State projects 3.5% revenue growth in coming budget year
State tax revenues will grow at a 3.5 percent clip next fiscal year, state budget managers agreed on Friday, signaling that the governor and Legislature will have almost $27.6 billion available to spend, along with billions of dollars in federal and non-tax revenues, as they begin to shape the fiscal 2019 state budget.
Gov. Charlie Baker's budget chief and the chairs of the House and Senate Ways and Means Committees on Friday detailed a finalized accord on how much tax revenue the state expects to collect in fiscal year 2019, which begins on July 1. Budget watchers also upgraded their expectations for tax revenue in the current fiscal year, upping the projected total revenue by $157 million, to $26.661 billion.
The estimate of $27.594 billion in tax revenues for fiscal 2019 amounts to $933 million more in revenue than the updated projection for the current fiscal year. The projected growth rate will serve as the basis for Baker's budget, which is due on Jan. 24, and budget-building exercises this spring and summer in the House and Senate. The Republican governor and Democrats in the Legislature faced a Jan. 15 deadline to agree on a tax revenue estimate.
As part of the revenue agreement, the triumvirate of budget officials also announced Friday a $2.609 billion transfer to the pension fund -- a $214 million increase over the fiscal 2018 contribution -- a $1.032 billion transfer to the MBTA, a transfer of $858.9 million to the Massachusetts School Building Authority and a $24.1 million transfer to the Workforce Training Fund.
After a total of $4.612 billion in transfers, the maximum amount of tax revenue available for the fiscal 2019 budget will be $22.982 billion, the officials agreed. The state budget, which totals about $39.4 billion this fiscal year, is supplemented by federal revenues along with non-tax revenues like fees.
The 3.5 percent growth figure, the budget managers said, assumes the state income tax rate will drop from 5.1 percent to 5.05 percent on Jan. 1, 2019, which DOR has previously said would result in a roughly $83 million reduction in state revenue over the last six months of fiscal 2019. Recent economic growth was not significant enough to statutorily trigger an income tax cut on Jan. 1, 2017 or Jan. 1, 2018.
The agreement also assumes $1.3 billion in capital gain taxes and assumes a transfer of $88 million of capital gains taxes to the state's stabilization fund.
"The FY19 forecast reflects modest growth in the Commonwealth's economy, consistent with testimony we have heard from economic experts, and incorporates a conservative view of year-to-date tax revenues," Administration and Finance Secretary Michael Heffernan said in a statement. "Establishing a consensus revenue forecast is an important shared first step in the budget process, and I look forward to working with House and Senate Ways and Means in the coming months as we develop a fiscally responsible FY19 budget."
At a revenue projection hearing in December, the Department of Revenue (DOR), budget-tracking think tanks and Massachusetts economists provided estimates of revenue growth that came in as low as 2.8 percent and as high as 6.1 percent. The consensus revenue figure announced Friday is closest to the 3.3 percent to 4.1 percent growth range estimate offered by the DOR, where officials were not available this week to discuss impacts of a new federal tax law.
State leaders in recent years have overestimated tax collections. In announcing the agreed-upon revenue figure on Friday, budget officials used words like "conservative," "cautious," "uncertainty," "volatility" and "modest" to describe their forecast of the state revenue picture.
"We must always be cautious when predicting revenue growth, especially given recent volatility and increased uncertainty for the coming year," Senate Ways and Means Chair Karen Spilka said in a statement. "This projection of modest growth reflects these uncertainties, along with a recent upswing in economic trends. Moving forward in the FY19 budget process, we will continue to monitor revenue as we work to build a balanced budget, mindful of our mission to provide critical services and programs for the Commonwealth’s most vulnerable."
House Ways and Means Chairman Jeffrey Sánchez said the 3.5 percent growth rate "reflects the cautious optimism and realities of current economic trends."
"This is a number that balances the uncertainty at the federal level and elsewhere with the growth we are experiencing in Massachusetts," he said in a statement. "With this agreement in place, we can begin the FY19 budget process and build upon previous investments in programs that improve the lives of people throughout the Commonwealth."
With less than two weeks until Baker is scheduled to unveil his fourth budget as governor and set in motion a budget process that will last into the summer, there remains significant uncertainty about how state finances will be affected by recent federal tax code changes and proposals to alter state tax policy.
After two budget years in which tax collections came up short of the consensus projections, tax collections over the first six months of the fiscal are greater than $12.9 billion, which is 6 percent above the benchmark and 8.1 percent, or $966 million, higher than the first half of fiscal 2017. But major revenue gaps have exploded in the second half of the last two fiscal years, or between January and June.
In a report earlier this week, the business-backed Massachusetts Taxpayers Foundation noted that tax collections are running nearly $730 million above benchmarks through December and recommended the state use above-benchmark revenues to build its rainy day, or stabilization reserve, an area that credit rating agencies have flagged as a concern.
"The state budget is twice the size it was fifteen years ago, while the Stabilization Fund balance is $400 million lower," MTF said in its report. "Without a behavior change, the next fiscal downturn will be disastrous."
Sánchez, embarking on his first budget as House budget chief, said in December that the Legislature has "the potential to set the stage for the next 30 years" with the Bay State's fiscal 2019 budget.
Heffernan, Sánchez and Spilka also agreed Friday to a 3.6 percent rate of potential gross state product growth for calendar year 2019, the same figure that has been used the past three years to set up a health care cost growth benchmark under the 2012 cost containment law.
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