massachusetts tax revenue forecasts for fy 2017 and … · the 63 economists who provide the wall...

BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 of 10

Massachusetts

Tax Revenue Forecasts for

FY 2017 and FY 2018

The Beacon Hill Institute at Suffolk University

8 Ashburton Place, Boston, MA 02108

www.beaconhill.org

617‐573‐8750

[email protected]

September 12, 2016

For today’s revenue summit, The Beacon Hill Institute at Suffolk University is pleased to offer an

updated forecast for Fiscal Year (FY) 2017 and FY 2018 for the Executive Office of Administration and

Finance.1 We divide our report into three sections: (1) a summary of our latest forecast, (2) background

information on the national economy, (3) background information on the state economy and (4) a

summary of the methodology used to provide our forecast.

Forecast

BHI predicts that tax revenues will be:

$26.1 billion in FY 2017, 3.1% over FY 2016, and

$26.9 billion in FY 2018, 3.3% over FY 2017.

The 3.1% increase for FY 2017 and the 3.3% increase in FY 2018 reflect a projected moderation in the

growth of state personal income. BHI projects state personal income to increase by 4.9% and 4.2% in

calendar years 2017 and 2018, respectively.2

1Prepared by the staff of the Beacon Hill Institute at Suffolk University, including Paul Bachman, Frank Conte and

David G. Tuerck. 2 Based on BHI calculations.


The U.S. Economy

The nation’s economy continued to grow albeit slowly and future signals are marked by

macroeconomic uncertainty. U.S. Gross Domestic Product increased at an annual rate of 1.1 percent in

the second quarter of 2016, according to the ʺsecondʺ estimate released by the Bureau of Economic

Analysis. In the first quarter, real GDP increased 0.8 percent.3 GDP growth for 2015, 2014 and 2013 was

2.6% 2.4% 1.7%, respectively. Growth has thus been substantially below the 3.5% annualized average of

the 1990s and is underperforming against the postwar benchmark rate of 3.0%.4 According to the

Bureau of Labor Statistics productivity decreased 0.4 % from the second quarter of 2015 to the second

quarter of 2016. This marks the first four‐quarter decline in the series since a 0.6‐percent decline in the

second quarter of 2013.5

The 63 economists who provide The Wall Street Journal Economic Forecasting Survey for August 2016

predict growth of 1.3%, 2.7% and 2.4%, respectively, for the second, third and fourth quarters of 2016.6

Looking over a longer time frame, the WSJ economists also predict that the unemployment rate for

December 2016 will fall to 4.7% and work its way to the same rate in June 2017. The Economist poll of

forecasters from April 2016 predicts that U.S. GDP growth will be between 1.0 % and 2.6 % in 2016 and

1.3 % and 2.9 % in 2017.7

Public sentiment is mixed despite strong improvements in the jobs market. According to the Suffolk

University Political Research Center/USA Today August poll, only 28.1% of likely voters think the

nation is headed in the right direction.8 The Conference Board reported that consumer confidence

index which had decreased slightly in July to 96.7 , increased in August to 101.19

Most of the major stock indices have posted double digit percentage gains.10 As of early September the

Dow Jones has gained 13.8% while the NASDAQ has gained 12.8%, signs that Wall Street continues to

expect accommodative rates from the Federal Reserve.

Over the past three months job gains have averaged 232,000 per month. The Bureau of Labor Statistics

reported that the August 2016 unemployment rate remained at 4.9%. The economy generated 151,000

jobs, shy of consensus estimates of 180,000. The BLS revised June 2016 jobs number down to 271,000

3 U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts

Gross Domestic Product: First Quarter 2016 (Second Estimate) Corporate Profits: First Quarter 2016 (Preliminary

Estimate)” (May 27, 2016), http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. 4 OECD, Economic Outlook Annex Tables. (May 2016)

https://www.oecd.org/eco/outlook/economicoutlookannextables.htm. The 3.5% GDP benchmark is based on the

years 1990‐2001. 5 BLS, http://www.bls.gov/news.release/pdf/prod2.pdf 6 Wall Street Journal Economic Forecasting Survey (August 2016

http://online.wsj.com/public/resources/documents/wsjecon0816.xls. 7 The Economist poll of forecasters, April 2016 averages (April 6, 2016). http://www.economist.com/news/economic‐

and‐financial‐indicators/21696577‐economist‐poll‐forecasters‐april‐averages. See also

http://www.economist.com/indicators 8 http://www.suffolk.edu/documents/SUPRC/9_6_2016_marginals_part_2.pd 9 Conference Board The Conference Board Consumer Confidence Index Improved in August (August 30, 2016) https://www.conference-board.org/data/consumerconfidence.cfm 10 Trading Economics http://www.tradingeconomics.com/stocks (accessed September 8, 2016)


from 292,000 but revised July 2016 figures upward to 275,000 from 255,000. The Labor Force

Participation (LFP) rate remained to 62.8%. The employment‐population rate remained unchanged at

59.7%. Labor force participation remains lower than historical average. Not all of the decline in labor

force participation rate can be attributed to changing demographics. Other facts are coming into play

such as an increase in disability payments and other safety‐net benefits, along with choices by single

women to remain in school.

The number of persons employed part‐time increased by 6.1 million in August. This is critical since it

represents the number of individuals who would like to work full time but have been unable to do so.

There were 576,000 discouraged workers in August, essentially unchanged from a year ago. The

number of persons considered long‐term unemployed (27 weeks or more) declined to 2.09 million,

Average hourly earnings for all employees have risen by 2.4% since August 2015 while the average

workweek declined to 34.3 hours.

Worker confidence in the ability to find a better paying job is a strong indicator. The quit rate has

shown steady improvement over the past several years. In addition, firms struggle to find workers

with the right skills for newly created jobs.

With four straight quarters of decline, lagging productivity is now a long‐standing concern and one of

the major worries standing in the way of higher interest rates from the Federal Reserve.11 According to

the Wall Street Journal, “The slowdown in recent quarters has likely been reinforced by weak business

investment in new equipment, software and facilities that could help boost worker efficiency.”12

Economists emphasize increased output per worker hour as the key to stronger economic growth.

These gains are made possible when workers apply materials, skills and experience in the most

efficient manner without incurring inflation

Figure 1

11 Ben Leubsdorf, “Productivity Slump Threatens Economy’s Long-Term Growth,” Wall Street Journal, August 9, 2016, http://www.wsj.com/articles/u-s-productivity-dropped-at-0-5-pace-in-the-second-quarter-1470746092. 12 Ibid.

‐2.0

‐1.0

0.0

1.0

2.0

3.0

4.0

5.0

Labor Productivity (output per hour)% change from previous quarter at annual rate

Source: Bureau of Labor Statistics


The slowdown in worker productivity may signal a new normalcy despite the availability of high

technology. Historically significant productivity gains are rare and there is some doubt whether the

new technology has really added anything to growth over the long term.

The Massachusetts Economy

Seven years after the end of the Great Recession, the Massachusetts economy is among the strongest in

the nation. Since last July, the state has added 65,500 jobs. The decision by General Electric earlier this

year to move its headquarters to Boston reflects the strength of the technology and educational sectors.

The vibrancy of the state’s life sciences sector underpins the reputation of its highly‐skilled base of

human capital. As with the nation, Massachusetts consumers enjoy lower gas prices low inflation and

improved job opportunities. In its fall 2015 forecast, the New England Economic Partnership (NEEP)

predicts slowing growth: namely: 3.1% (2016); 2.2% (2017) and 1.5% (2018).13

The state’s economy comprises 2.7 % of the entire U.S economy. A more recent BEA estimate —subject

to revision —puts growth at 1.6% in the first quarter of 2016. That comes after a 2.0% increase for all of

2015. The first quarter of 2016 number puts the state 22th in the nation, well behind first‐place Arkansas

which saw 3.9% growth.14 The size of Massachusetts’s economy, measured by nominal GDP State, is

more than $485.5 billion.15

The Massachusetts unemployment rate dropped to 4.1% in July 2016 according to the Executive Office

of Labor and Workforce Development (LWD).16 The state’s unemployment rate is below the national

April rate of 4.9%. The state economy added 7,300 jobs in July.17 The state’s LFP rate remains above the

national rate, at 65%. The latest figures (See Table 1) show year‐over‐year employment gains for

professional, scientific and business services; leisure and hospitality; trade, transportation and utilities;

and finance. Only manufacturing and other services lost jobs since last year. The state’s labor force

stands at 3.6 million. At the local level, the BLS found that the unemployment rate dropped to 3.1% for

the city of Cambridge in June.18 The Western part of the state continues to lag. The city of Springfield

saw an unemployment rate of 8.1% in June 2016, the month for which the latest summary data are

available.19

According to a June Manpower Employment Outlook Survey, employers in Massachusetts expect to

“hire at a positive pace” during Quarter 3, 2016.20 The report predicted that, of the surveyed

13 New England Economic Partnership, Fall 2015, “Economic Outlook,” http://www.neepecon.org. (Data file) 14 BEA, Gross Domestic Product by State: First Quarter 2016 (August 26, 2016), 15 BEA, http://tinyurl.com/knep34d. 16 Labor and Workforce Development, “Unemployment Rate Drops to 4.1 Percent in July (August 18, 2016) http://lmi2.detma.org/Lmi/News_release_state.asp. 17 Labor and Workforce Development, “Quick Stats,” (April 2016), http://lmi2.detma.org/lmi/Quick_StatsCES.asp 18 BLS Economic Summary Boston‐MA‐NH Metro Area (August 3, 2016 update),

http://www.bls.gov/regions/new‐england/summary/blssummary_boston.pdf. 19 See Labor Force and Unemployment Data at http://lmi2.detma.org/lmi/lmi_lur_a.asp#3 and Springfield, MA‐

CT, Area Economic Summary (April 6, 2016), http://www.bls.gov/regions/new‐

england/summary/blssummary_springfield_ma.pdf 16 ManpowerGroup, “Solid Job Market Expected for Massachusetts,ʺ June 14, 2016, http://press.manpower.com/q3/2016/solid‐job‐market‐expected‐for‐massachusetts‐2//.


employers, 22% would hire more employees, while 5% would reduce their payrolls. For 71%, there was

an indication that they would not reduce employment, a positive sign given the state’s tight labor

market. The report said that the prospects for employment are strong across all sectors, except for

financial services.

The Federal Reserve Bank’s September 2016 Beige Book describes the current outlook for the region

cautiously saying that “Economic activity continues to increase in the First District, although there are

scattered signs of slowing growth rates.”21 Examining the residential real estate market, the Boston Fed

noted that July represents the first year‐over‐year decrease in 14 months after a year that included

several records highs for Massachusetts. The reported called office leasing activity steady and healthy

in greater Boston, where office rents are up slightly in recent weeks. The Fed also said manufacturing

firms in the New England region remains consistent and “that growth is at a pace typical of recent

years.”

Table 1

Super Sector Jul‐16 Jun‐16 Jul‐15

Net Change Prior Month

Net Change 1 year ago

% Change Prior month

% Change Year Ago

MINING, LOGGING AND CONSTRUCTION 151,100 150,500 139,600 600 11,500 0.4 8.2

PROFESSIONAL, SCIENTIFIC & BUSINESS SERV 553,500 548,900 536,000 4,600 17,500 0.8 3.3

EDUCATION AND HEALTH SERVICES 782,200 783,400 762,900 ‐1,200 19,300 ‐0.2 2.5

LEISURE AND HOSPITALITY 358,500 355,300 350,400 3,200 8,100 0.9 2.3

FINANCIAL ACTIVITIES 224,000 222,700 220,800 1,300 3,200 0.6 1.4

INFORMATION 88,800 89,100 88,100 ‐300 700 ‐0.3 0.8

GOVERNMENT 454,800 454,600 452,000 200 2,800 0 0.6

TRADE, TRANSPORTATION & UTILITIES 574,200 573,500 571,200 700 3,000 0.1 0.5

MANUFACTURING 250,200 250,400 250,300 ‐200 ‐100 ‐0.1 0

OTHER SERVICES 134,700 136,300 135,200 ‐1,600 ‐500 ‐1.2 ‐0.4

In the most recent BHI State Competitiveness Report, Massachusetts, which once again ranked number

one, continues to show formidable strengths in its human resources (for example a high number of

residents with health insurance and low infant mortality rates), technology (as a recipient of National

Institutes for Health grants to local institutions and its large base of science and engineering graduates

and high‐tech employment), and business incubation, where Massachusetts draws the second top

21 Federal Reserve Bank, “Beige Book,” (September 2016)

http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201609.htm?boston


ranking in terms of venture capital per capita and ranks eighth in Initial Public Offering dollars per

capita.22

Data collected by BHI from NASDAQ show that Massachusetts firms issued $1.58 billion in IPOs,

roughly 5% of all the nearly $30 billion in the U.S. for 2015.

Whether Massachusetts is a destination for corporate headquarters (as is the case for General Electric)

or an outpost for large out‐of‐state firms is an emerging narrative. On September 7, native mainstay

EMC was unlisted from the New York Stock Exchange as it merged with computer supergiant Dell. 23

Plans to maintain or consolidate the Massachusetts‐born data storage company’s work force could

translate into Bay State job cuts over the long term.

22 22 Beacon Hill Institute at Suffolk University, State Competitiveness Report (15), (July 29, 2016).

http://www.beaconhill.org/Compete15/Compete2015.pdf 23 Sara Castellanos, “Report: Dell Technologies to cut up to 3,000 jobs after EMC buyout,” Boston Business Journal, September 8, 2016. http://tinyurl.com/zonjfua.


Methodology

Table 2

Economic Forecasts for Massachusetts, 2017 through 2018

Actual Actual Actual Forecast Forecast Forecast

Massachusetts (calendar year end)1 2013 2014 2015 2016 2017 2018

Gross State Product 415 425 440 454 463 470

% change p.a. 1.1 2.3 3.5 3.1 2.2 1.5

Personal income ($ billion) 383 400 422 447 470 488

% change p.a. 1.7 4.3 5.5 6.0 5.1 3.9

Employment (ʹ000) 3,359 3,414 3,482 3,546 3,594 3,619

% change p.a. 1.7 1.6 2.0 1.8 1.4 0.7

Unemployment rate, % 6.6 5.7 4.7 4.4 4.2 4.1

BHI forecast, MA taxes, (fiscal year) Actual Actual Actual Actual Forecast Forecast

Personal income tax ($ million) 12,829 13,202 14,449 14,388 14,975 15,515

% change p.a. 7.7 2.9 9.4 0.1 4.1 3.6

Sales Tax 5164.0 5495.8 5774.5 6,047 6,099 6,252

% change p.a. 2.1 6.4 5.1 4.7 0.9 2.5

Corporation Excise 1821.6 2049.0 2172.1 2,159 2,269 2,387

% change p.a. 2.8 12.5 6.0 5.1 5.1 5.2

Business Excises 439 461 388 377 390 365

% change p.a. (20.0) 5.0 (15.8) 3.3 3.4 (6.3)

Motor Fuels 652 732 756 766 782 804

% change p.a. (1.6) 12.4 3.2 1.3 2.1 2.8

Total Taxes 22,121 23,369 24,932 25,267 26,055 26,909

% change p.a. 4.8 5.6 6.7 2.2 3.1 3.3

Notes: 1 From New England Economic Partnership, Fall Economic Outlook, 2015.

BHI revenue forecasts assume that there will be no major change in Massachusetts tax policy for the

forecast period, which runs through June 2018. Table 2 shows the forecasts by year and by major tax.

For FY 2017, we forecast a 3.3% increase in tax revenues over FY 2016. Personal income tax revenues will

increase by 4.1% and sales tax revenues by 0.9%. Corporate income tax revenues will rise by 5.1%, and

business excise tax revenues will increase by 3.44%. Business excise taxes have experienced the most

volatility in the year‐over‐year collections, and, as a result, remain the most difficult to forecast. Other

tax revenues will rise by 1.9% and alcohol taxes will rise by 4.3%. Motor fuels taxes will rise by 2.1% and

cigarette taxes will fall by 2.4%.

We prepared tax revenue forecasts for 11 categories for every month through June 2018. Three steps

were needed to develop these forecasts.

1. We used projections of personal income to derive month‐by‐month growth rates of personal

income, allowing us to project personal income on a monthly basis through June 2018.

Information on personal income in Massachusetts is available on a quarterly basis. Monthly

estimates were obtained by interpolation.


2. For each tax series, we estimated a regression equation that extrapolates from historical data

to predict the future. For estimated and withheld income taxes and other taxes, we included

personal income as an independent variable. We used dummy variables to pick up the effect

of major changes in the tax code.

3. In estimating the regressions, we paid particular attention to the structure of the errors, in

order to pick up the effects of seasonal, quarterly and monthly variations in tax collections.

This was done by estimating the equations with autoregressive (AR) and moving average

(MA) components. The number and nature of the AR and MA lags were determined initially

by examining the autocorrelation and partial correlation coefficients in the correlogram, and

then fine‐tuning after examining the structure of the equation residuals. The details are given

in Table 3.

The left side of the table contains the revenues and the percentage increases from the previous year

broken out into the individual tax categories – the actual revenues for FY 2016 as well as the BHI

projections for FY 2017 and FY 2018. The right side of the table provides the model specification used to

forecast each tax and the timeframe for each data series used in the model.24

24A complete breakdown of revenue forecasts by month and by the eleven tax headings is available upon request.


Table 3

Revenue forecasts, dis‐aggregated, for FY17 and FY18, including technical estimation details

Revenue forecasts, disaggregated, for FY17 and FY18, including technical estimation details

% change

FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 AR MA Vars/Dummies Dates

Income tax

Estimated payments 3,174 3,217 3,260 3,419 6.0% 15.0% 1.4% 1.3% 4.9% 1,2,5,12 3 PI, PIEST(‐12) 79:6‐16:08

Tax Withheld 11,063 11,422 11,829 12,186 4.9% 5.3% 3.2% 3.6% 3.0% 1,12 12 PI 79:6‐16:08

Returns & Bills 2,183 2,042 2,286 2,421 ‐8.0% 12.4% ‐6.5% 11.9% 5.9% 1,12 1,12 PI 79:6‐16:08

Refunds (2,045) (2,293) (2,400) (2,511) 5.7% 1.9% 12.1% 4.7% 4.6% 1,2,12 1,3,12 PI 79:6‐16:08

Income Net 14,375 14,388 14,975 15,515 2.9% 8.9% 0.1% 4.1% 3.6%

Sales & Use taxes 5,774 6,047 6,099 6,252 6.4% 5.1% 4.7% 0.9% 2.5% 4,12 1,13 C 79:6‐16:08

Corporation Excise 2,055 2,159 2,269 2,387 12.5% 0.3% 5.1% 5.1% 5.2% 12 3,12 PI 79:6‐16:08

Business Excises 365 377 390 365 5.0% ‐20.9% 3.3% 3.4%

‐

6.3% 12 3,12 C 79:6‐16:08

Alcohol Beverages 80 83 86 88 1.9% 2.7% 3.4% 4.3% 2.3% 1,3,12 12 PI 79:6‐16:08

Cigarettes 510 506 493 494 18.3% ‐2.0% ‐0.9% ‐2.4% 0.2% 1,24 1, 12 83:7, 93:1, 96:10, 02:8, 08:7 79:6‐16:08

Motor Fuels 756 766 782 804 12.4% 3.2% 1.3% 2.1% 2.8% 1,13 1,12 PI 79:6‐16:08

Other taxes 802 942 960 1,003 18.9% ‐3.4% 17.4% 1.9% 4.5% 1,12 2,12 PI 79:6‐16:08

Effect of Tax Law Changes

Total Taxes 24,717 25,267 26,055 26,909 5.6% 5.8% 2.2% 3.1% 3.3%

Notes:

AR refers to Autoregressive lags used in the regression. MA refers to Moving Average lags used in the regression. “Dummies” gives starting dates of each Dummy variable used (e.g. 01:1 is a dummy that

is set equal to 1 from January 2001 onwards and to 0 otherwise). “Dates” refers to period of data used in regression estimates.” (PIEST)‐12 refers to the income tax estimated payments data lagged by 12

month. PI refers to Personal Income and C, a Constant variable. We directly incorporated into our estimates the cigarette and motor fuels tax increases.


THE BEACON HILL INSTITUTE

at SUFFOLK UNIVERSITY 8 Ashburton Place

Boston, Massachusetts 02108‐2770

phone: 617.573.8750

fax: 617.994.4279

email: [email protected]

web site: www.beaconhill.org

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