FY10 Revenue Development

Tax Revenues

Tax revenues comprise over 60% of all revenues (including new revenues proposed in the H.1 recommendations) used to support the Commonwealth's operating budget. Each year, the Administration and the House and Senate consult with economists and other groups to gather information and analysis on the condition of the U.S. and Massachusetts economies. Guided by that information, they project state tax revenue for use in the state budget. The following is a general description of the consensus revenue process.

General Information Regarding Consensus Revenue

The consensus revenue process is required under M.G.L. c.29, s.5B and requires that on or before January 15th, the Secretary of Administration and Finance meet with the House and Senate Committees on Ways and Means and jointly develop a consensus tax revenue forecast for the budget for the next fiscal year, which shall be agreed to by the Secretary and the House and Senate. The law requires that the consensus revenue estimate be placed before the General Court in the form of a joint House and Senate Resolution for full consideration.

On December 15, 2008, the Secretary of Administration and Finance and the House and Senate Committees on Ways and Means held a public hearing in Boston and heard testimony from a number of the Commonwealth's noted economists and public finance experts from the Massachusetts Department of Revenue (DOR), the Federal Reserve Bank of Boston, Massachusetts Taxpayers Foundation, the Beacon Hill Institute, the University of Massachusetts-Boston, and Harvard University. The three branches subsequently agreed upon a fiscal year 2010 tax revenue estimate of $19.530 billion, consistent with testimony presented at the hearing, as well as a revised fiscal year 2009 estimate of $19.450 billion.

As part of the statutorily required consensus revenue process, the Secretary of Administration and Finance, House and Senate also agree on the amount of tax revenues that will need to be transferred to support the State's Pension Fund, the School Building Authority and the MBTA (Massachusetts Bay Transportation Authority). For fiscal year 2010, these transfers are estimated to total $2.784 billion and will be directed to the following funds:

MSBA - School Modernization & Reconstruction Trust Fund = $641 million
MBTA State and Local Contribution Fund = $767 million
Pension Reserves Investment Trust Fund = $1.376 billion

$2.784 billion total
$16.746 billion remains

Basis for the Fiscal Year 2010 Consensus Revenue Forecast

Fiscal year 2009 tax revenues are estimated to be $19.450 billion, representing a decline of 6.8% actual and 8.0% baseline from fiscal year 2008 collections (the baseline calculation adjusts for the impact of tax law and processing changes, and thus is a better indicator of underlying economic activity). Through December of 2008, fiscal year 2009 year-to-date tax revenues are down 0.7% actual and 1.4% baseline, and were $55 million above the year-to-date benchmark based on the October 15, 2008 Executive Office for Administration and Finance fiscal year 2009 estimate of $20.302 billion. The amount over benchmark is the result of one-time settlement revenues received in December 2008 that were not included in the official benchmarks but were expected to be paid sometime during the fiscal year (these revenues were assumed in the Governor’s fiscal action plan in October). It is expected that due to economic deterioration and a decline in capital gains tax collections, tax collections for the remainder of fiscal year 2009 will decline by $1.36 billion, or 11.6% actual, and $1.6 billion, or 13.6% baseline, from the same period in fiscal year 2008.

The fiscal year 2010 consensus tax revenue estimate is $19.530 billion, representing revenue growth of 0.4% actual, but a decline of 0.1% baseline from the fiscal year 2009 estimate of $19.450 billion. The fiscal year 2010 estimate assumes that the national and state economies will remain in recession at least through the middle of calendar year 2009 and then begin a slow recovery. In developing the consensus estimate, the Commonwealth relies on economic forecasts from Moody’s Corporation, Economy.com, Global Insight and the New England Economic Partnership (NEEP). The economic forecasts upon which the consensus revenue estimate is based are as follows:

As measured by real Gross Domestic Product (GDP), the economy declined in both the third and fourth quarters of calendar year 2008 and is projected to decline through at least the second quarter of calendar year 2009. GDP growth for the full fiscal year 2009 is projected to be between 0% and negative 1.0% compared to growth of 2.0% in FY07 and 2.4% in FY08. In fiscal year 2010, GDP growth is projected to range from -0.1% to +1.6%.
Massachusetts employment is expected to decline by 1.1% to 1.8% over the remainder of fiscal year 2009, and by 0.5% to 1.1% for fiscal year 2009 as a whole. For fiscal year 2010, Massachusetts employment is expected to decline by 1.0% to 2.2%.
Massachusetts personal income (excluding capital gains) is expected to grow by only 1.0% to 2.5% over the remainder of fiscal year 2009 and 1.9% to 3.1% for fiscal year 2009 as a whole. For fiscal year 2010, Massachusetts personal income is projected to grow by 1.6% to 2.3%.
Massachusetts wages and salaries are projected to grow by between 0.6% and 2.0% for the remainder of fiscal year 2009 and 2.0% to 3.2% for the year as a whole. For fiscal year 2010, the growth in Massachusetts wages and salaries is projected to range from -0.7% to +1.3%.
Massachusetts retail sales are expected to decline by 6.3% to 6.8% over the remainder of fiscal year 2009 and by 4.3% to 5.5% for the fiscal year as a whole. (A significant portion of the fiscal year 2009 retail sales decline is the result of falling fuel prices, which do not affect sales tax revenue.) For fiscal year 2010, Massachusetts retail sales are projected to grow by 1.4% to 1.5%.
Corporate profits at the national level are expected to decline by 4.9% to 13.3% over the remainder of fiscal year 2009, and by 6.0% to 18.9% for the fiscal year as whole (there are no forecasts for state corporate profits). For fiscal year 2010, growth in corporate profits is projected to range from -3.5% to +16.3%.

In addition to the economic forecasts described above, the consensus revenue estimate takes into account forecasts for capital gains realizations and taxes. The consensus agreement capital gains forecast is based on the following considerations:

Preliminary tax year 2007 data indicates that Massachusetts capital gains realizations increased by approximately 23% in tax year 2007, to $35.9 billion. Fiscal Year 2008 taxes on those capital gains totaled approximately $2.080 billion, an increase of approximately $426 million, or 26%, from fiscal year 2007 (taxes on tax year 2007 capital gains realizations were paid mostly in fiscal year 2008).
The stock market, as measured by the average of the S&P 500 over the entire year, declined by 17.6% in calendar year 2008 (which largely determines fiscal year 2009 capital gains taxes) and is expected to decline by an additional 13.6%-19.4% in calendar year 2009 (which largely determines fiscal year 2010 capital gains taxes). Economy.com, the only economic forecasting firm to project capital gains, estimates that capital gains realizations declined approximately 40.5% in tax year 2008 compared to 2007 and will decline by an additional 1.1% in tax year 2009. After considering more conservative scenarios developed by the Massachusetts Department of Revenue, the consensus agreement assumes that Massachusetts capital gains realizations will decline by 47.5% in calendar year 2008 and an additional 20% in calendar year 2009.

Because most of the recent asset market declines occurred in the second half of calendar 2008, many taxpayers did not adjust their estimated capital gains tax payments downward in the first half of 2008. Capital gains tax payments over the remainder of fiscal year 2009 will be reduced below what would ordinarily be consistent with a 48% decline in capital gains realizations, as taxpayers now adjust their payments downward to align them with their full tax year 2008 capital gains tax liabilities. The fiscal year 2009 estimate assumes that these adjustments will result in a reduction in fiscal year 2009 capital gains taxes of 59% from fiscal year 2008. Furthermore, because capital gains taxes will be reduced by more than 48% in fiscal year 2009, the consensus estimate assumes that fiscal year 2010 capital gains taxes will decline by only 1.5% from fiscal year 2009, despite a much larger 20% decline in tax year 2009 capital gains realizations.

The charts below reflect the national and state economic forecasts presented at the December 15, 2008 consensus revenue hearing and the consensus estimate assumption for capital gains realizations and taxes, all of which were taken into consideration in developing the fiscal 2009 and 2010 consensus revenue estimates.

The bar graph shows real US GDP growth from fiscal years 1994 to 2010. According to the graph, in fiscal year 2009 Economy.com and Global Insight project that growth will be .01% and -1%, respectively. For FY10, their respective forecasts total 1.6% and -.1%.

The bar graph depicts US Corporate Profit Growth from fiscal years 1994 to 2010. According to the chart, both Economy.com and Global Insight project negative profit growth for fiscal year 2009. While Economy.com projects negative growth will continue in FY10, Global Insight projects that growth will rebound in fiscal year 2010.

This bar chart shows Massachusetts gap growth between 1994 and 2010 with gap growth, according to economy.com, growing by .5% in FY09 and 1.4% in FY10.

This bar chart shows Massachusetts employment growth from 1994 to 2010 with Economy.com, Global Insight and NEEP all showing various percentage declines.

This bar chart shows the Massachusetts unemployment rate from 1994 to 2010 with global insight, economy.com and neap all showing at least 5.7% unemployment in FY09 and at least 6.8% unemployment in FY10.

This bar chart show Massachusetts personal income growth from FY1994 to FY2010 with economy.com, global insight and neap showing a maximum increase of 3.1% in FY09 and 2.3% in FY10.

This bar chart shows Massachusetts wage and salary growth from Fy1994 to FY2010, with economy.com, global insight and neap showing maximum growth of 3.2% in FY09 and 1.3% in FY10.

This bar chart shows Massachusetts retails sales growth from FY1994 to Fy2010 with economy.com showing a decline of 5.5% in FY09 and growth of 1.4% in FY10.

The table reflects Capital Gains Taxes from tax years 1982 to 2009. The table measures both Massachusetts Capital Gains Taxes but also Capital Gains Realizations. In tax year 2000 Capital Gains taxes were $1.164 billion and then dropped off to $337 million in 2001. They recovered to a peak of $2.080 billion in 2007 before dropping off to $870 million in 2009. The 2009 figure is an estimate

Based on these economic projections and actual tax collections through December 2008, fiscal year 2010 tax collections are projected to grow by $80 million, or 0.4% actual, but decline by 0.1% baseline from fiscal year 2009 tax collections, with income tax collections growing by 0.3% actual and 0.4% baseline, sales tax growing by 2.3% actual and 1.9% baseline, and corporate/business taxes declining by 3.2% actual and 6.5% baseline, as shown in the chart below.

FY10 Consensus Tax Revenue Forecast
($ Millions)
Tax Type	Actual Revenue Growth from FY09	Baseline Revenue Growth from FY09	FY10 Revenue Estimate	FY10 Growth from FY09
Total Income	0.3%	0.4%	11,432	34
Withholding	0.5%	0.5%	9,139	44
Sales	2.3%	1.9%	4,021	92
Corporate/Business	-3.2%	-6.5%	2,308	-75
Other	1.7%	0.3%	1,769	29
Total	0.4%	-0.1%	19,530	80
Memo: Capital Gains	-1.5%	-1.5%	846	-13

The chart below shows historical trends in actual and baseline tax revenue growth.

This table details the FY10 consensus tax revenue figure by tax category, i.e. income, sales, corporate, and compares it to FY09 estimates.