At the annual “consensus” revenue hearing on Dec. 16, fiscal experts painted a challenging picture for the state’s chief budget writers as they begin work on the fiscal 2017 budget.
 
The governor and legislative leaders customarily reach a pre-budget agreement on a revenue estimate for the upcoming year that is used as the basis for the governor’s budget bill, due to be filed by Jan. 27, and the two legislative budget recommendations.
 
The state economy is expected to grow moderately next year and into 2017, with continued growth in jobs and income, Revenue Commissioner Mark Nunnelly told Administration and Finance Secretary Kristen Lepore and Rep. Brian Dempsey and Sen. Karen Spilka, chairs of the House and Senate Ways and Means committees.
 
Nunnelly said tax collections are forecast to grow by about 4 percent in fiscal 2017 to $26.8 billion, an increase of about $1 billion. This modest forecast for tax growth, despite a growing economy, reflects the impact of tax law changes, including two cuts in the state income tax rate triggered by economic growth factors that together are estimated to reduce collections by $231 million next year.
 
The income tax rate dropped from 5.15 percent to 5.1 percent on Jan. 1, 2016, and is expected to drop again, to 5.05 percent, next January. Absent these and other tax rule changes, the Department of Revenue estimated that “baseline” tax collections would increase within the range of 5.2 percent to 5.7 percent.
 
Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, told panelists that her foundation projects that state tax collections will increase by 3.8 percent next year ($980 million) to $26.7 billion. Tax revenue growth next year was expected to fall short of the 4.6 percent growth rate trend over the past five years, she said.
 
A news release accompanying McAnneny’s testimony stated, “There are several factors driving the foundation’s projection of slower growth in the Massachusetts economy and revenues available for the 2017 budget. Three of the primary factors impacting expected revenue growth are: another income tax rate reduction, expansion of the Earned Income Tax Credit, and capital gains tax revenues in excess of the threshold.”
 
The restrained growth estimates pose problems for state budget writers with few new dollars available to fund current budget obligations and, at the same, time add to the state’s stabilization fund and try to keep up with long-term liabilities such as pension and health insurance benefits for retired public employees.
 
At the revenue hearing, Lepore said the state faces a major structural gap heading into fiscal 2017 and that it would be another difficult budget year.
 
Rep. Dempsey noted that while the state has benefitted from a strong bond rating, there is a need to replenish the stabilization fund and pay attention to long-term liabilities.
 
The Taxpayers Foundation recommended that 1 percent of tax revenues ($270 million) should be added to the stabilization fund. All above-threshold capital gains tax revenues should also be added to the fund, the foundation said.
 
State Treasurer Deborah Goldberg testified that Lottery net revenues are forecast to grow by 2 percent in fiscal 2017, to $981 million, an increase of nearly $20 million.
 
The treasurer also commented on the $61 billion state-run pension fund, noting that the anticipated rate of return had been decreased from 8 percent to 7.75 percent last year but remains on the high side. Citing lower assumptions being used by local systems in Massachusetts, and a national trend toward lower rates, she recommended that the state should lower the number again to 7.5 percent.
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