State budget leaders agree on tax growth rate of 2.8% for FY21

Legislative budget writers and the governor’s budget office have agreed to base next year’s state budget on the assumption that revenues will grow by 2.8%, to $31.15 billion.

The “consensus revenue estimate” for fiscal 2021 is the basis on which the Baker-Polito administration, the House, and the Senate will build their respective state budget recommendations. The consensus growth rate has been used in recent years to determine the rate of increase in Unrestricted General Government Aid, the main discretionary local aid account.

The forecast was announced on Jan. 13 by Administration and Finance Secretary Michael Heffernan, Senate Ways and Means Chair Michael Rodrigues and House Ways and Means Chair Aaron Michlewitz.

The fiscal 2020 consensus forecast growth rate was 2.7%. It was 3.5% for fiscal 2019, 3.9% for fiscal 2018, and 4.3% for fiscal 2017.

The estimate for fiscal 2021 is $862 million more than the estimate for the current fiscal year.

Also on Jan. 13, Heffernan revised the fiscal 2020 revenue estimate upward by $190 million after revenues over the first half of the fiscal year increased by 4.7% and beat estimates by $231 million.

On Dec. 4 at an annual hearing held to help develop the state revenue projection, state budget writers heard warnings from fiscal experts that the exceptional revenue growth enjoyed by the Commonwealth over the past two years may be coming to an end.

Noting over-target tax growth in both fiscal 2018 and fiscal 2019, the experts said that labor market constraints, the diminishing impact of federal tax cuts and other factors would likely reduce increases in future years.

Revenue available to fund the fiscal 2021 state budget will be somewhat limited by tax cuts that took effect on Jan. 1 and by rules capping the use of capital gains income tax collections over a certain threshold to fund the state budget.

Gov. Charlie Baker is scheduled to file his fiscal 2021 budget recommendation by Jan. 22.