By Colin A. Young and Matt Murphy
The state revenue gravy train kept rolling right along in April as Department of Revenue tax collectors hauled in more than $2 billion more than what was expected during the month, giving Gov. Charlie Baker cause to press his case for the Legislature to take up his proposals to provide roughly $700 million in tax relief to residents.
The April haul pushed the state at least $3.5 billion ahead of its year-to-date benchmark with just two months left in the fiscal year. Collections last month added up to $6.941 billion, $3.076 billion or nearly 80 percent more than what was collected in April 2021 and $2.057 billion or just over 42 percent more than DOR’s own monthly benchmark.
April is historically the single-largest month for tax collections, and the windfall should be reason enough, Baker said, for lawmakers to share some of the money with the taxpayers.
“You could easily pay, more than one time, for all the tax proposals we made with just a piece of the overage in April,” Baker told the News Service in an interview. “Inflation isn’t going away. It’s not transitory. It’s for real. And people are paying it everywhere. They’re paying it in food costs. They’re paying it in gas costs. They’re paying it in rent. They’re paying it in property taxes as the value of their home goes up. And I think this is a time when we should give a piece of the benefit that’s being accrued here by the work of the people of Massachusetts back to them, because we can afford it.”
Baker said it “troubles” him, for instance, that the threshold to pay income taxes is lower at the federal level than it is in Massachusetts. Part of his plan would exempt more low-income households from state income tax liability. “We shouldn’t be in that position,” the governor said.
Baker also said that Massachusetts has “never been more protected against a downturn than we are right now,” with a “rainy day” fund that could potentially top $6 billion by the end of this fiscal year, with more expected to be deposited into reserves through the fiscal year 2023 budget under consideration.
“Any reasonable assumption about the next two years with respect to taxes would leave you to believe our tax proposals are eminently affordable in the short term, and more importantly the people who are suffering right now deserve it and we are in a position to help them, and we should,” Baker said.
Collections increased in most major tax types in comparison to April 2021 collections and the April 2022 monthly benchmark, including increases in withholding, non-withholding, corporate and businesses taxes, said Revenue Commissioner Geoffrey Snyder, while sales and use taxes decreased relative to April 2021 collections but increased compared to the April 2022 benchmark
“The increase in withholding in comparison to April 2021 collections is likely related to labor market conditions, while the increase in non-withholding tax collections is mostly due to an increase in income return payments,” Snyder said in a statement. “The decrease in sales and use tax in comparison to April 2021 collections is partially due to a law requiring the early remittance of certain sales, meals, and room occupancy tax collections, which became effective in April 2021 and generated a one-time increase in sales and use tax collections in that month.”
Now through 10 months of fiscal year 2022, tax receipts of $34.487 billion are more than $8 billion or 30 percent ahead of actual FY 2021 collections and are $4.241 billion or 14 percent above DOR’s year-to-date benchmark. After adjusting for a pass-through entity excise that officials have said has affected comparisons, year-to-date tax collections are $3.573 billion or 12.3 percent above the year-to-date benchmark.
The state took in more than $5 billion more than it was expecting in fiscal year 2021 and this year could be on a similar track, setting up the Legislature to dispense with an election year budget surplus.
With $34.487 billion already in the bank, DOR would have to bring in just $1.461 billion more over the next two months to meet the agreed-upon annual revenue estimate of $35.948 billion. DOR has set its May benchmark at $2.339 billion and its June benchmark at $3.363 billion.
The calls for tax relief will compete with a strong legislative appetite to spend surplus revenues.
Baker proposed a series of estate, capital gains, rent and senior property tax reforms that the Legislature has neither ruled in or out, but legislative Democrats have focused on investing and saving over-budget revenues and repeatedly rejected attempts to suspend the state’s gas tax during a period of high fuel prices and surging tax revenues. The Joint Committee on Revenue did not report on Baker’s tax package by its original deadline, March 2, and on Wednesday sought an extension that would push its reporting deadline all the way out to July 31, the final day of formal sessions allowed this year under legislative rules.
“These good times may not roll forever. We want to make sure that we have money in case there is a sudden downturn. You know, we’re on the brink of major confrontations in Europe, the oil production is being cut way down; if I was an economic prognosticator, I would think we were in for some tough times,” House Speaker Ronald Mariano said last month when asked about the decision to leave Baker’s tax relief proposals out of the House’s fiscal 2023 budget and to push the state’s rainy day fund to a record high $6.55 billion by the end of the next budget. “So obviously we wanted to strengthen our ability to pivot if revenues do take a downward plunge.”
Mariano’s position seems to be supported by S&P Global Ratings, which said in a report last week that it expects things will change as the federal stimulus injections, low bond interest rates and pent-up consumer demand that have benefitted state budgets in the last year fade over the coming year.
The credit rating agency cautioned that states using above-benchmark tax receipts to fund tax reforms could find themselves in tougher positions than states that elect to sock the surplus money away for uncertain or severe times.
“As federal support tapers off and interest rates climb, we expect fiscal 2023 budgets will see slower revenue growth as the economy cools. We believe some states will be better positioned for this slowdown while others, which are depending on economic growth to offset tax rate reductions, could face structural pressures depending on the accuracy of their revenue forecasting,” S&P said.
The firm said 13 states have already pursued personal income tax reforms for fiscal 2023 while two are working on property tax changes and one is pursuing corporate tax reforms. S&P also noted that some states are suspending sales taxes on groceries and others are pursuing temporary gas tax holidays for similar household spending relief.
Connecticut Gov. Ned Lamont reported Wednesday that a budget adjustment bill approved by General Assembly in that state gives taxpayers “their largest tax cut in history,” estimated at $500 million and aimed at working people, middle class, and retirees.
Republican Rep. Nicholas Boldyga of Southwick seized on that news to point at votes last week by the Massachusetts House to reject gas tax relief, while raising the salaries of judges and sheriffs.
“As every state around us helps their working-class citizens. Democrats in the Baystate continue to give pay raises to the States’ Payroll 1%ers!” Boldyga tweeted.
Baker said he didn’t want to theorize as to why the Legislature has been more cautious than some peers in other states, but he remains optimistic.
“They are talking to people on our team at the staff level about details associated with these items so that says to me they are interested in these issues. That doesn’t mean they’re going to do it, but I think they’re interested,” Baker said.
In Massachusetts, the Baker administration and legislative leaders agreed to a consensus revenue forecast of $36.915 billion for the fiscal year beginning July 1, which would represent 2.7 percent growth over the sure-to-be-surpassed revenue estimate for the current fiscal year.
“What’s striking is not just that the state continues to collect a substantial amount of tax revenue; it’s that the pattern is so unusual. All the volatile stuff – which you expect to swing up and down – just keeps swinging up, be it corporate profits or capital gains. I’m tempted to say this can’t go on but I would have said the same thing three months or six months ago and been very, very wrong,” said Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University.
S&P said the most recent S&P Global Economics baseline forecast lowered projections for the nation’s economic growth over the next two years; from 3.9 percent to 3.2 percent for 2022 and from 2.7 percent to 2.1 percent in 2023.
Slowing economic growth worldwide, rising interest rates and high inflation have plunged the state pension fund into “all hands on deck situation,” Executive Director Michael Trotsky said Tuesday.
“Personally, I believe that this is the most uncertain and difficult environment that I’ve witnessed in my entire and very long investment career,” he said.
[Michael P. Norton contributed reporting]