A new estimate of tax collections this fiscal year suggests receipts won’t fall as far as some experts predicted in the spring, but will still leave lawmakers with a big budget challenge.
In April, forecasters told lawmakers to anticipate fiscal 2021 collections would tumble by between $4 billion and $6 billion, but an updated projection produced for the News Service by the Center for State Policy Analysis at Tufts University suggests a nearly $1.6 billion reduction in anticipated tax revenues.
Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said the model used by the center relies on U.S. gross domestic product projections and was used in early spring to project a $700 million revenue gap for fiscal 2020, a figure that appears to roughly match the latest estimates.
That gave Horowitz more confidence in the model’s accuracy, he said.
Horowitz ran the model again using fiscal 2021 GDP projections. If those projections hold up, he said, the state could reasonably expect to collect $29.6 billion in tax revenues this fiscal year, down from the state’s existing and still unrevised prepandemic estimate of $31.15 billion.
“So that would put tax revenues about $1.5 to 1.6 billion below that expectation, which is obviously not great but also not in the higher range of deficit estimates and not outside the universe of what could be filled with money from federal aid should that happen, or the rainy day fund,” Horowitz said. “At this point, with the knowledge that we have, this is the estimate that makes sense.”
Horowitz said the center chose GDP as a baseline for its economic model in part because it involves measures of income and spending, and in Massachusetts the state income and sales taxes are anchors of the state tax base. He said models that rely on jobless rates have been “quite misleading” during the current crisis because income supports to the unemployed and the temporary nature of furloughs are unique to the COVID-19 response.
Two other experts who advised lawmakers this year did not have updated tax estimates but told the News Service that recent tax collections and economic performance have provided some reasons for optimism about receipts, which actually rose year-over-year in the first two months of fiscal 2021.
Pandemic impacts have hit lower income workers disproportionately and most income taxes are paid by earners in the higher quintile, said Massachusetts Taxpayers Foundation President Eileen McAnneny.
“That means we have a high unemployment number but it also means that you don’t see it reflected as much in the revenues,” she said.
Income withholding numbers have been surprising given record unemployment, she said, but that’s due in part to the federal income supports in place in recent months for the jobless, and those levels of aid are dissipating as talks drag on over a possible new round of federal aid and economic stimulus measures. McAnneny said the foundation is waiting to revisit its revenue estimate until tax collections in September are clear, since that’s a big month for estimated payments and corporate tax collections. The state is due to report September revenues in early October.
Looking back at the roughly $700 million revenue gap in the fiscal year that ended June 30, McAnneny said the deficit could be covered by drawing from the state’s $3.5 billion rainy day fund or using special borrowing powers authorized by the Legislature, but also mentioned a third option.
While Gov. Charlie Baker has not revised state revenue estimates during the pandemic, which would have forced him to make budget adjustments, McAnneny said she believes there has probably been a reduction in spending and state health care costs have declined because MassHealth patients have avoided visiting hospitals and doctors.
“There could have been measures taken by the executive branch to reduce spending,” she said. “It doesn’t mean they haven’t been managing to a lower number.”
Alan Clayton-Matthews, a Northeastern University economics professor and senior editor at MassBenchmarks, said estimates offered in mid-April predicting the most staggering revenue implosions did not take into account impacts of aid authorized in the CARES Act and other stimulus measures already taken by the federal government.
In April, Clayton-Matthews estimated that state tax revenues in fiscal year 2021 would come in around $26.1 billion. He said stimulus measures have aided consumer spending and low interest rates have boosted the stock market, but, like others, Clayton-Matthews flagged virus trends and additional federal stimulus measures as the big wildcards.
“The rebound started earlier than I expected but it’s losing more steam than I think I would have expected,” Clayton-Matthews said, citing more downside risks than upside risks in the current climate.
Will Burke, at the Beacon Hill Institute, said they have not rerun their economic models but said the threat of an economic shutdown if flu season erupts with a resurgence of COVID-19 is a central concern.
“That’s sort of looming over the economic conditions going forward,” Burke said.
Burke called July a “huge month” for tax collections and took note of the year-over-year rise in collections this summer.
During previous budget crises, governors and legislators have touted their rapid responses to the changing circumstances as indicative of their willingness to tackle problems head on. This year’s crisis has come with the opposite response -- Baker did not make any formal changes to the fiscal 2020 budget in the spring and the Legislature opted to postpone its usual spring budget debate while collecting more information. Budgeteers say the state’s delayed tax-filing deadline and uncertainty over federal aid levels warrant the go-slow approach.
While no new forecasts or budget timetables have emerged from the House or the Baker administration, Senate Ways and Means Committee Chairman Michael Rodrigues last week told business leaders he expects a $5 billion revenue tumble this fiscal year and said lawmakers will need to dip “deeply” into state reserves unless new federal aid arrives from Washington.
Expressing pessimism about the near-term prospects for more federal aid, Rodrigues speculated about tackling a fiscal 2021 budget in October, with scheduling plans coming soon.
Days later, however, Senate President Karen Spilka expressed optimism about the federal aid outlook, saying she thinks Congress might “pull it out of the hat just before the election to swoop down and say, ‘See, we were able to do it, look at what a great job we’re doing.’”
“I don’t see how the federal government cannot provide more assistance to the states,” Spilka said. “If we don’t get assistance, our unemployment rate will go up even higher and this is true in all states, there will be more layoffs that states will have to figure out ways for revenue.”
State law encourages executive and legislative branch leaders to agree on a single estimate of state revenues for budgeting purposes. While only a few top officials are involved in making the revenue projection, the revised fiscal 2021 estimate will be critical because it will set the boundaries of the coming debate over tax hikes, spending cuts, reserve fund use and other measures that will need to be worked into a state spending plan for the latter half of this budget year.
The annual budget was due July 1, but to get through the first four months of fiscal 2021 state government has instead been operating on interim budgets, which lack the spending directives that characterize the usual line-item-filled state budgets.