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Massachusetts Revenue to Fade in Next Budget Cycle

The state’s tax revenue growth for fiscal year 2021 is expected to slow down, with estimates for the coming fiscal year ranging from a low of 0.8 percent to a high of 3.5 percent.

(TNS) — State budget writers began the fiscal year 2021 budget cycle Wednesday with a hearing at which the Department of Revenue, independent economists and think tanks sent the same message: Get ready for state tax revenue growth to start slowing down.

The annual consensus revenue hearing held by the Joint Committee on Ways and Means and the Executive Office of Administration and Finance is a chance for budget managers to probe the status of the local economy, take into account other factors and then guess about the availability of tax revenues for budget-building purposes.

Tax revenue growth estimates for the coming fiscal year ranged from a low of 0.8% to a high of 3.5%. By Jan. 15, state officials must pick a growth number and base their spending plans off of it.

"Slower growth. Still growth, but slower growth, certainly not a recession. It's been consistent with the message that we've been hearing for the last few months, that we are still growing, just at a slower rate," Senate Ways and Means Chairman Sen. Michael Rodrigues said after the three-hour hearing.

House Chairman Rep. Aaron Michlewitz noted that the range of growth estimates "seems a little tighter" than in previous years and added that "there's a lot of uncertainty" in play when trying to project how the economy will act more than a year from now.

At the outset of Wednesday's hearing, both chairmen mentioned last year's budget surplus but also the need to plan for years when the state is not as flush with cash.

"Revenue forecasting is difficult and an uncertain process. While we had a $1.1 billion surplus this past fiscal year, we must remain thoughtful as we plan for the future," Michlewitz said.

For fiscal 2019, which ended June 30, Massachusetts government revenue collections totaled $29.693 billion, which was $1.1 billion or 3.8% above expectations. The sum represented a 6.9% - or $1.916 billion - increase in actual collections over fiscal 2018, a year when collections rose 8.5%. None of the groups that presented at Wednesday's hearing projected similar growth for fiscal 2021.

Revenue Commissioner Christopher Harding told budget writers he is not projecting a recession to begin this fiscal year or next. He said there's an "upside potential" beyond the fiscal 2020 revenue estimate of up to $250 million and pegged the midpoint of the agency's fiscal 2021 revenue forecast at $30.805 billion - 2.3% growth in actual tax collections.

The FY21 forecast assumes a deceleration in the economic growth environment and a moderate decrease in the non-withheld personal income tax category, which is mostly from investment, business, pass-through and other income, including capital gains, which at this time is a potentially volatile swing factor," Harding said.

The commissioner also foreshadowed the next round of tax relief once the state income tax falls to 5% on Jan. 1. Automatic tax relief associated with charitable donation deductions will result in a $64 million hit to the fiscal 2021 state budget and a $300 million impact in fiscal 2022.

Numbers released after Wednesday's hearing showed tax collections over the first five months of fiscal 2020 exceeding the state's benchmarks by $271 million, and up 5.4% over the same period in fiscal 2019. Harding cautioned lawmakers at the hearing that $160 million in over-benchmark revenues this fiscal year are associated with the "volatile" estate tax.

Massachusetts Taxpayers Foundation President Eileen McAnneny said the state appears poised to return to the slower revenue growth rates of fiscal 2016 and fiscal 2017, rather than the "supercharged" growth rates of fiscal 2018 and fiscal 2019.

The business-backed organization projected a more limited revenue growth rate - 2% in fiscal 2020 and 2.5% in fiscal 2021.

The "largest drag" on the forecast and the state's economy as a whole, McAnneny said, is the tightening labor market as the workforce continues to age and the unemployment rate remains low. MTF cautioned that "anemic" growth in the number of jobs created "is likely to have a material impact on income withholding and sales tax revenue going forward."

McAnneny said that if an economic downturn does hit, the federal government "may not be a reliable partner" given the combination of low interest rates and the rising national deficit.

"I think the federal government will just not be in a position to provide bailouts as they have done in other recessions," she said.

Northeastern University economics professor Alan Clayton-Matthews, a senior contributing editor of MassBenchmarks, told the Joint Ways and Means Committee that he expects state tax revenues to total $31.804 billion in fiscal 2021 - a 3.5% rate of growth.

"Economic growth is expected to continue but at a slowing rate reflecting constraints on labor force growth due to an aging workforce," Clayton-Matthews said. "Growth in Massachusetts payroll employment, for example, is projected to be 0.8% in FY2020 and 0.5% in FY2021."

Economists at the Beacon Hill Institute offered the most cautious take, forecasting growth of 1.9% to $30.2 billion in fiscal 2020 followed by a 0.8% increase in fiscal 2021. William Burke, the institute's director of research, said the state's economic outlook "remains solid," though growth is likely to moderate.

Whatever the eventual rate of growth ends up being, Rodrigues said he's confident that the administration and Legislature will have the money they need to craft the state's budget.

"Oh yeah. I'm confident there will be enough there. It's still growth," Rodrigues said. "I've been around long enough that I've been here when there's been shrinkage, and we're not moving in that direction."

Even with slower growth projections, lawmakers will need to begin including substantial new K-12 education funding in next year's budget, in keeping with a $1.5 billion, seven-year school funding reform plan Gov. Charlie Baker signed into law last week.

Baker is due to file his fiscal year 2021 budget proposal by Jan. 22.

©2019 Telegram & Gazette, Worcester, Mass.. Distributed by Tribune Content Agency, LLC.

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