THE MASSACHUSETTS ECONOMY and state tax revenues are expected to see “moderate growth” and Beacon Hill can expect to make further adjustments following record-high collections in the immediate post-pandemic years.
That was the message that House Ways and Means Chairman Aaron Michlewitz, Senate Ways and Means Chairman Michael Rodrigues,and Administration and Finance Secretary Matthew Gorzkowicz heard during the annual hearing on revenue trends, held to help state budget writers estimate the revenues that will serve as the foundation of forthcoming fiscal year 2025 state budget plans.
Department of Revenue Commissioner Geoffrey Snyder told lawmakers that his agency expects tax revenue growth in fiscal 2025 of between 1.7 percent and 3.2 percent.
For the current fiscal 2024, DOR offered a benchmark of $39.83 billion, and forecast that tax revenues will flow in between a lower projection of $38.83 billion and a higher estimate of $39.61 billion. Midway into the year, collections are falling short of benchmarks.
Rodrigues, during a speech on the Senate floor later, said November revenues are due to be released on Tuesday. “I don’t think they’re going to be pretty,” he said.
With those slowing collections in mind, the Department of Revenue is forecasting that the state will bring in between $39.504 billion and $40.898 billion in fiscal year 2025.
The Massachusetts Taxpayers Foundation had a similar estimate, that fiscal year 2025 tax revenues are projected to reach $40.5 billion, an increase of 2.4 percent over the MTF’s projection for fiscal 2024.
Both of these projections exclude revenue brought in from the new surtax on the state’s highest earners, which created a newly-available $1 billion pot to spend on education and transportation initiatives in fiscal 2024.
“Thanks to robust revenue growth during the pandemic, a record high rainy day fund balance, and our collective efforts to support our state’s diverse economy and workforce, we have built a fiscally resilient commonwealth that is well positioned to continue our shared success,” Rodrigues said. “However, we find ourselves at a precarious crossroads. There are storm clouds gathering on the horizon.”
Rodrigues identified some of the factors contributing to the cooling economy and “stormclouds” to be several months of collections in fiscal year 2024 that have fallen below benchmarks, as well as high interest rates and the continued humanitarian crisis as the state’s emergency shelter system has been overwhelmed with new arrivals in the past year.
DOR identified risk factors for the upcoming fiscal year as high inflation and interest rates, the possibility of an extended federal government shutdown, conflicts in the Middle East and Russia and Ukraine, and the looming threat of a recession.
As tax revenue collections have come up short in fiscal year 2024, MTF director Doug Howgate and another policy expert that testified on Monday called for the Healey administration to readjust its forecast.
MTF estimates that tax revenues will come in at $39.53 billion this year, resulting in an $880 million shortfall from the benchmark lawmakers and administration officials set at the beginning of the year.
Evan Horowitz, the executive director of the Center for State Policy Analysis at Tufts, said the state should lower its estimate of available tax revenues for this fiscal year by $700 million.
“We believe that the weak tax collections which have characterized the early months of FY24 are likely to continue, while we see no reason to expect offsetting winter and spring strength,” Horowitz said. “Counting usable millionaires tax revenue, we expect the state to close FY24 with roughly $40.7 billion in total tax collection, roughly $700 million below the current benchmark. That’s not a huge gap, and the state could conceivably take a wait-and-see approach. But given expectations of slowing economic growth and broad uncertainty about capital gains and millionaire’s tax revenue, we think a downward adjustment is more prudent.”
Tax collections have so far fallen short of the state’s fiscal 2024 benchmarks by more than $350 million and the state is nearing fiscal year’s midpoint. Midyear revenue corrections can sometimes force the executive branch to more tightly manage or cut spending.
“We recommend this $880 million downgrade,” Howgate said in his testimony. “I think we’re also paying close attention to November and December, and if those months kind of continue that below-benchmark trend we’ve seen, I think we’re going to need to take an even bigger downgrade in fiscal year 2024.”
Fiscal 2023 tax collections of more than $39.1 billion also fell short of benchmarks and were nearly $2 billion lower than fiscal 2022.
Experts mostly made their estimates for fiscal 2025 by excluding new surtax funds, and though shortfalls are possible at the end of the fiscal 2024 budget cycle, economists seem to agree that surtax revenue is going up.
Voters last year amended the constitution to impose a 4 percent surtax on income over $1 million, with the funds going toward public transportation and education initiatives. Budget writers drafted the fiscal 2024 spending bill by budgeting for the surtax to fund $1 billion worth of investments.
DOR forecast during January’s consensus revenue hearing that the surtax revenue would bring in close to $1.5 billion, but budget writers decided to earmark a more conservative amount to fund new policies in the budget, at $1 billion.
With the estimated $1 billion in surtax allocated in this year’s budget, lawmakers and Gov. Maura Healey created several new educational initiatives, including free school meals for all public schools students, free community college tuition for those over 25, and extending in-state tuition rates and financial aid to students without legal immigration status at public colleges and universities.
The budget also dedicated $477 million in surtax funds for transportation investments, about half of which went towards the MBTA.
The department is now predicting the new income surtax will bring in between $1.578 billion and $2.06 billion in fiscal 2024. The excess amount that hasn’t been allocated for spending will go into a “rainy day” surtax fund.
DOR estimates that fiscal year 2025 surtax revenue will be between $1.777 billion and $2.127 billion.
Howgate and Horowitz advised that the budget writers once again in fiscal 2025 cap surtax spending with a more conservative amount than the state is likely to bring in from the tax.
“We applaud you folks for the structure you put in place in terms of surtax collections last year. The cap was the most important thing, which was implemented,” Howgate said. “We think it’s critically important that we stick with that cap approach and a conservative cap in FY 2025.”
Howgate said this source of revenue is “volatile” and that it will be important to have a “mini rainy day fund” to offset times when the state collects less from high earners.
Echoing concerns that some had last year about the implementation of the surtax, Horowitz warned that wealthy people affected by it could leave the state.
“Implementation of the tax will simultaneously reduce income tax collections as taxpayers who leave the state are engaged in tax avoidance will end up skirting both the millionaire’s tax and state income tax, right?” Horowitz said. “That is one of the challenges with behavioral change: the millionaire’s tax, if people do make behavioral change, they leave or if they choose to earn less, or if they engage in tax avoidance, the cost is not just a millionaire’s tax revenues, but also to standard income tax revenues, you lose both.”
While there are people leaving the state due to high cost of living, they are mainly not the population affected by the new tax, UMass Dartmouth professor in the Department of Public Policy, Michael Goodman, said in his testimony. He said it is largely young families, and those under 35 who do not have deep roots established in Massachusetts.
A proponent of the income surtax said the new projections address “naysayers” who have warned high earners will leave the state.
“The Fair Share Amendment is already making a real difference in the lives of people across Massachusetts. Public colleges are more affordable, and we’re starting to repair the MBTA’s infrastructure and fix bridges across the state. School meals are now free for all students, and we’re expanding free local bus service and building new green public schools,” said Andrew Farnitano, spokesperson for the Raise Up Massachusetts coalition. “Just a year after voters passed the Fair Share Amendment, they are already proving the naysayers wrong. And with today’s announcement that Fair Share revenue is exceeding initial estimates, voters can expect even more transportation and public education improvements that will help make Massachusetts more affordable, competitive, and equitable.”