BOSTON (STATE HOUSE NEWS SERVICE) – Like mechanics puzzled by a car that runs just fine but struggles to get up to speed on the highway, budget writers got under the hood of the state budget Monday morning, trying to discern what they need to do to ensure their spending plans stay on the road in fiscal 2018.
Despite the lowest unemployment rate in 15 years, and heightened consumer and business confidence, state budget managers have had to scramble this fiscal year and last to adjust as state tax collections have not lived up to initial projections amid a slow-growing economy.
“Do we have any better idea as to why some of this is happening in an economy, particularly for Massachusetts, that is doing, by all indications, well?” Sen. Karen Spilka, the Senate chair of the Ways and Means Committee, asked at the outset of the hearing. “I mean, you’d think that we would be doing well with withholdings and sales tax and corporate, with the business confidence the way it is.”
The hearing Monday by the Joint Committee on Ways and Means and the Executive Office of Administration and Finance was held to answer questions like Spilka’s and ascertain the availability of tax revenues for fiscal 2018 budget-building purposes.
Lawmakers heard a range of projections from the Department of Revenue, budget-tracking think tanks and Massachusetts economists at the annual hearing. Their estimates came in as low as 2.65 percent and as high as 5.2 percent.
The projections came with a flurry of warnings, with analysts urging lawmakers to consider how President-elect Donald Trump’s agenda could affect the state budget picture, how political and financial instability in Europe might make waves in Massachusetts, and how the state’s demographics play into its future economic performance.
DEPARTMENT OF REVENUE
Forecasted fiscal 2018 tax revenue growth: $901 million, or roughly 3.5 percent
Michael Heffernan, commissioner of the Department of Revenue, gave an uncertain forecast of state tax revenues in fiscal 2018, telling state budget writers that the outlook for next fiscal year is “perhaps even more uncertain than would normally be the case” due to economic and political unknowns around the country and the world.
DOR estimated fiscal 2018 tax collections will come in between $26.81 billion and $27.104 billion, representing growth of 2.9 to 4 percent over fiscal 2017 benchmarks. Using the midpoint of its range, DOR estimated a fiscal 2018 revenue increase of $901 million to $26.957 billion, growth of 3.5 percent.
According to the DOR, its estimate assumes the income tax rate will drop from 5.1 percent to 5.05 percent on Jan. 1, 2018, resulting in an $83 million reduction in state revenue. Recent economic growth was not significant enough to statutorily trigger an income tax cut on Jan. 1, 2017.
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The DOR estimate also assumes that the state will see no revenue from legal marijuana in fiscal 2018, which ends 18 months from now or halfway through 2018. Retail marijuana shops are not expected to open until 2018.
Making the task of predicting difficult, DOR officials said, is the uncertainty surrounding the economic policies of the incoming Trump administration, instability in Europe due to Great Britain’s decision to leave the European Union, and the potential for Federal Reserve interest rate hikes.
“If the U.S. economy slows considerably, the Massachusetts economy will slow as well. Second, while there has been a recent bounce in consumer confidence and in the financial markets, it would not be prudent to project these as permanent,” DOR Commissioner Michael Heffernan said. “The level of uncertainty in both the economic and political spheres remains.”
MASSACHUSETTS TAXPAYERS FOUNDATION
Forecasted fiscal 2018 growth: $687 million, or roughly 2.65 percent.
The Massachusetts Taxpayers Foundation on Monday presented the Joint Ways and Means Committee with an estimate that state tax collections will grow by only 2.65 percent in fiscal 2018. Tax revenues will increase by about $687 million, to $26.64 billion, according to the foundation’s estimate.
Though the reasons behind the sluggish growth of the last nearly two years are “uncertain, what is clear is that there are no indicators suggesting state tax revenues will grow at a rate substantially higher than we’ve experienced over the last 11 months,” MTF President Eileen McAnneny said.
MTF echoed DOR’s concerns, and “advises extreme caution over the next 18 months and urges lawmakers to exercise great restraint in building the budget.”
“There are both longstanding causes for concern, such as a shrinking workforce and insufficient reserves in our stabilization fund, and many new ones — such as the lack of clarity on many policy positions from President-elect Trump and ominous signs of a global economic slowdown — that necessitate a conservative approach,” McAnneny said. “Given our fragile fiscal state and our unpreparedness for a recession, our expectation is that these pressures will only grow in the coming year.”
Closest to home, the state’s demographics could soon begin to limit economic growth, McAnneny said. As the Baby Boomer generation begins to exit the state’s workforce, there are not enough young workers entering the working ranks. The number of Massachusetts residents between the ages of 16 and 64 peaked in 2015 at 4.59 million, according to MTF, and is expected to tick downward to 4.45 million by 2025.
And President-elect Donald Trump’s stance on immigration could further stress the state’s workforce. Net international migration has averaged over 10,000 people per year since 2000, offsetting the scores of residents who leave the state and providing a valuable source of workers for Massachusetts businesses. If Trump’s immigration plans stop that flow, challenges to economic growth could worsen.
Of Trump’s campaign proposals, the ones that seem most likely to have “significant and immediate impacts” on the Massachusetts economy, according to MTF, are the repeal of the Affordable Care Act, immigration reforms that could further the contraction of the workforce, protectionist trade policies and changes to the Medicaid program.
“Any one of these changes could be sufficient to cause a significant contraction. I think if you see a combination of them, they could have a profound and long-lasting economic consequence and place more tension on our precarious fiscal situation,” McAnneny said. She added, “There are just many external forces at play, whether they’re local, national or international, and I think our fragile fiscal state really suggests the only prudent course is to exercise great restraint when you build the budget.”
BEACON HILL INSTITUTE
Forecasted fiscal 2018 growth: $1.36 billion, or roughly 5.2 percent.
The Beacon Hill Institute’s projections for next fiscal year were the most bullish that lawmakers heard Monday. David Tuerck, executive director of the institute, pegged fiscal 2018 tax revenues at $27.8 billion, up $1.36 billion or 5.2 percent over fiscal 2017.
“For some reason, we always tend to be more optimistic,” Tuerck said. He added, “So I think that even though our numbers are on the high end, in fact much higher than the other numbers you’re getting here today, I’m confident in them.”
Tuerck differed from the others who offered testimony Monday not just by presenting by far the most optimistic revenue projection, but also by suggesting that Trump’s policies could be a boon to the state economy.
“I’m not sure what’s going to happen to our relations to China, I don’t know what it’s going to cost to build a wall, but I find nothing but encouraging news in the Trump economic plan,” he said. “Getting rid of the Clean Power Plan, revising Dodd-Frank, revising the Affordable Care Act, in particular cutting the tax on business profits to 15 percent can’t have anything except an exuberant effect on the economy.”
ALAN CLAYTON-MATTHEWS and MICHAEL GOODMAN
Forecasted fiscal 2018 growth: $971 million, or roughly 3.7 percent
Northeastern University economist Alan Clayton-Matthews was the Goldilocks of Monday’s hearing, presenting an fiscal 2018 revenue projection that was “just right” compared to those from MTF and the Beacon Hill Institute, he said.
Clayton-Matthews estimated that revenues will rise $971 million, or 3.7 percent, to $27.27 billion in fiscal 2018.
He said that while last month’s presidential election is still reverberating through the economy, the election of Trump could lead to a more positive outlook for the national economy, pointing to upticks in financial markets since Nov. 8.
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“Economic uncertainty related to the election is still high, but in the short term there has been a significant shift from predominantly downside risk to predominantly upside risk. You can see the Wall Street Journal monthly survey of economists to see that, the difference between before and after the election was quite substantial,” he said. “The prospects of fiscal stimulus could boost economic growth beyond that in the outlook on which this revenue forecast is based.”
Michael Goodman, co-editor with Clayton-Matthews of Massachusetts Benchmarks, said he concurs with Clayton-Matthews’ projection, and highlighted high utility rates, the K-12 educational achievement gap, local zoning regulations that limit affordable housing stock and climate change as potential future challenges.
“In many respects the Commonwealth is as well positioned as any place in the nation to ride out whatever comes next and there are a number of good reasons to be optimistic,” Goodman said. “But I do think that it’s important for you to carefully consider the risks that are in the economic outlook and the state’s long-term needs before arriving at your consensus revenue estimates and preparing your budget for FY ’18.”