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January 31, 2023

State expecting elevated tax revenues to hold

A large brick building with columns in front and a gold dome on top with a long staircase leading up to it and an American flag on the left hand side. Photo | Courtesy of Commonwealth of Massachusetts Massachusetts State House

The Healey Administration and legislative budget managers agreed Monday to build their upcoming state budget plans on the assumptions that they will have $40.41 billion in general state tax revenue to spend in the budget year that begins July 1 and an additional $1 billion in revenue from the state's new high-earner surtax that can be put towards education or transportation.

The fiscal year 2024 consensus revenue agreement announced Monday would represent 1.6 percent growth over the latest estimate for fiscal year 2023 tax revenue, or 4.1 percent growth when adding the $1 billion in projected revenue from the surtax on income greater than $1 million to the equation. The surtax revenue, by law, is supposed to only be spent on education and transportation initiatives.

"The Fiscal Year 2024 consensus revenue forecast lays the groundwork for a fiscally responsible FY24 spending plan that supports core services for residents and makes meaningful and sustainable progress in addressing the varied needs and issues facing the Commonwealth," Administration and Finance Secretary Matthew Gorzkowicz, who agreed to the growth figure with Ways and Means Committee chairs Rep. Aaron Michlewitz and Sen. Michael Rodrigues, said. "More importantly, the additional surtax revenue will allow for significant new investments in transportation and education that will make the Commonwealth more competitive, affordable, and equitable."

Gov. Maura Healey is expected to file her first annual budget proposal by March 1. The House and Senate will redraft Healey's spending blueprint and debate their own versions, likely in April and May. Fiscal year 2024 begins on July 1, but Massachusetts has rarely had its full-year budget in place by that date in recent years.

"I think really important and exciting news on the consensus revenue and what is an atypical year in terms of how these things are put together. So we're really pleased to be able to announce that today," Healey said Monday afternoon.

The governor referred back to the consensus revenue accord later in the same press conference Monday when asked about the future of Chapter 62F, the state tax revenue cap law that House lawmakers in particular have said they want to see changed.

"I don't know what the future looks like," she said. "I know that right now we're really pleased to be out with the consensus revenue number. We'll be having some discussions about upcoming budget and priorities and the like, and a lot of work to sort through in the immediate," Healey said.

Rodrigues said the revenue accord "provides a strong foundation for the Legislature and the Healey-Driscoll administration to develop a forward looking FY24 budget plan that upholds fiscal responsibility and meets the critical needs of our communities." Michlewitz said it "will allow the Legislature and the Healey-Driscoll administration to collectively construct a reasonable and appropriate budget for the upcoming fiscal year."

"By basing the budget on a judicious consensus revenue figure, the Commonwealth will be able to make the necessary investments that our constituents deserve, while at the same time enhancing the state's fiscal health," Michlewitz said.

The $40.41 billion revenue estimate that Gorzkowicz, Michlewitz and Rodrigues agreed to Monday, a day ahead of their deadline, is largely in keeping with the testimony they heard from economic and budget experts at a hearing last week.

The Department of Revenue forecasted fiscal year 2024 state tax revenue within a range of $39.838 billion to $41.017 billion, the Mass. Taxpayers Foundation projected that fiscal year 2024 state revenues will come in at $40.06 billion, and the Center for State Policy Analysis at Tufts University estimated that fiscal year 2024 state tax revenue will land at $40.2 billion.

While the official estimate of 1.6 percent growth is well below what Beacon Hill officials have projected in each of the last at least six years, it means that state revenues are expected to stay at their significantly elevated levels.

The consensus revenue growth estimates were for 3.5 percent in fiscal 2022 and 2.7 percent in fiscal 2023, but over those two years state tax revenues actually surged more than 15 percent and more than 20 percent, respectively. The fiscal year 2024 revenue estimate of $40.41 billion is more than $10 billion above the estimate that Michlewitz, Rodrigues and the Baker administration originally agreed to for fiscal year 2022 ($30.12 billion) in January 2021.

The state budget, which totals $52.7 billion for fiscal 2023, is supplemented by substantial federal revenues along with non-tax revenues like fees. The fiscal year 2023 bottom line represented an increase of $5.1 billion or 10.7 percent over the $47.6 billion annual budget passed for fiscal 2022.

Gorzkowicz, Michlewitz and Rodrigues also confirmed Monday the amounts of money that will be transferred to various entities that have over the years secured themselves dedicated budget carve-outs. The MBTA will get $1.463 billion ($138 million more than in the current year), the Massachusetts School Building Authority will get $1.303 billion (an increase of $138 million), and $27 million will flow to the Workforce Training Fund.

There will also be a $4.105 billion transfer to the state pension fund -- an increase of $361 million over the fiscal 2023 contribution -- which is expected to keep Massachusetts on track to fully fund its pension liability by 2036.

Gorzkowicz also announced Monday that he was upgrading the current year's revenue estimate by $151 million or about 0.4 percent, from $39.618 billion to $39.768 billion. The three top state budget officials said that $100 million of fiscal year 2023 revenue was earmarked Monday for use to "fully pay down" pension liabilities stemming from a 2015 early retirement incentive program that otherwise would not have been paid off until fiscal year 2027. That decision was announced as one made by "the secretary and chairs."

Through the first half of fiscal 2023, DOR has collected $17.789 billion, which is $56 million or 0.3 percent less than what was collected to the same period of fiscal 2022, but still $1.087 billion or 6.5 percent more had been expected during that time period.

"However, a significant portion of the above-benchmark performance is due to lower than expected credits claimed by [pass-through entity] members, which we do expect to reverse in the second half of this fiscal year," Revenue Commissioner Geoffrey Snyder said last week.

Gorzkowicz, Michlewitz and Rodrigues also agreed Monday to a 3.6 percent rate of potential gross state product growth for calendar year 2023. That figure is used to set up a health care cost growth benchmark under the 2012 cost containment law.

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