Budget writers agree on 3.5% state tax revenue growth rate for FY19

State budget leaders announced on Jan. 12 that they’ve agreed on a 3.5 percent anticipated growth rate for state tax revenues next fiscal year, setting an important benchmark that will be used for building fiscal 2019 state budget bills from the governor as well as the House and Senate.
 
For the past several years, the consensus growth percentage has served as the benchmark for the growth rate of revenue sharing with cities and towns through the Unrestricted General Government Aid account in the state budget.
 
Gov. Charlie Baker’s budget bill, which will be his fourth, is due by Jan. 24. The governor and legislative leaders faced a Jan. 15 deadline to agree on a tax revenue estimate.
 
Gov. Baker’s budget chief and the chairs of the House and Senate Ways and Means committees announced that the governor and Legislature will have nearly $27.6 billion in tax collections available to spend in fiscal 2019, along with billions of dollars in federal and non-tax revenues. (The state budget totals about $39.4 billion this year.)
 
Budget writers also upgraded their expectations for tax revenue in the current fiscal year, raising the projected total by $157 million, to $26.66 billion. The fiscal 2019 revenue estimate is $933 million higher than the updated projection for the current fiscal year.
 
The 3.5 percent growth estimate, state budget leaders said, assumes that the state income tax rate will drop from 5.1 percent to 5.05 percent on Jan. 1, 2019, which the Department of Revenue has said would result in a reduction in state revenue of about $83 million over the second half of fiscal 2019.
 
In a statement, Administration and Finance Secretary Michael Heffernan said the fiscal 2019 tax collection forecast “reflects modest growth in the Commonwealth’s economy … and incorporates a conservative view of year-to-date tax revenues.”
 
At the “consensus revenue hearing” last month, the Department of Revenue and other budget experts and economists offered revenue growth estimates that ranged from 2.8 percent to 6.1 percent. The estimate from the DOR was 3.3 percent to 4.1 percent.
 
At the hearing, Revenue Commissioner Christopher Harding told the panel that the department’s forecast assumes modestly improving economic growth, but that there is a very high level of uncertainty for both economic and political reasons. He mentioned increasing uncertainty in global financial markets and the potential impact of a federal tax overhaul on the economy.
 
Harding noted that the DOR forecast does not include the potential impact of two questions expected to be on the state ballot next November. One would reduce the sales tax rate from 6.25 percent to 5 percent (and establish an annual sales tax-free weekend), and the other would impose a 4 percent income tax surcharge on incomes of more than $1 million. The DOR forecast also does not include state tax collections from the sale of recreational marijuana, which are estimated at $44 million to $82 million in fiscal 2019.
 
After two budget years in which tax collections came up short of projections, tax collections over the first half of the current fiscal year are 6 percent above the benchmark and 8.1 percent, or $966 million, higher than the first half of fiscal 2017. Significant revenue gaps have surfaced, however, in the second half of the last two fiscal years (between January and June).