Senate Ways and Means Committee Chair Michael Rodrigues, and House Ways and Means Committee Chair Aaron Michlewitz

The enduring economic hardships caused by the COVID-19 pandemic will pose both revenue and spending challenges to state and local budget writers next year, but may be less dire than first expected.

The Department of Revenue and other fiscal experts and economists offered outlooks for the economy and state revenues over the second half of fiscal 2021 and for fiscal 2022 during the annual “consensus” revenue hearing convened on Dec. 15 by the House and Senate Ways and Means committees and the governor’s budget office.

Legislative leaders and the administration are expected to reach agreement on a tax revenue forecast for fiscal 2022 sometime this month. The forecast would be used in the governor’s budget recommendation, due to be filed by Jan. 27, and the House and Senate budget plans that are customarily released in April and May, respectively.

The annual revenue hearing marks the start of the budget season and is important for municipal officials because it provides insights into the direction of the economy and anticipated state revenues available to fund municipal and school aid programs next year, particularly Unrestricted General Government Aid, which in recent years (with the exception of fiscal 2021) has increased at the same rate as the “consensus” projection for the growth of state tax collections.

For the current fiscal year, the Department of Revenue projects a drop in tax collections of about 6%, which is a bit steeper than the 5% forecast provided by the Massachusetts Taxpayers Foundation. Both outlooks are more favorable than they were earlier in the year, when taxes were expected to drop by more than 10% – billions of dollars below the final number for last year.

For fiscal 2022, the mid-range tax number offered by the Department of Revenue is almost 4% above the expected fiscal 2021 level. The Taxpayers Foundation projects growth of 5.5%.

The outlooks for next year were all heavily qualified with an expectation of control of the coronavirus and help from the federal government.

“While the FY22 forecast represents an improved fiscal outlook from the dark, early days of the pandemic that influenced our FY21 revenue projections, we are still not out of the woods,” warned Taxpayers Foundation President Eileen McAnneny. “All the optimistic assumptions concerning vaccine distribution, efficacy and inoculation rates and the ensuing speedy economic recovery upon which this forecast is based must materialize for the fiscal 2022 revenue projection to be realized.

“Given the unprecedented level of uncertainty the pandemic has prompted,” she said, “we would still urge a conservative approach to budgeting.”

Longer term, McAnneny noted, “Lawmakers need to be paying close attention to fundamental shifts in the economy that could have significant budgetary implications. Zoom meetings, telework, telehealth, remote learning, food delivery services – all have changed the way people communicate and socialize. Whether or not these potentially seismic changes persist post-pandemic will dictate how the state’s economy evolves and their future impact on tax revenues.”

Pandemic-related disruption to local schools and the impact on enrollment numbers could significantly affect school aid allocations next year.

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