Economists offer dire projections for state revenues
DOR: Tax take will be down at least $1.2b compared to last year
STATE TAX REVENUES are likely to tank by between $1.2 and $3.6 billion this year compared to last year, amid significant uncertainty generated by the COVID-19 pandemic and by federal inaction, according to the state’s top revenue official. That represents a drop of as high as 12 percent year over year.
Compared to the amount lawmakers expected to have this year, before the pandemic hit, the drop is even greater – between $2.7 and $5.2 billion less than anticipated, a drop of between 8.9 and 16.8 percent.
The projections by Revenue Commissioner Geoffrey Snyder are slightly more pessimistic, but not too far out of line with, projections made by several outside experts, who testified Wednesday during a more than three-hour hearing on state revenues.
The projections of multi-billion–dollar revenue drops come even as revenue for the first three months of this fiscal year has come in stronger than expected. But experts say the steady revenues early in the year were due primarily to federal money – like a temporary expansion of unemployment benefits – that has been drying up.
The hearing was run by House Ways and Means chairman Aaron Michlewitz, Senate Ways and Means chairman Michael Rodrigues and Administration and Finance Secretary Michael Heffernan and was meant to inform state budget writers as they draft a full year budget for fiscal 2021. Although the fiscal year started in July, state government has been operating on temporary budgets as policymakers monitor the trajectory of the virus and the actions of the federal government.
At the hearing, both Michlewitz and Rodrigues voiced frustration that Congress and the president still have not passed another federal stimulus bill, and progress seems unlikely. “The uncertainty of the federal government has been frustrating to all of us to say the least,” Michlewitz said, adding that the lack of additional federal money for state and local governments “will have a dramatic negative impact on the Commonwealth’s finances.”
In fiscal 2020, which ended June 30, the state collected $29.5 billion in tax revenues – about $700 million less than had been anticipated before the pandemic hit. In fiscal 2021, Snyder is projecting tax collections of between $25.9 billion and $28.3 billion. That is far lower than the $31.1 billion that state budget-writers had expected to have when Gov. Charlie Baker released his initial budget proposal in January.
The Massachusetts Taxpayers Foundation is similarly projecting tax revenue of $27.3 billion. Other groups have slightly more optimistic predictions: The Tufts University-affiliated Center for State Policy Analysis, the conservative-leaning Beacon Hill Institute and economist Alan Clayton-Matthews of Northeastern University all project tax revenues of between $29.2 billion and $29.8 billion.
While an enormous revenue drop would not be surprising – given a global pandemic that has required shutting down much of the world economy in response – some may question whether the dire projections are warranted since so far, the state has not seen extraordinary revenue drops this fiscal year. From July through September, revenues were actually $69 million, or 1 percent, higher than during the same time period last year. (This figure does not include money that was owed in 2020 but paid in 2021 due to deferred tax deadlines.)
But experts say the recent revenue is mostly due to factors that are not expected to continue. The first is federal benefits. A $600–a–week hike to unemployment benefits was in effect from April through July, and President Trump diverted money from the Federal Emergency Management Agency to continue a $300-a-week benefit for another approximately five weeks.
According to Jeffrey Thompson, director of the New England Public Policy Center of the Federal Reserve Bank of Boston, as of July, $950 million a week was flowing into the Massachusetts economy through the payout of standard unemployment benefits. By October, that will fall to $200 million a week. The difference is not due to people returning to work as much as it is to the loss of enhanced benefits.
That figure does not include another approximately $14 billion Massachusetts businesses got from the Paycheck Protection Program – and businesses pay corporate taxes.
Kazim Ozyurt, chief economist at the Department of Revenue, said despite the strong July to September numbers, “The question is, is it going to be sustainable?”
Ozyurt said there are questions about how fast the economic recovery will be and how quickly jobs will come back. “The labor market in general is in really a dire situation, and recovery may take some time,” he said.
In addition, while sales tax collections are up, Ozyurt speculated that may partly be attributable to “pent-up demand” after the full-fledged closures of March and April, so it is not clear if strong sales will continue. The sales tax category includes taxes on car sales, which are increasing, but also meals taxes, which decreased by 33 percent in the first quarter of fiscal 2021 compared to the same period last year.
Several experts mentioned the continuing high unemployment rate –– now 11.3 percent, down from a high of 16.2 percent in April. While Massachusetts has bounced back quickly in past recessions, that appears less likely to be the case this time.
University of Massachusetts Dartmouth professor Michael Goodman noted that the health care and education sectors, which are usually stable employers that the Massachusetts economy relies on, are no longer as stable, with both industries experiencing job losses.
Snyder said the Massachusetts unemployment rate is projected to be between 8.3 percent and 13.7 percent in fiscal 2021 – compared to under 3 percent before the pandemic hit.
The labor force – the number of people either working or looking for a job –– is also shrinking, as people are leaving the workforce for health or other reasons. The Massachusetts Taxpayers Foundation says while Massachusetts-specific data are not yet available, national data show that women comprise 80 percent of those leaving the workforce, possibly because they are shouldering the primary burden of a lack of childcare.
And many businesses may close. Treasurer Deborah Goldberg, who oversees the Alcoholic Beverages Control Commission, estimated that of retail businesses with liquor licenses –– restaurants, package stores, and hotels — 20 to 25 percent may not renew their licenses, along with another 10 to 15 percent of state licensees, which include wholesalers, manufacturers, wineries and breweries.
All the economists agreed that there remains significant uncertainty in the forecast. Rodrigues noted that he had never seen such a wide estimate from the Department of Revenue, making it hard for budget-writers to pin down an exact revenue estimate.
Without that certainty, there is likely to be continuing debate over how lawmakers should deal with potential budget shortfalls. Marie-Frances Rivera, president of the liberal-leaning Massachusetts Budget and Policy Center, which has pushed for higher taxes on wealthier individuals and corporations, warned that lawmakers need to prioritize spending that helps people who need it. “We can only get the economy back on track by making sure people have basic things,” Rivera said, referring to food, shelter and medical care.
Raising taxes on those who can afford it, Rivera said, “can get money flowing through our local economies.”
A coalition of unions and liberal community organizing groups planned an online rally Wednesday evening calling on lawmakers to increase taxes on profitable corporations in order to invest in public services. “Tens of thousands of Massachusetts residents are facing the threat of eviction, tightening their budgets as expanded unemployment benefits run out, and facing devastating cuts to the public services they depend on every day,” said Lew Finfer, co-director of the Massachusetts Communities Action Network and a co-chair of the Raise Up Massachusetts coalition, in a statement.But David Tuerck, president of the Beacon Hill Institute, warned that tax increases, such as those proposed by Democrats nationally, threaten to have a negative impact on the economy.
Evan Horowitz, executive director of the Center for State Policy Analysis, suggested that the state could take some money from its rainy day fund. While he recognized concerns that cutting into the fund now could result in cuts down the line, he said, “If the cost of that prudence is painful cuts today, you’re actually ensuring the bad outcome you’re trying to avoid.”