State's Virtual Economic Roundtable Discusses Revenue Projections

ACEC/MA thanks and credits Molly Sullivan and Coleman Lynds of Rasky Partners for providing this summary:

 

House Ways and Means Chair Aaron Michlewitz kicked off the Roundtable by reminding the public of the where the budget development process currently stands, including previous roundtables, interim budgets, and tax revenues collected. He expressed his frustration in the lack of action at the federal level, particularly regarding remarks that the President made last night. More locally, Michlewitz wants to ensure that the state is committed to economic and job development as the state works to get out of this crisis.

 

Senate Ways and Means Chair Michael Rodrigues expressed his hope of a productive roundtable where they can review the past six months, look forward to the end of FY21, and gain some insights into the future. All things considered, Rodrigues noted that the state is in a better fiscal position than what was predicted back in April, but the state still has a lot of decision to makes to ensure future stability and growth.

 

Secretary of Administration and Finance Michael Heffernan echoed the statements of his fellow chairs and shared that he has been in constant contact with them throughout the pandemic as the legislature and Governor’s administration work through the budget development process.

 

• DOR is forecasting that FY21 tax revenue collections will total $25.918 - $28.387 billion, which is $2.76 - $5.23 billion less than the current consensus figure ($31.151). This would be a 4% - 12% decrease from final FY20 collections.

      o These forecasts were based on tax payments to date and economic projections from leading credit rating agencies.

• September revenue collections totaled $3.144 billion, $46 million or 1.4% less than the actual collections in September 2019.

• FY21 year-to-date collections total approximately $7.27 billion, which is $69 million or 1.0% more than collections in the same period of FY20.

• Tax collections during the remainder of FY21 will depend on many factors, including vaccine development, potential federal fiscal stimulus, and the General Election.

• The national unemployment rate is projected to be between 7.5% -11.1% for the remainder of FY21, while Massachusetts is projected to be between 8.3% - 13.7%.

• In conclusion, Commissioner Snyder predicts the state’s economic recovery may be drawn out, even given the levels of tax revenue collected over the pas three months. With that being stated, he did stress that the vast array of unpredictable variables makes forecasting incredibly difficult.

 

Following Commissioner Snyder’s remarks, Chair Michlewitz asked for some clarification on why year-to-date tax collections are up over this time in FY20. The DOR chief economist told the Chairs that the growth is largely be attributed to the increase in unemployment benefit withholdings. He shared that he is unsure if this trend will continue through the rest of the fiscal year due to the volatility in the labor market. One other increase was with regular sales, which was up about 9%, though meal sales were down slightly. Chair Rodrigues asked for some clarification on why there is such a large range in the forecasted FY21 tax revenue and if DOR would be able to choose a single number within that range for the legislature to use. Snyder explained that the range was due to the many very likely scenarios that could play out over the coming months. Based on feedback from DOR research and vendors, they believed that there is a higher probability, just over 50% chance, of the state’s tax revenue collections being closer to the higher side of DOR’s forecasted range.

 

• Treasurer Goldberg began her remarks by sharing that PRIM is healthy and does not predict any liquidity issues. In fact, the net asset value of the pension fund grew to over $75 billion, an increase of about 2%.

• Regarding the state lottery, while sales were down sharply at the beginning of the pandemic, reaching a 50% decrease in some categories, the state lottery was able bring in over $986 million in profit for FY20, only a 10.6% decrease year-over-year.

o Treasurer Goldberg urged the legislature to pass legislation to allow online lottery sales and shared that in states where it is legal, lottery sales were up year-over-year.

• The ABCC has been working at full capacity to ensure that businesses and restaurants are able to operate a

• Goldberg acknowledged that the cash management department has worked uninterrupted throughout the pandemic.

 

Chair Michlewitz asked the Treasurer to speak about the impact of the rainy-day fund and the state’s debt services. Treasurer Goldberg said that while credit agencies acknowledge that money may need to be spent from the rainy-day fund, they expect that states will find other avenues to address revenue shortfalls first. In terms of debt, the state is always in the market to find better rates and that the Commonwealth has been to meet cash flow needs. Senator Rodrigues asked the Treasurer to speak further about how credit rating agencies view the Commonwealth. Goldberg said that they are watching the Commonwealth’s budget development process closely and understand the state’s use of month-to-month budgets so far, but there is a concern that we have been using old numbers. The state’s bond rating has not changed throughout the pandemic, but the Commonwealth needs to act smartly because other states, such as New York, have been downgraded recently.

 

• The presentation given by Thompson focused more largely on the New England regional economy, instead of just Massachusetts.

• Employment in New England from February to March declined by 18 points and has only rebounded slightly since then.

• Throughout the region, the rate of recovery has slowed with each successive month since June. Recovery through May and June was much quicker than it has been in July and August.

• Not all states in the region have maintained a reduction in unemployment since the beginning of the pandemic. While Massachusetts once had the highest unemployment rate in the county, it has dropped each month since its peak. Meanwhile, unemployment in Maine and Rhode Island dropped initially, but has gone up since June. Rhode Island currently has the highest unemployment rate in the country.

• Early reports on home sales and prices show that the market is staying even, or even going up in some localities, and does not reflect the home sales market in 2008 and 2009.

• Thompson urged state leaders to ensure that COVID-19 infections stay down because the state will not continue with its economic recovery if cases spike.

 

• MTF’s topline projections are as follows:

    o FY21 tax revenues are projected to fall by $3.9 billion or 12.5 percent from the FY21 January benchmark of $31.15 billion upon which Governor Baker’s budget was based.

    o MTF is projecting for tax revenues in FY21 to reach $27.27 billion. While this is still sizeable decrease, it less than the $6 billion MTF had estimated in June.

    o MTF projects withholding income tax to decline by $1.27 billion or 8.8%, sales tax revenues to decline by $940 million or 12.7 %, and corporate taxes are projected to decrease by $215 million.

    o For the first quarter of FY21, the Massachusetts’ economy has been propped up by various forms of federal financial assistance. As these sources of income are exhausted amidst growing uncertainty, the state’s fiscal situation is expected to deteriorate.

• McAnneny concluded by saying that while the Commonwealth’s revenue projections have improved since April, economic growth could stall or deteriorate further putting downward pressures on tax revenues. At its core, this current crisis is a public health one that is causing an economic crisis. When the pandemic is controlled, economic recovery should follow. With that said, the continued uncertainty about the pandemic’s path, and the sheer number of potential headwinds associated with that, the pace of economic recovery requires careful monitoring of the fiscal situation and a cautionary approach to budgeting.

 

In Massachusetts, the state’s GDP in the first quarter of calendar year 2020 was down 4.3% and the US GDP was down 5.0%. In the second quarter, the Commonwealth’s GDP dropped by 31.6% and the US GDP dropped by 31.4%. The Beacon Hill Institute is forecasting that real GDP will be down 5.0% by the end of CY20 but will recover by 5.3% in CY21. The Institute is forecasting that FY21 tax revenue will reach $29.214 billion, only a 1.3% decrease from FY20. They are also forecasting that tax revenues in FY22 will reach $30.070 billion.

 

Rivera is concerned that there is a looming budgetary crisis that will uniquely impact the populations that rely on services that the state provides. This is further demonstrated by the fact that those in white collar jobs were able to transition to work from home and increase their discretionary income, while the populations in need continue to struggle. There are 850,000 people enrolled in SNAP benefits, which means that 1 in 9 residents cannot afford food. Rivera also urged the lawmakers to provide schools with adequate funding so that they can ensure a safe learning environment. 

 

Professor Clayton-Matthews is projecting that tax revenues in FY21 will be between $29.324 - $29.824 billion, which is between -.92% to .77% off FY20. For capital gains tax revenues in FY21, he is projecting that they will be 16.3% above FY20 at $2.366 billion. 

 

Goodman highlighted that the COVID-19 pandemic affected the economy multiple ways, including containment measures, global supply chain disruptions, loss of business confidence and increased unemployment. Further, Massachusetts is not alone in its economic outlook as this is a global issue. A factor unique to Massachusetts is that health care and higher education have not been the stable and countercyclical employers we typically rely on. Since the early 2000’s, these two groups have grown, even during previous recessions, but since March, they have dramatically shrunk. The pandemic has had a disparate negative impact on densely populated areas and communities of color. Goodman believes that the depth and duration of the downturn will be more a function of public health conditions than economic fundamentals. In conclusion, he told the Chairs that fiscal austerity and budget cutting do more economic damage than tax increases do in our current environment, which sees some populations increasing wealth, while other continue to struggle.

 

Horowitz is projecting that FY21 tax revenues will be $29.6 billion, which is 1.6 billion below the January 2020 consensus revenue number and in line with the final revenues for FY20. The Center’s revenue number is based on a belief that there will be strong growth through this quarter, then there will be continued, but slow growth next quarter. Horowitz believes that the state could completely cover any tax revenue losses for FY21 by using the rainy-day fund, while still not wiping out fund. He urged the Chairs to maintain economic development now, rather than cutting back spending out of a fear of future economic recession. Further, he believes that there is a strong possibility that FY22 will be stable or even bring growth. Lastly, Horowitz strongly urged the Chairs to delay any budgetary decisions until after the General Election, as that will determine the likely hood of future federal stimulus. A democratic Senate and Presidency would all but ensure federal stimulus for states.

 

Background:

Since April, forecasters have told lawmakers to anticipate that FY21 collections would tumble by between $4 billion and $6 billion, but an updated projection in September produced by the Center for State Policy Analysis at Tufts University suggested that tax revenue loss would only be about $1.6 billion. Governor Baker has also told legislators that the state will not need to rely on borrowing or draw from the rainy day fund to close out the FY20 budget even though tax collections were about $693 million short of expectations.

 

Through the first three full months of FY21, tax collections are about 1 percent above where they were this time last year. On Monday, the Department of Revenue (DOR) reported taking in $3.144 billion in tax revenue in September, which was $46 million or 1.4 percent less than September 2019. Year-to-date tax collections total roughly $7.27 billion, which is $69 million more than was collected during in the same time period of FY20. DOR said that September is a significant month for revenue collection because the third installments of both individual and corporate estimated payments are due and that the month generally produces about 10 percent of the state's annual revenue. DOR did note in its report for September that they expected the month’s tax collections to be lower than usual because the filing and payment due date for sales, meals and room occupancy taxes for qualifying businesses for March 2020 through April 2021 has been pushed out until May 2021.