Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018

Transcription

1 Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 The Beacon Hill Institute at Suffolk University 8 Ashburton Place, Boston, MA bhi@beaconhill.org 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 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 1 Prepared 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. BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 1 of 10

2 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 This marks the first four quarter decline in the series since a 0.6 percent decline in the second quarter of 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 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 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 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 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), 4 OECD, Economic Outlook Annex Tables. (May 2016) The 3.5% GDP benchmark is based on the years BLS, 6 Wall Street Journal Economic Forecasting Survey (August The Economist poll of forecasters, April 2016 averages (April 6, 2016). financial indicators/ economist poll forecasters april averages. See also Conference Board The Conference Board Consumer Confidence Index Improved in August (August 30, 2016) 10 Trading Economics (accessed September 8, 2016) BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 2 of 10

3 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 Labor Productivity (output per hour) % change from previous quarter at annual rate Source: Bureau of Labor Statistics 11 Ben Leubsdorf, Productivity Slump Threatens Economy s Long-Term Growth, Wall Street Journal, August 9, 2016, 12 Ibid. BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 3 of 10

4 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 That comes after a 2.0% increase for all of The first quarter of 2016 number puts the state 22 th 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, The report predicted that, of the surveyed 13 New England Economic Partnership, Fall 2015, Economic Outlook, (Data file) 14 BEA, Gross Domestic Product by State: First Quarter 2016 (August 26, 2016), 15 BEA, 16 Labor and Workforce Development, Unemployment Rate Drops to 4.1 Percent in July (August 18, 2016) 17 Labor and Workforce Development, Quick Stats, (April 2016), 18 BLS Economic Summary Boston MA NH Metro Area (August 3, 2016 update), england/summary/blssummary_boston.pdf. 19 See Labor Force and Unemployment Data at and Springfield, MA CT, Area Economic Summary (April 6, 2016), 16 ManpowerGroup, Solid Job Market Expected for Massachusetts,ʺ June 14, 2016, job market expected for massachusetts 2//. BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 4 of 10

5 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, , , , PROFESSIONAL, SCIENTIFIC & BUSINESS SERV 553, , ,000 4,600 17, EDUCATION AND HEALTH SERVICES 782, , ,900 1,200 19, LEISURE AND HOSPITALITY 358, , ,400 3,200 8, FINANCIAL ACTIVITIES 224, , ,800 1,300 3, INFORMATION 88,800 89,100 88, GOVERNMENT 454, , , , TRADE, TRANSPORTATION & UTILITIES 574, , , , MANUFACTURING 250, , , OTHER SERVICES 134, , ,200 1, 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) BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 5 of 10

6 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 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 Beacon Hill Institute at Suffolk University, State Competitiveness Report (15), (July 29, 2016) Sara Castellanos, Report: Dell Technologies to cut up to 3,000 jobs after EMC buyout, Boston Business Journal, September 8, BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 6 of 10

7 Methodology Table 2 Economic Forecasts for Massachusetts, 2017 through 2018 Actual Actual Actual Forecast Forecast Forecast Massachusetts (calendar year end) Gross State Product % change p.a Personal income ($ billion) % change p.a Employment (ʹ000) 3,359 3,414 3,482 3,546 3,594 3,619 % change p.a Unemployment rate, % 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 Sales Tax ,047 6,099 6,252 % change p.a Corporation Excise ,159 2,269 2,387 % change p.a Business Excises % change p.a. (20.0) 5.0 (15.8) (6.3) Motor Fuels % change p.a. (1.6) Total Taxes 22,121 23,369 24,932 25,267 26,055 26,909 % change p.a Notes: 1 From New England Economic Partnership, Fall Economic Outlook, BHI revenue forecasts assume that there will be no major change in Massachusetts tax policy for the forecast period, which runs through June 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 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 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 Information on personal income in Massachusetts is available on a quarterly basis. Monthly estimates were obtained by interpolation. BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 7 of 10

8 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 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 A complete breakdown of revenue forecasts by month and by the eleven tax headings is available upon request. BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 8 of 10

9 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 Income tax % change FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 AR MA Vars/Dummies Dates Estimated payments 3,174 3,217 3,260 3, % 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, % 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, % 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, % 8.9% 0.1% 4.1% 3.6% Sales & Use taxes 5,774 6,047 6,099 6, % 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, % 0.3% 5.1% 5.1% 5.2% 12 3,12 PI 79:6 16:08 Business Excises % 20.9% 3.3% 3.4% 6.3% 12 3,12 C 79:6 16:08 Alcohol Beverages % 2.7% 3.4% 4.3% 2.3% 1,3,12 12 PI 79:6 16:08 Cigarettes % 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 % 3.2% 1.3% 2.1% 2.8% 1,13 1,12 PI 79:6 16:08 Other taxes , % 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, % 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. BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 9 of 10

10 THE BEACON HILL INSTITUTE at SUFFOLK UNIVERSITY 8 Ashburton Place Boston, Massachusetts phone: fax: bhi@beaconhill.org web site: BHI: Massachusetts Tax Revenue Forecasts for FY 2017 and FY 2018 / September 12, 2016 Page 10 of 10