BOSTON — With COVID-19 vaccines being administered for the first time in Massachusetts last week, economists offered a brighter outlook for the state’s finances next year, predicting the possibility of a strong recovery driven by job growth and a resurgence in retail sales, dining and travel.
Economic and budget experts told legislative leaders and Baker administration officials to expect tax collections in fiscal year 2022, which begins in just over six months, to climb, but by how much depends on the virus and Congress.
While the estimates ranged from a low of $29.6 billion to a high of $31.9 billion, most agreed there were reasons to be optimistic after a year that saw the sharpest economic decline in a single quarter in state history in April, May and June.
Some experts also said that revenues in the current fiscal year could turn out stronger than anticipated in the $45.9 billion budget recently signed by Gov. Charlie Baker. That budget assumed tax revenues will fall by 4% in fiscal 2021 from fiscal 2020 levels, even though the new $28.44 billion tax estimate was revised upward by Baker on Friday by $459 million.
But all of the optimism expressed at a revenue hearing on Tuesday came with a heavy dose of caveats from experts, who warned that if the spread of the coronavirus accelerates and Baker locks down more segments of the economy, the picture could get gloomier.
The most optimistic forecasts were predicated on renewed hope that Congress will deliver another round of stimulus by early 2021 and that the state’s plan to make vaccines widely available to the general public by the spring comes to fruition.
“Predicting future revenue figures can be a challenging process in normal times, as we all know, but in a year dominated by the havoc and uncertainty caused by the COVID-19 pandemic, this year will make it even all the more daunting,” said House Ways and Means Chairman Aaron Michlewitz.
The House and Senate Ways and Means Committees and the Executive Office of Administration and Finance turned their attention to planning for fiscal 2022 last week. Michlewitz, Senate Ways and Means Chairman Michael Rodrigues and Secretary Michael Heffernan hosted a revenue hearing to collect forecasts for tax collections from leading economic experts.
While the hearing is typically an annual event, legislators and the administration sought the advice of this same group on three separate occasions over the past year as it developed the fiscal 2021 budget in the midst of the pandemic, and several said they hoped to avoid a repeat. The Legislature and administration must agree on a revenue estimate by early January, and Baker will use that figure to build the fiscal year 2022 budget he must file before the end of next month.
Revenue Commission Geoffrey Snyder said the administration’s forecast predicts that tax collections in fiscal 2022 will fall within a range of $27.83 billion to $30.61 billion, or between a 1% decrease and an 8.8% increase.
Synder also said that despite revenues in the current fiscal year trending 1.3% above estimates, tax collections are actually down $219 million, or 1.9%, from the same period last year when discounting withholding on unemployment benefits, one-time tax events and business refunds that are due.
“We expect that revenue volatility may increase during the remainder of this fiscal year,” Snyder said.
While DOR offered a wide range of possible outcomes, the Massachusetts Taxpayers Foundation and other fiscal observers and economists said they were “cautiously optimistic” about what fiscal 2022 might hold.
The Taxpayers Foundation projected $29.73 billion in tax revenues in fiscal 2022, which would be roughly 6% higher than the Baker administration’s upwardly revised estimate for fiscal 2021, not counting the one-time gain of accelerated sales tax collections this fiscal year.
MTF President Eileen McAnneny said the bullish projections were predicated on sales taxes jumping 7.1%, or $484 million, and withholding income tax climbing nearly 4%, or $522 million. Gas and room occupancy taxes could also rebound significantly, she said.
“There is a light at the end of the tunnel with the development of a vaccine, but a lot of uncertainty remains,” McAnneny said.
McAnneny said said a failure by Congress to deliver another round of coronavirus relief to states could strain municipal budgets and prolong the recession by limiting the purchasing power of individuals and small businesses. MTF’s forecast was built on the assumption that Congress would pass a $1.5 trillion stimulus bill.
David Tuerck, president of the Beacon Hill Institute, made a similar prediction to MTF, but his did not count on federal stimulus spending. BHI estimated that the state would collect $29.77 billion in fiscal 2022.
“Economic indicators for Massachusetts and the country are moving in the right direction,” Tuerck said. He said one thing that could alter his forecast would be if Baker were to move the state into a more complete economic shutdown in the coming weeks because of the spread of COVID-19.
“That could undermine the accuracy of what I’m offering here,” Tuerck said.
Alan Clayton-Matthews, a Northeastern University economics professor and MassBenchmarks senior contributing editor, predicted that tax revenues in the current fiscal year could top out at $30.2 billion, which would be significantly higher than what lawmakers are expecting.
He then said revenues could climb 4.4% in fiscal 2022 to $31.5 billion.
Clayton-Matthews said his “relatively sanguine” outlook depended on the vaccine being widely distributed by the summer, which would lead to a rebound in meals taxes and allow the current trend of strong corporate profits to continue.
He said his fiscal 2021 estimates were inflated based on estimates that there is an outstanding liability for income taxes that were not withheld on unemployment benefits, and will be paid in the spring.
If tax collections in the current fiscal year exceed estimates, the Legislature and Baker administration may choose to reduce its draw from the state’s “rainy day” fund. The budget authorizes up to $1.7 billion in spending from the $3.5 billion reserve account, but Treasurer Deborah Goldberg said credit rating agencies would welcome a decreased reliance on the fund.
Goldberg said investor demand for state bonds is still strong, and that the rating agencies have been “overall impressed” with the state financial management through the crisis, but she said they are anticipating that the state will look to bulk up its reserves as the economy improves.
“If we continue to increase expenditures and utilize rainy day funds, that’s going to become a problem for them,” Goldberg said.
Goldberg testified that the state’s pension fund stands at an all-time high of $80 billion, and that $1.5 billion in refunding bonds issued since the pandemic began has saved the state $298 million in debt service in fiscal 2021 and $109 million for fiscal 2022.
The treasurer, however, warned that more economic restrictions to control COVID-19 could hurt the Lottery, which is projecting $960 million in profits in fiscal 2022, up from $940 million this year.
“States with online lotteries have done far better than we have and will continue to be better positioned for any future crisis,” Goldberg said. She also said that changing commuter patterns, including a lasting switch to working from home, will impact Lottery sales by decreasing regular visits to convenience stores, gas stations and markets.
The most optimistic forecast for 2022 also came at the end of the hearing from Evan Horowitz, director of the Center for State Policy Analysis at Tufts University.
Horowitz estimated tax revenues of $31.9 billion in fiscal 2022, banking on a well of pent-up spending energy springing forth from individuals and families who were most easily able to transition to working from home. Those families, he said, were able to build up household savings by not traveling, dining out or spending on entertainment, and could drive a surge in sales taxes when they are allowed to move about freely as the pandemic recedes.
“Unlike recent months, where economic uncertainty has reached new and sometimes nausea-inducing heights, our forecast for FY 2022 involves a normal, merely dizzying level of uncertainty. Future crises may still arise, but this one should be receding,” Horowitz said.
UMass Dartmouth professor Michael Goodman also noted that household savings for part of the population have grown during the pandemic, but he said for others food and housing insecurity has grown and could become a liability for Massachusetts if the federal government doesn’t step in with aid.
“The human stakes are quite high,” Goodman said.
Goodman also noted that the stock market has been “counterintuitively robust” during the pandemic, boding well for capital gains taxes.
“One way or another, the trajectory of the pandemic over the next six months in particular is going to have a lot to say about the last half of FY21 and the momentum we have going into fiscal 20202,” Goodman said.
This article originally appeared on Telegram & Gazette: Economists: Job growth, retail resurgence could boost state’s financial footing