Forecasters predict modest state tax revenue growth next year
Economists worry about supply chain, labor issues
AFTER TWO YEARS of unexpected soaring tax revenues, economists are predicting continued growth next year. But they caution that there are a lot of uncertain factors that could constrain growth, from inflation to supply chain issues to continuing labor shortages.
“None of us really know with any certainty where the economy will be a year from now,” admitted UMass Dartmouth public policy professor Michael Goodman, the co-editor of the economic journal MassBenchmarks, at a legislative hearing on Tuesday, even as he counseled cautious optimism. “There are major wildcards related to the pandemic, inflation, supply chain, and labor supply.”
From an economic perspective, the past two years have been buffered by predictions of catastrophe that did not pan out. While people lost jobs en masse and businesses shut down during the early days of the pandemic in 2020, the economy overall was saved by a massive influx of federal stimulus money to individuals, businesses, and government. State tax revenues soared, in large part due to federal largesse and a strong stock market. Spending has been constrained by supply more than demand, as many people saved money during lockdowns only to be confronted with supply chain issues when they tried to spend it. Businesses today are struggling to find workers, not the other way around.
At a consensus revenue hearing held by the House and Senate Ways and Means Committees on Tuesday, the first step in the fiscal 2023 budget process, economists predicted a continued rise in tax revenues next year – but a more modest one than the state saw this year. They all tempered their predictions by noting that there are many unknowns, including the trajectory of the pandemic.
The Massachusetts Taxpayers Foundation and the Center for State Policy Analysis at Tufts University both offered predictions that fell within that range, $37.63 billion and $36.5 billion, respectively. Northeastern University professor Alan Clayton-Matthews predicted a higher $40.79 billion, a difference he said is partially attributable to different predictions regarding the stock market.
The largest segments of state tax revenues come from income and sales taxes.
Income taxes are correlated with employment and wages. Snyder said Massachusetts employment levels today have rebounded from the height of the pandemic, but still lag around 5 percent behind pre-pandemic levels. Goodman said wages are higher than pre-pandemic, particularly in lower-wage sectors, as businesses compete for a limited pool of job-seekers.
Yet many people still have not returned to work, which surveys show is due to a mix of COVID fears, having a financial cushion built up, and caregiving responsibilities.
The Massachusetts Taxpayers Foundation has long argued that an aging, retiring workforce will cause challenges in Massachusetts. Goodman said COVID has sped up that challenge. While in past recessions, older adults often delayed retiring for financial reasons, this time, many older adults are retiring sooner, because of COVID fears or to help care for grandchildren so their adult children can keep working.
“Folks who might have otherwise been able to hang on a few years are throwing in the towel,” Goodman said.
Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, said between 2018 and December 2022, the Massachusetts workforce is projected to decline by 75,000 people. The number of retired people in Massachusetts was just under 873,000 in September 2019 and jumped to over 1 million in September 2021. The number of people taking care of a house or family also increased during that time, from 205,600 to 249,700.
Sales tax projections are also affected by societal factors, including supply chain issues that affect how much people can buy. While during the pandemic, there was sky-high demand for goods, economists suggest the demand will soon shift to services as society fully reopens. “How much more goods can people buy?” Clayton-Matthews asked.
Economists also noted that supply chain issues are likely to continue, constraining the availability of goods. For example, electronic chips used in everything from computers to cars have been in short supply. One national survey of chief financial officers cited in Goodman’s presentation said most expect supply chain disruptions to continue through the second half of 2022. These include production delays, shipping delays, a lack of availability of materials, and material price increases.
McAnneny said given all the uncertainties, predicting tax revenues the last two years has been challenging, and that remains true. “I liken it to a roller coaster ride complete with dips and turns, and unfortunately we have one more loop before this ride is over,” she said.Evan Horowitz, executive director of the Center for State Policy Analysis, said factors are converging to provide higher-than-expected revenues: high rates of consumer spending, a strong job market, highly priced assets, and the Federal Reserve planning to raise rates. Yet what that means going forward, he said, is that there may be course corrections in areas like the capital gains tax, which has been powered by a strong stock market.
“There are a lot more ways for our economy to stumble and a lot fewer chances to accelerate,” Horowitz said.