State Officials Expecting More Tax Revenue in Massachusetts Even Through Coronavirus Shutdowns

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State budget writers have agreed to build fiscal 2022 spending plans on the assumption that Massachusetts state tax revenues will grow by 3.5 percent over upgraded projections for the current fiscal year, signaling that the damage done to the state’s finances by the COVID-19 pandemic may not be as severe as once thought.

The estimate of $30.12 billion in state revenue for the budget year that starts July 1 amounts to about $1.03 billion more in revenue than the updated projection for the current fiscal year, roughly 3.5 percent growth. But the forecast announced on Friday, January 15 is still $1.03 billion less than the $31.15 billion pre-pandemic estimate the same group of officials made for fiscal year 2021 revenue a year ago.

The so-called “consensus revenue estimate” for fiscal year 2022 was announced by Michael Heffernan the state secretary of Administration and Finance; state Senator Michael Rodrigues (D-Westport), the chairman of the Senate Ways and Means Committee; and state Representative Aaron Michlewitz (D-North End), the chairman of the House Ways and Means Committee.

“After a tumultuous budget cycle over the last few months, this consensus revenue agreement for Fiscal Year 2022 is a modest and responsible forecast that will allow the Commonwealth to continue to provide the services our constituents deserve, while at the same time preserving our fiscal health,” Michlewitz said. “Despite the pandemic, our revenue intake continues to be better than anticipated, proving the continued resiliency of the Commonwealth’s economy.”

In conjunction with the fiscal year 2022 revenue accord announcement, Heffernan on Friday revised the fiscal year 2021 revenue estimate upward by $700 million after revenues over the first half of the fiscal year increased by $372 million or 2.7 percent from what was collected during the first six months of fiscal 2020 that were entirely unaffected by the COVID-19 pandemic.

When combined with a $459 million markup the administration announced December 11, the Baker administration in the last month has boosted its estimate of available revenues this fiscal year by $1.16 billion. The administration is now projecting total fiscal 2021 revenue of $29.09 billion.

Governor Charlie Baker, a Republican, on January 27 is expected to file his annual budget proposal for fiscal year 2022 based on the new revenue estimate of $30.12 billion. (Fiscal year 2022 runs from July 1, 2021 through June 30, 2022.) The House and Senate will redraft Baker’s spending blueprint and debate their own versions, likely in April and May.

“As we develop a budget for Fiscal Year 2022, we will continue to closely monitor tax collections, weigh the fiscal implications of COVID-19, and strive to put forward a budget that maintains fiscal responsibility and protects core essential services for our most vulnerable populations, while building an equitable economic recovery for all,” Rodrigues said.

At a hearing in December, economic and budget experts told legislative leaders and Baker administration officials to expect tax collections to climb in fiscal year 2022, but said that whether they grow modestly or significantly will depend on the coronavirus and Congress. At the time, the Massachusetts Department of Revenue’s forecast predicted that tax collections would fall within a range of $27.83 billion to $30.61 billion in fiscal year 2022, and the agreement announced Friday shows that key budget officials lean towards the higher end of that range.

“The consensus revenue forecast for Fiscal Year 2022 is consistent with the expert testimony offered in December and importantly accounts for updated revenue trends in the current fiscal year,” Heffernan said. “We appreciate the consistent and thoughtful collaboration of our colleagues in the House and Senate Ways and Means Offices, and look forward to developing spending plans for Fiscal Year 2022 which continue to protect essential government services, fund critical priorities, and maintain financial discipline and responsibility.”

Heffernan, Michlewitz, and Rodrigues also agreed Friday on a transfer of $1.174 billion to the Massachusetts Bay Transportation Authority, a $1.014 billion transfer to the Massachusetts School Building Authority, and $25 million to the Workforce Training Fund.

There will also be a $3.415 billion transfer to the state pension fund — an increase of $300 million over the fiscal year 2021 contribution — which is expected to keep Massachusetts on track to fully fund its pension liability by 2036.

After a total of $5.628 billion in transfers, the maximum amount of tax revenue available for the fiscal year 2022 budget will be $24.327 billion, the officials agreed. The state budget, which totals $45.9 billion for fiscal year 2021, is supplemented by substantial federal revenues along with non-tax revenues like fees.

Halfway into fiscal year 2021, state government has collected $372 million more in taxes from people and businesses than it did during the same six pre-pandemic months of fiscal year 2020. Even with the mark-up announced Friday, the Baker administration does not appear to expect the cushion that’s been accumulated to last, however.

Based on the new expectation of $29.09 billion, the administration now expects that fiscal year 2021 tax collections will end up about $506 million, or 1.7 percent below actual fiscal year 2020 collections of $29.596 billion.

Massachusetts will also see billions in federal funds this fiscal year — at least $9 billion from the pandemic relief and economic stimulus package Congress passed late last month, according to an estimate from Baker’s budget office. President-elect Joe Biden has signaled an interest in additional relief packages. On Thursday night, Biden unveiled a $1.9 trillion package that would include $350 billion in aid to state and local governments, which could further benefit Massachusetts.

Heffernan, Michlewitz, and Rodrigues also agreed Friday to a 3.6 percent rate of potential gross state product growth for calendar year 2021, the same figure that has been used the last six years to set up a health care cost growth benchmark under the 2012 cost containment law.

Baker has aimed to enable unrestricted local aid to cities and towns to rise by the rate of tax revenue growth each year, which means cities and towns may see a 3.5 percent increase in that aid category next fiscal year.