BHI Weekly Dispatch: Comments before last Monday’s Tax Revenue Hearing

The following are prepared remarks by BHI Executive Director David G. Tuerck which served as a basis for his oral testimony before the House and Senate Ways and Means Committee, Monday, December 12, 2011.

I would like to thank Chairman Dempsey and Chairman Brewer along with all other members of the Committee, for inviting us here today.  The Beacon Hill Institute estimates that Massachusetts state tax revenues will come in at $21.411 billion for Fiscal Year 2012, for a growth of 4.4% over FY 2011 and at $22.287 billion for FY 2013, which will be 4.1% above 2012.  

I will have just a few comments about these estimates.  We have provided a detailed copy of our report, which will be posted in a short time at our web site

Total tax revenues grew by 4.7%, or by $356 million, for the first five months of the current fiscal year, compared to the same period last year.  Sales tax revenues were relatively flat, growing by only 0.8%, while personal income tax revenues grew by 6.5%.

After a strong rebound from the recession, state revenue collections are returning to more normal trends.  Tax revenues grew by 10.6% in Fiscal Year 2011, but the slowness with which the country as a whole is recovering from the recession made – and will continue to make – that growth unsustainable.

We expect FY 2012 personal income tax revenues to grow by 5.4 %, sales tax revenues by 1.9%, business excise tax revenues by 42.9% and motor fuel revenues by 0.2% over fiscal 2011.  Total taxes for FY 2013 will increase by $876 million over FY 2012.

Uncertainty over federal policies, the immense overhang of federal debt and the sovereign debt crisis in Europe will combine to dampen further growth of the U.S. economy and, with it the economy of Massachusetts.  

We have calculated the U.S.  “GDP gap,” which may be defined as the percentage by which full-employment GDP exceeds predicted GDP.  This gap will be around 12% for the next five years, barring a dramatically improved policy environment both at home and abroad.  

Third quarter U.S. real GDP growth was only 2%.  In line with most economists, we do not think the U.S. economy will slip into a recession. The Wall Street Journal Economic Forecasting Survey for December 2011 estimates that the economy will grow by 1.7% in calendar year 2011 and 2.3% in calendar year 2012. The Economist poll of forecasters scaled down last year’s forecast to growth of 1.7% in 2011 and 2.0 % in 2012.

According to an estimate made in July 2011 by the Beacon Hill Institute, Massachusetts real GDP will grow by 2.9% in 2011 and 2.8% in 2012. BHI’s forecasting models show that Massachusetts, after benefiting from 5.0% growth in 2010, will join the national economy in a slower growth trajectory.

Barring a major improvement in the direction of federal policy making or in the European economy, we cannot expect the real GDP gap to close in the near term.  This has negative implications for the states and therefore for the growth in Massachusetts tax revenues.  Thus we don’t expect another year of robust growth such as we had in 2011.  

As for state policy making, the reductions in the corporate and personal income tax rates that are built into current law will provide a small and welcome stimulus to the state economy.   Additionally, Massachusetts continues to be a strong performer in terms of its competitiveness with other states, as measured by our competitiveness index.  

Like most states, Massachusetts is limited by the confused state of federal policy making and negative influences from Europe.   All that the state can do to insulate its economy from these influences is, where possible, to improve its competitiveness relative to other states.  

We therefore recommend staying on a path that will eventually bring the state personal income tax rate down to the 5% level that the voters mandated eleven years ago and finding spending cuts that would permit further relief from the state’s still-high corporate tax.  It would be helpful also to find a path back to the 5% rate at which the sales tax stood until it was recently increased to 6.25%.  

To be avoided at all costs are unemployment-creating ideas such as raising the minimum wage or hobbling infrastructure improvements with cost-increasing union-only contracts.  

Thank you.

About Beacon Hill Institute

The Beacon Hill Institute engages in rigorous economic research and conducts educational programs for the purpose of producing and disseminating readable analyses of current public policy issues to voters, taxpayers, opinion leaders and policy makers.