Experts: Growth will mean $1B more in taxes for budget

BOSTON (State House News Service) – Economic experts predicted on Thursday that state tax revenues would continue to grow at a “modest” clip through fiscal 2016, with estimates hovering around 4.5 percent growth as lawmakers and Gov. Charlie Baker’s team look ahead toward preparing a new state budget.

The estimates, on par with tax collection growth in fiscal 2015, led Rep. Brian Dempsey, the House’s incumbent budget chief, to suggest that despite encouraging signs of an economic recovery there might be an “inflated sense” of what it means for state revenue.

“What we’re hearing today is slow growth in the 4 percent to 5 percent range, and we must continue to be cautious,” Dempsey said near the end of a nearly three-hour hearing intended to help officials develop a consensus revenue estimate upon which to build the fiscal 2016 budget.

Economists cited global economic slowdowns in Europe and China, unrest in the Middle East and Ukraine and the deflationary effect of low oil prices, despite its benefits for consumers, as unknown factors that are prohibiting a more robust recovery.

Unlike the 1990s recovery when revenue growth eclipsed 6 percent a year, Dempsey said the state is unlikely to see a return such boom times when lawmakers stashed away savings, cut taxes and still invested in areas like education. “We were able to do it all,” Dempsey said.

Dempsey, new Senate Ways and Means Chairman Karen Spilka and Administration and Finance Secretary Kristen Lepore led the hearing. While much the first three weeks of the year have been consumed by dealing with a $765 million fiscal 2015 deficit, Baker’s budget team must come to a consensus revenue estimate with House and Senate leaders for fiscal 2016 by Jan. 31, and the governor’s first budget is expected in late February.

Dempsey cheered the Baker administration for moving “very aggressively” to address the current budget shortfall, while saying he “eagerly awaits details” of the governor’s plan to close the gap.

“We’ll be announcing a plan sometime early to mid-next week,” Lepore told reporters on her way to Thursday’s hearing.

Andrew Bagley, research director of the Massachusetts Taxpayers Foundation, projected that tax revenues this year, which are trending $18 million below estimates, would come in $95 million above benchmarks by the end of the year, representing 4.4 percent growth.

For fiscal 2016, Bagley estimated a similar 4.5 percent rate of growth, or $1.1 billion, for a total of $25.5 billion in tax revenues.

The foundation estimates were roughly in line with those of other experts, including Northeastern University economist Alan Clayton-Matthews who said revenues can be expected to climb to $25.73 billion in fiscal 2016.

David Tuerck, executive director of the Beacon Hill Institute, estimated that final fiscal 2015 revenues would come in just above benchmarks at $24.5 billion, or 4.9 percent growth from fiscal 2014. Moving into fiscal 2016, Tuerck said revenue growth would continue at a 5.3 percent pace delivering $25.8 billion in taxes for the state to spend.

A fourth opinion came from the Department of Revenue. Tax revenues this fiscal year should wind up within a range of $94 million below to $19 million above benchmarks, Revenue Commissioner Amy Pitter told lawmakers. Looking ahead to fiscal 2016, Pitter said the Department of Revenue expects tax revenues to grow by between $1.02 billion and $1.3 billion, or 4.2 percent to 5.7 percent.

Dempsey, along with House Minority Leader Brad Jones, floated the idea in December of a corporate tax amnesty program to generate additional revenues to close the budget deficit. The shortfall at the time was assumed to be much smaller after former Gov. Deval Patrick identified a $329 million deficit.

Asked by Dempsey for her opinion, Pitter said there’s always a danger in offering tax amnesty too frequently, which could influence taxpayer behavior if they think amnesty will be a regular occurrence.

The Legislature last year authorized a tax amnesty program for individual filers. Pitter suggested that expanding tax amnesty to businesses should happen soon, before filing season, if it happens at all, and cautioned that the department currently lacks the technology to implement a broader tax amnesty program to go after non-filers.

“If we were going to do corporate, we’d want to do it almost immediately,” Pitter said, adding, “like a week from Thursday.”

Lepore, quiet for much of the meeting, questioned Pitter over whether the department had anticipated a further reduction in the income tax next January when developing its revenue estimate.

An income tax cut to 5.15 percent this January took an estimated $70 million out of the fiscal 2015 budget, and officials estimate over the course of a full year it will reduce revenues for the state by $145 million in fiscal 2016.

While Pitter said the triggers that would need to be hit to initiate a further reduction to 5.1 percent in 2016 are too “tight” to confidently predict, Bagley said MTF did assume another income tax dip next year.

Treasurer Deborah Goldberg reiterated her position that Baker and lawmakers should steer clear of making any withdrawals from the state’s roughly $1.2 billion “rainy day” fund to balance the current budget. Dempsey agreed with Goldberg that the state should be building, not depleting, its reserves.

“I’d like to see it north of $2 billion. I’d like to see it at $2.5 billion,” Dempsey said.

Tuerck, however, suggested lawmakers might consider using reserves to cover the unbudgeted costs, potentially $230 million or more, associated with Medicaid spending growth and the failed launch of the Affordable Care Act in Massachusetts.

Goldberg also urged lawmakers to boost spending on state Lottery advertising from $8 million to $10 million. She said an increased advertising budget would allow her to boost her Lottery profit expectations in fiscal 2016 from $925 million to nearly $930 million, still about $17 million shy of fiscal 2015 estimates.

“As a businesswoman, I firmly believe that the last thing you do when you’re trying to increase revenue is cut advertising. And especially not when new competition is moving into your backyard,” Goldberg said, referring to casinos and slot parlors.

The treasurer also recommended lowering the anticipated rate of return on the state’s pension fund investments from 8 percent to a more “realistic” 7.75 percent, predicting bond rating agencies would look favorably on the move.

“Yes, this change will increase our unfunded liability. But fiscal responsibility demands planning beyond best-case scenarios in a strong economy,” she said.

According to Lottery Executive Director Beth Bresnahan, the drop for two consecutive years in Lottery profits, despite rising sales figures, is due to the popularity of higher priced instant tickets that pay out bigger prizes. The Lottery remains on track to deliver $947 million in profits for local aid to cities and towns in fiscal 2015, Goldberg said.

UMass Dartmouth economist Michael Goodman said Massachusetts faces risks from the “fragile” world economy, and encouraged state policymakers to focus on the cost of electricity, the urban education “achievement gap,” housing production that has lagged for more than a decade because of “archaic zoning and land-use regulations,” transportation infrastructure and preparations for climate change and sea-level rise.

Goodman said housing prices in Brockton are still well below their pre-recession peak, while housing in Brookline is well above that prior peak. He said people move to areas with lower housing prices, but then commute because there is not enough economic opportunity in those areas.

“I think about that every morning,” Dempsey said.

Asked by Rep. Stephen Kulik, a Worthington Democrat, about the economic impact of expanded broadband internet access to western Massachusetts and Cape Cod, Goodman said lack of broadband can be a “deal breaker” when people are deciding where to move their home or business.

Quizzed by Spilka about the number of people who have given up on looking for work, Clayton-Matthews said the rate of unemployment, underemployment and those who have given up on looking for work in the state is at about 11 percent, down from the recession high of nearly 16 percent in 2009 and still off of the pre-recession level of about 8 percent.

The unemployment rate was 5.5 percent in December.

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