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At a Dec. 6 hearing at the State House, state budget officers heard from a range of fiscal experts that state tax collections are likely to do better than expected over the rest of fiscal 2018 and grow moderately next year, although there are significant uncertainties related to the economy, federal tax law changes, and two tax questions headed for the state ballot in November.
The annual “consensus revenue hearing” marks the unofficial kickoff to the budget season. It is convened by the governor’s secretary of administration and finance and the chairs of the House and Senate Ways and Means committees as an early meeting with fiscal experts to help reach agreement on a tax forecast to be used in the governor’s and legislative budget recommendations for the coming fiscal year. The governor is scheduled to file his fiscal 2019 state budget bill by Jan. 24.
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, and this will continue to be a high priority for cities and towns in fiscal 2019.
The Department of Revenue forecasts that tax collections for fiscal 2019 will increase within the range of 3.3 to 4.1 percent as the economy grows at a moderate pace, which means tax collections next year would total between $27.4 billion and $27.6 billion.
The Massachusetts Taxpayers Foundation forecast also shows fiscal 2019 tax collections growing to $27.6 billion, while MassBenchmarks forecasts a more positive 6.1 percent growth, to $28.7 billion next year.
For all of the panelists, a key part of their forecast was predicting when taxpayers would take capital gains that have been accumulated and subject them the state’s income tax. Capital gains and other non-wage and salary parts of the income tax are an important yet volatile part of the state’s total tax mix and pose a special challenge when making forecasts. Both the MTF and MassBenchmarks forecasts assume a surge in capital gains revenues for the Commonwealth during the 2018 tax year.
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.
“Preparing a budget months in advance is difficult in the best of circumstances,” Massachusetts Taxpayers Foundation President Eileen McAnneny noted in written testimony, “but this year is particularly challenging given the huge revenue swings that could result from any one of several scenarios in play, including the potential impact on state finances from federal tax cuts and ballot initiatives impacting state tax revenues.”
The MTF estimates that voter approval of the sales tax cut would reduce fiscal 2019 tax collections by $650 million.
In a briefing book released for the hearing, the Department of Revenue forecasts that taxes could end the current year above the $26.5 billion projection adopted last July, when the fiscal 2018 state budget became law. The MTF and MassBenchmarks also projected that tax collections for fiscal 2018 could beat expectations. The revenue growth projection in the budget for fiscal 2018 is 3.5 percent, but expectations now are that it could approach or exceed 4 percent.