019 tax revenue growth: $870 million to $1.078 billion or 3.3 percent to 4.1 percent

The Department of Revenue predicted that state tax collections will swell by $870 million to $1.078 billion in fiscal 2019 over fiscal 2018 estimates — a 3.3 percent to 4.1 percent actual growth in annual tax revenues next fiscal year.

That forecast was made under the assumption that economic factors will ratchet down the state's 5.1 percent income tax rate to 5.05 percent on Jan. 1, 2019 and that the Legislature will authorize accelerated sales tax collections again in fiscal 2019.

The department's forecast does not make any prediction on passage of two questions headed for the November ballot that could have major bearing on tax revenues. One would add a 4 percent surtax on incomes over $1 million and could lead to $2 billion annually. The other would drop the state's sales tax from 6.25 percent back to 5 percent. Both would take effect in 2019.


Forecasted fiscal 2019 tax revenue growth: $742 million or roughly 2.8 percent

The Massachusetts Taxpayers Foundation on Wednesday presented the Joint Ways and Means Committee with an estimate that state tax collections will grow by 2.8 percent in fiscal 2019. Tax revenues will increase by about $742 million, to $27.59 billion, according to the foundation's estimate.

"For the past few years, Massachusetts has grappled with stalled growth in tax revenues, the threat of declining federal funding, and insufficient reserves to mitigate the budgetary impacts -- all during a period of continued economic expansion," the think tank wrote in its forecast. "Massachusetts has thrived despite being a high cost state with challenging demographics. Counting on these conditions to continue would be imprudent at best."

MTF said its forecast does not include possible revenue from newly legal marijuana sales and also does not assume an income tax rate reduction in fiscal 2019. If the income tax rate drops to 5.05 percent on Jan. 1, 2019 as DOR has projected, MTF said its fiscal 2019 forecast would be revised downward by $84 million.


Forecasted fiscal 2019 growth: $690 million or roughly 2.8 percent

Paul Bachman of the Beacon Hill Institute said revenue growth has slowed down dramatically over the past few years, a situation he called "a little bit puzzling" given the 70,000 jobs created in the past year. But he said personal income growth has also slowed dramatically -- falling to 0.9 percent in the fourth quarter of 2016 after having been over 5 percent in earlier quarters — and now may be on track for a rebound.

"That's what's driving the less than robust tax revenue collections," he said.


Forecasted fiscal 2019 growth: $1.647 billion or roughly 6.1 percent

Northeastern University economist Alan Clayton-Matthews' projections for next fiscal year were the most bullish that lawmakers heard Wednesday. Michael Goodman, co-editor with Clayton-Matthews of Massachusetts Benchmarks, presented the projections for Clayton-Matthews, who is traveling out of the country.

Clayton-Matthews expects state tax collections in fiscal 2019 to be about $28.7 billion, a growth rate of 6.1 percent over his fiscal 2018 estimates. His estimates assume the income tax rate will drop to 5.05 percent halfway through fiscal 2019.

Goodman warned that the pace of job growth in Massachusetts is expected to "slow significantly" next fiscal year, but that the New England Economic Partnership has forecasted wage and salary, and total personal income to grow at rates of 4 percent and 4.2 percent respectively in fiscal 2019.

"In many respects, Massachusetts is as well positioned as any state in the nation to ride out whatever comes next and there are a number of good reasons to be optimistic about the commonwealth's economic prospects," Goodman said. "But ongoing national policy debates inject more than the usual amount of uncertainty into the mix this year."

Each projection came with an array of caveats, with analysts urging lawmakers to consider how Republican-championed federal tax reform and federal changes to the health care landscape could affect the state budget picture, how political tensions with North Korea and in the Middle East might make waves in Massachusetts, and how the state's aging population plays into its future economic performance.

"Predicting revenues in FY 2019 is more daunting than usual because there are several upcoming events over the next 12 months, any one of which will have major impacts on state tax revenues, but those impacts are unknowable right now," MTF wrote in its forecast. "Taken together, these events could dramatically alter the state's fiscal health."

MTF said federal tax legislation could have "a major impact" on the state's finances, but said that three possible 2018 ballot questions — imposing a 4 percent surtax on income greater than $1 million, reducing the sales tax rate from 6.25 percent to 5 percent, and a paid family and medical leave initiative -- "could make irrelevant the forecasts presented at today's hearing."

The so-called millionaire's tax, according to a 2015 estimate from DOR, could lead to an additional $2 billion in tax revenue annually. MTF said DOR's estimate should be updated given a series of changes in the tax landscape since 2015.

If voters approved a reduction in the state sales tax, state coffers would lose about $650 million in fiscal 2019, according to MTF, which would lower total tax revenue growth to less than $100 million or 0.3 percent for the year. DOR estimates the full-year impact on revenues of the sales tax reduction at $1.5 billion. The paid family and medical leave ballot question, MTF said, "would likely cost the state $100 million to $150 million annually."

Based on testimony Wednesday, the Ways and Means committees and Heffernan must agree by Jan. 15 on a tax revenue estimate for fiscal year 2019, which begins July 1. The estimate will serve as the basis for Gov. Charlie Baker's annual budget proposal, which is due Jan. 24, and the House and Senate budget bills that will follow, usually in April and May.

"We must be fiscally responsible by investing in programs and services necessary to support our vulnerable residents and keep the commonwealth moving forward. Each line item of the budget impacts a child, a family, a business, a community," Senate Ways and Means Chair Karen Spilka said. "As we prepare for the upcoming budget cycle, it's important to recognize recent trends of slow revenue growth."

Spilka opened the hearing by acknowledging the state's recent sluggish revenue growth, detailing how original projections for fiscal 2018 had to be revised downward from 3.9 percent growth to 3.4 percent growth.

"With this context of volatility in mind, we must be cautious in our projections. But I am cautiously optimistic," she said, adding that fiscal 2018 tax collections are "slowly creeping up and I know we all have our fingers and toes crossed that this will continue."

After two budget years in which tax collections came up short of the consensus projections, tax collections over the first five months of this fiscal year are $204 million above benchmark, the Department of Revenue announced Tuesday. But major revenue gaps have exploded in the second half of the last two fiscal years, or between January and June.

House Ways and Means Chairman Jeffrey S nchez, embarking on his first budget as House budget chief, said the Legislature has "the potential to set the stage for the next 30 years" with its fiscal 2019 budget.

"We continue to be a place where businesses want to be located thanks to our highly-educated workforce and everywhere I look I see more and more cranes in the skyline and new buildings that are sprouting up," S nchez said. "But make no mistake about it, we need to make sure the opportunities are not only here in the city of Boston but that we're expanding our reach from Worcester to Springfield, New Bedford to Pittsfield, to every corner of the commonwealth. These are challenges and opportunities I'm thinking about."