After three years of mediocre economic performance and poor job growth in Massachusetts, various economists are projecting the state’s tax revenues will increase significantly in 2005, as the state’s economy improves with the rest of the nation.
The higher tax receipts, however, are likely to lead to greater spending rather than rate cuts, recent budget actions and statements by state legislators suggest.
The Beacon Hill Institute at Suffolk University (BHI) noted the expected revenue increases in fiscal year 2005 and 2006 forecasts it delivered to the Massachusetts legislature’s Joint House and Ways Committee and the Executive Office of Administration and Finance in early December.
“Although Massachusetts lags the national economy, we see strong growth in state tax revenue through the rest of fiscal 2005,” BHI Executive Director David G. Tuerck told the committee.
Strong Economy to Continue
The BHI forecasts anticipate continued strength in the Massachusetts economy. The institute’s forecasts for FY 2005 and 2006 included the following:
- For FY 2005 (ending June 30, 2005): $16.813 billion of revenue for the state government, for growth of 5.4 percent over FY 2004.
- For FY 2006 (ending June 30, 2006): $17.555 billion of revenue, for growth of 4.4 percent over the predicted level for FY 2005.
Other observers have made similar estimates. The Massachusetts Taxpayers Foundation, a business-backed research organization, pegged FY 2005 revenues at $16.6 billion. The state’s Executive Office of Administration and Finance estimates FY 2005 revenues will be $16.2 billion.
Pressure for Spending Increases
Republican Governor Mitt Romney will present his budget in late January, and it remains unclear whether he can navigate the demand for new spending and hold the line on taxes.
Members of the Ways and Means Committee expressed interest not only in the expected revenues but also in ways to spend the money, including on Medicaid (a program with annual 10 percent cost increases), debt service, and a newly approved school construction program. The school construction program is estimated to cost $1 billion over 20 years, financed by using one-fifth of the state’s 5 percent sales tax, according to a statement by the Massachusetts Teachers Association.
Looming in the background is a potentially costly school funding case, Hancock v. Driscoll. The school-funding-equalization case may cost taxpayers another $1 billion a year if the state’s Supreme Judicial Court finds the state has shortchanged poorer school districts.
A favorable ruling for the plaintiffs–a coalition of poorer cities and towns–would require the state to spend more on education in addition to the billions already spent under a 10-year-old Education Reform Act that has earmarked generous state aid to minority and low-income school districts.
Health care also weighs heavily on budget writers, as both the governor and the legislature are considering expanding access to health care for the state’s uninsured population. While not calling for new taxes, the Romney plan would require businesses to provide health insurance to their employees or forgo doing business with the state.
A proposal by State Senator Richard Moore (D-Uxbridge) and Rep. Deborah Blumer (D-Framingham) calls for higher cigarette taxes to fund health care programs. Both the governor’s and legislature’s health care proposals call for employer mandates that some observers believe may diminish economic activity and make the state less competitive.
Consistently Pro-Tax Legislature
In 2000, Massachusetts voters approved a referendum that called on the legislature to cut the state personal income tax rate back to its original 5.0 percent rate. In 2002, in the middle of a fiscal crisis, the legislature postponed the voter-approved tax rollback by freezing the rate at its current 5.3 percent, ignoring the will of the voters. At that time, lawmakers also cancelled a voter-approved income tax deduction for charitable giving and approved Romney’s extensive plan to raise fees.
Earlier this year Romney called for restoration of the 5.0 percent personal income tax rate. But the Democratic legislature–emboldened by the rout of a statewide Republican slate of challengers in November–shows no inclination of entertaining an income tax cut.
“If there was ever a time politically when the legislature could successfully enact new taxes, it would be now, given that the election is behind us and every single incumbent in the general election was re-elected,” outgoing State Representative Paul Demakis (D-Boston) told the Boston Phoenix recently. “If a modest package that helps to address the fiscal crisis on a more permanent basis can be put together, and it doesn’t include anything that really arouses the ire of the voters, then it’s something that should be considered.”
The legislature has already over-committed itself to expenditures from the state sales tax by earmarking specific dollars for both public transportation and the ambitious school building program.
Moreover, the state’s capital gains tax remains a cause for concern given the uncertainties of the stock market and consequently extreme volatility of receipts for that tax. Meanwhile, the state Department of Revenue is keeping an eye on a prospective Supreme Judicial Court ruling that would set the date for a retroactive 2002 capital gains tax it had earlier invalidated. An unfavorable ruling could cost the state $250 million in taxpayer refunds if the court settles on a January 2003 date as the required start date for collecting the tax.
Hence the question remains whether the legislature, with more revenue at hand, will provide the kind of tax relief demanded at the ballot box in 2000 by a majority of the state’s voters.
Frank Conte ([email protected]) is director of communications and information systems at the Beacon Hill Institute at Suffolk University.