State economy expected to improve in FY22
Tax revenue to grow, but timing depends on vaccine, federal aid
THE ECONOMY is expected to improve in the fiscal year beginning in July, raising the amount of tax revenues the state can expect to receive, economists said. But the fiscal outlook remains uncertain, with lingering questions about the timing of COVID-19 vaccine distribution and whether more federal stimulus money will be forthcoming. Unemployment is expected to remain above pre-pandemic levels.
Secretary of Administration and Finance Michael Heffernan summed up the sentiment of state officials succinctly in his opening remarks at a Tuesday hearing beginning the process of reaching a consensus revenue estimated for fiscal 2022. “Happy holidays, here’s to the new year. We hope there’s a vaccine. We hope there’s federal money,” he said.
With the ink barely dry on the delayed fiscal 2021 budget, Heffernan joined the House and Senate Ways and Means Committees to hold the annual consensus revenue hearing for fiscal 2022, which starts July 1, 2021. The hearing marks the first step in the state budget process, where state budget writers hear from economists and begin to develop an agreement on how much tax money they will have to base the next year’s state budget on.
Department of Revenue Commissioner Geoffrey Snyder estimated that tax revenue for Fiscal 2022 will be between $27.828 billion and $30.610 billion, or anywhere from a 1 percent decline to an 8.8 percent gain compared to the current fiscal year.
Several outside experts provided tax revenue estimates for next year that fell within the range of or slightly higher than the Department of Revenue estimate. The business-backed Massachusetts Taxpayers Foundation and the conservative-leaning Beacon Hill Institute both project tax revenues of around $29.7 billion, although the MTF analysis includes a federal stimulus package while the BHI one does not. The Tufts University-affiliated Center for State Policy Analysis and Northeastern University professor Alan Clayton-Matthews projected a more generous $31.9 billion and $31.5 billion, respectively, both of which include a limited amount of additional federal aid.
Snyuder said economic indicators have improved since April 2020, but the pandemic continues to impact both the national and Massachusetts economies.
In the current fiscal year, tax revenues are actually up through the first five months ompared to the same time last year. Snyder said much of the increase is due to taxes on unemployment benefits, which may run out soon; business tax payments from the prior year that were remitted late due to extended deadlines; and one-time business activities.
“It’s difficult to say if that trend is something we can rely on or whether it’s a mirage,” said House Ways and Means Chair Aaron Michlewitz.
While the state has recovered nearly half the jobs it lost in March and April since the economy started to reopen, the Department of Revenue forecasts that the state’s unemployment rate will remain between 5.0 percent and 9.2 percent in fiscal 2022 – far higher than it was pre-pandemic. Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, said unemployment levels are not expected to return to pre-pandemic levels until 2024.
McAnneny noted that the pandemic has also pushed people out of the labor force, with 228,000 people having left the labor force entirely since March – which means they are neither working nor looking for work. There are also questions about the long-term impact of the pandemic – for example, if businesses permanently curtail business travel, hotels that rely on business travel will not recover.
Several economists noted that the pandemic did not impact all workers evenly. Clayton-Matthews said low-wage workers were more likely to lose jobs than higher-wage workers. UMass Dartmouth Michael Goodman noted that while all industries shed jobs, the leisure and hospitality industries lost huge numbers of jobs, while the education and health sectors performed better than average. Women with children were more likely to leave the labor force than other workers, due to difficulties accessing childcare.
Evan Horowitz, executive director of the Center for State Policy Analysis, said the pandemic has been economically devastating for lower-income families who could not work remotely, but wealthier families have actually increased their savings. “Many middle and upper-income families have maintained their incomes while reducing spending due to a lack of opportunity to travel, dine out, go to concerts, etc.,” Horowitz said. That could result in a spike in spending once it becomes safe to go out again.
Clayton-Matthews noted that meals taxes, which took a huge hit in fiscal 2021 as people stopped going out to restaurants, are also likely to rebound once people are vaccinated and restaurants can fully reopen.
Several major wildcards are outside the state’s control. One is how quickly the vaccine is distributed, and whether it can curb the spread of COVID-19. That depends on myriad factors, including how safe and effective the vaccine is, how many people take it, and how efficiently it is distributed. McAnneny said if 70 percent of the population is vaccinated by the summer, “people should have sufficient confidence to reengage socially and economically for the first time in 15 to 18 months, sparking growth in the state’s economy and an upsurge in tax revenues.”Another question is whether Congress passes another stimulus package. McAnneny said if a bill is not signed into law, the absence of federal funds would have direct impacts on state and local budgets, and could prolong the recession if federal assistance programs dry up for individuals and small businesses.