New report tries to explain slow tax collection
With Beacon Hill leaders puzzled by tax collection trends, a new report reflecting continued economic growth in Massachusetts takes a stab at explaining the causes of recently slumping sales tax receipts.
"It may reflect in part a return to normal spending on automobiles after last year's record pace, a reaction to weak and uncertain stock markets earlier in the year, an acceleration in the shift towards on-line spending - most of which escapes the regular sales tax, or weaker spending by businesses, who pay sales taxes on most purchases of supplies and equipment," the authors of MassBenchmarks, an economic journal based on feedback from local economists, wrote in their newest edition.
Consumer and business spending on items subject to the state sales tax grew at a 5.5 percent annualized rate in the second quarter of 2016. But such spending grew at only a 1.4 percent rate in the 12 months ending Oct. 1 and declined by a 0.6 percent annualized rate in the third quarter, prompting the Baker administration to reduce its estimate of total tax receipts.
Sluggish consumer spending and sales tax receipts are at odds with other broad-based indicators about the Massachusetts economy.
Real gross domestic product grew at an annual rate of 3.7 percent in the third quarter, up from 3.6 percent in the second quarter and 2 percent in the first quarter, according to the economic journal, published by the University of Massachusetts Donahue Institute and released on Friday.
Looking ahead, the journal's leading index predicts an annualized state economic growth rate of 2.4 percent in the fourth quarter and 2.1 percent in the first quarter of 2017, when Gov. Charlie Baker is scheduled to unveil his proposed fiscal 2018 state budget proposal. State budget writers usually call economists to Beacon Hill in December to hear their forecasts and develop their own opinions about tax revenue projections.
"It is unlikely that the pace of employment and earnings growth in Massachusetts can continue at the current pace given weak global economic performance and demographic constraints on labor force growth," Alan Clayton-Matthews, MassBenchmarks senior contributing editor and professor of economics at Northeastern University, said in a statement.
The Massachusetts unemployment rate in September fell to 3.6 percent, dropping from 3.9 percent in August to hit its lowest level since June 2001. The jobless rate here has fallen 1.2 percent over the past year.
While that's "unequivocally good news for the Commonwealth," the low rate raises a new concern in and around Greater Boston, where the localized unemployment rates are lower than in other parts of the state.
"You have to start being concerned about the supply of available labor in the areas of the state that are growing to sustain this kind of pace," Michael Goodman, MassBenchmarks co-editor and executive director of the Public Policy Center at the University of Massachusetts Dartmouth, told the News Service recently.
Clayton-Matthews agreed. "A major headwind is the tightening labor market. With fewer unemployed workers and with more baby boomers retiring, it is becoming more difficult for employers to find the workers they need," he said. "This is reflected in the historically low levels of initial unemployment claims, a signal that employers are reacting to the tightening labor market by holding on to the workers they have. Tight labor markets may become a constraint on the Commonwealth's capacity to grow."
Just as regions of Massachusetts have experienced varying growth rates in this long economic recovery, with older cities outside of greater Boston continuing to face higher unemployment rates, the state economy and the U.S. economy have also been on different tracks.
The U.S. Bureau of Economic Analysis reported Friday that real gross domestic product grew at a 2.9 percent annual clip during the third quarter, up from 1.4 percent in the second quarter and 0.8 percent in the first quarter.
U.S. payroll employment in the third quarter grew at a 1.7 percent annualized rate, following growth at a 1.3 percent rate in the second quarter. U.S. wages and salaries expanded at a 4.8 percent rate in the third quarter, after growing at a 4.7 percent rate in the second quarter, according to MassBenchmarks estimates. The U.S. unemployment rate in September was 5 percent, compared to 5.1 percent a year ago.
In Massachusetts, payroll employment grew at a 2.3 percent annualized rate in the third quarter, following an "exceptionally strong" 3.1 percent rate in the second quarter. Employment levels in the third quarter were 2 percent higher than in the third quarter of 2015, according to MassBenchmarks, and wage and salary income expanded at an 11.4 percent rate in the third quarter, after growing at a 13.7 percent rate in the second quarter, according to estimates that are based on withholding tax revenues.
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