Early accord on state tax revenue points to 2.7% growth

Administration and Finance Secretary Michael Heffernan
Keith Bedford/Globe Staff
Administration and Finance Secretary Michael Heffernan

State budget writers agreed Monday to build their fiscal year 2020 plans on the assumption that state tax revenues will grow by 2.7 percent over the current fiscal year.

Governor Charlie Baker’s budget chief and leaders of the House and Senate Ways and Means committees detailed an accord on how much tax revenue the state expects to collect in fiscal 2020, which begins July 1. Officials also upgraded their expectations for tax revenue in fiscal 2019, increasing the total by $200 million, to $28.5 billion.

The estimate of $29.3 billion in tax revenue for fiscal 2020 amounts to $770 million more than the updated projection for the current fiscal year. The projected growth rate will serve as the basis for Baker’s budget, which is due Jan. 23, and budget-building exercises this spring and summer in the House and Senate.


Experts who offered financial forecasts at an annual hearing in December predicted revenue collections would grow 2 percent to 3.4 percent in fiscal 2020.

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In announcing the agreed-upon figure of 2.7 percent, budget officials used words like “modest,” “more moderate,” and “responsible” to describe a forecast that represents a slowdown from the 3.5 percent revenue growth the officials had agreed to for the current year.

Fiscal 2018 tax collections of $27.787 billion surged 8.3 percent above fiscal 2017 collections, according to state records.

The slowdown in natural revenue growth comes as lawmakers reevaluate plans for major increases in education, transportation, and health care spending, and ways to pay for those investments. Legislative leaders have not ruled out tax increases in the new year, and any proposals to raise taxes would be considered as part of the annual budget debate in the first half of 2019.

“The FY20 forecast reflects modest growth in the Commonwealth’s economy, consistent with testimony we have heard from economic experts,” Administration and Finance Secretary Michael Heffernan said in a statement. “Reaching agreement on a consensus revenue forecast is a critical first step in developing a fiscally responsible budget for FY20.”


Senator Joan Lovely, who serves as vice chair of the Senate Ways and Means Committee but has led the panel since chairwoman Karen Spilka became Senate president, said the 2.7 percent growth estimate will be enough to invest in programs and to stash money away in the stabilization fund.

The House Ways and Means chairman, Jeffrey Sanchez, who is leaving the Legislature after losing his November reelection bid, said the agreement leaves the state in good fiscal hands.

“Through engaging economists and other fiscal experts, we’ve come to a responsible FY20 consensus revenue agreement that sets the stage for the next budget process,” he said.

The 2.7 percent growth figure, the budget managers said, assumes the state income tax rate will drop from 5.05 percent to 5 percent on Jan. 1, 2020. Baker’s office recently announced that all of the necessary economic triggers had been hit and that the income tax will fall from 5.1 percent to 5.05 percent on New Year’s Day 2019. The reduction will have a $175 million impact over a full fiscal year.

Heffernan, Sanchez, and Lovely also agreed Monday on a transfer of $1.077 billion to the Massachusetts Bay Transportation Authority, a $917 million transfer to the Massachusetts School Building Authority, and $25 million to the Workforce Training Fund.


There will also be a $2.841 billion transfer to the state pension fund — an increase of $233 million over the fiscal 2019 contribution — which is expected to keep Massachusetts on track to fully fund its pension liability by 2036.

After a total of $5.080 billion in transfers, the maximum amount of tax revenue available for the fiscal 2020 budget will be $24.219 billion, the officials agreed.

The state budget, which totals about $41.7 billion this fiscal year, is supplemented by federal revenues and nontax revenues like fees.

Neither the fiscal 2019 revenue estimate adjustment nor the fiscal 2020 estimate announced Monday include projections of nonmedical marijuana revenue. Five retail marijuana stores have opened in Massachusetts, and regulators expect a handful more to come online each month. Marijuana sales are subject to a 10.75 percent excise tax and the state’s 6.25 percent sales tax, as well as a local tax of up to 3 percent.

“With the industry at its beginning stages, the three branches decided to set aside the marijuana forecast so that the Administration, House, and Senate can make independent decisions on marijuana revenue for FY20 based on available information as each goes to print their budget proposals,” the administration wrote in a press release Monday.

The Department of Revenue is still forecasting that Massachusetts will take in $44 million to $82 million in marijuana taxes this fiscal year and could bring in as much as $172 million in fiscal year 2020, Revenue Commissioner Christopher Harding told lawmakers in early December.

Also Monday, Heffernan, Sanchez, and Lovely agreed to a 3.6 percent rate of potential gross state product growth for calendar year 2019, the same figure that has been used the past four years to set up a health care cost growth benchmark under the 2012 cost-containment law.