For Massachusetts Tax Revenues, Federal Government 'Made This Recession Disappear'

Apr 6, 2021

This week we learned that Massachusetts tax collections have again exceeded the state's expectations. Does that mean that — despite the pandemic — the state's finances are actually somewhat healthy?

The answer is a little more complex than yes or no, according to Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University.

Horowitz recently wrote a piece in Commonwealth Magazine about the state's tax forecasts.

Evan Horowitz, Tufts University: The key thing is really just to separate the health of the overall economy and the health of individuals across the state, from the health of state tax revenues.

State tax revenues do look healthy. They do look like they're doing well, and that's because they are. I don't mean to suggest that that's an illusion of some kind. They have held up well — surprisingly well — this year. That's not because everyone is doing well economically, right? That's not because no one is struggling or suffering or businesses aren't closing, right. Those things are all happening.

Carrie Healy, NEPM: So while the state Department of Revenue showed relatively healthy tax collections last summer, there were also massive numbers of unemployed workers in Massachusetts. Can you unpack that?

I mean, they look good and they looked so good that it seemed unbelievable. That is, you know, I was among a group of forecasters and economists who are periodically getting together to talk about how state tax revenues looked. And our initial reaction was, 'This can't be right. It must be a blip, and tax revenues will surely collapse again soon.'

And it took a while to realize that what was actually going on was that the federal government really was filling the void. So, it's true, we had unprecedented unemployment claims and jobless rates. But the federal government also had an unprecedented program to expand unemployment benefits, such that lots of people who are collecting unemployment were actually making more in the form of unemployment benefits than they were getting from their jobs.

That was good for the economy, in the sense that businesses couldn't really hire them anyway. The lockdowns were such that there wasn't really an opportunity to hire. So, it was OK that people were making more money, and that money was being taxed by the state. And more than that, it was being spent. It was being spent on online purchases. It was being spent on takeout food. It was being spent on all manner of things that people could do from their homes — new refrigerators were being purchased, things like that. And all that also translate into sales tax revenue.

So, a lot of it just trickled down from these federal changes.

Though Massachusetts is still looking forward to quite a lot of money coming in from the federal government to stimulate the economy, at some point, the pandemic will be over. And where does that leave folks like you in making projections available for lawmakers so that they can make budgets?

Tt will end, but the hope is that when the federal support ends, it ends because the economy has recovered and therefore it's not as if there's some cliff out ahead of us. As of now, for instance, expanded unemployment benefits are set to continue through September. By that point, most people should be vaccinated. The economy should be recovering. [The] labor market should be improving, possibly very strongly. It's not as if there's going to be a falloff in tax revenues then.

And that's kind of a key lesson, which is hard to believe in some sense. But from a state tax revenue perspective, the federal government made this recession disappear. It made it as if this recession never happened. That's not true for individuals living their lives, right? But it is true for state tax revenues.

And that's something that forecasters like us have to account for. That the federal government has this capacity and can use it to backstop virtually all potential losses if they have the political will to do it. That's a huge change in the way the state and the federal government thinks about their authority and abilities in a time of economic calamity.

If you saw revenue is coming in much stronger than expected for a duration of time like it did, why were those tax revenue forecasts not revised?

So, I will say — for sure — it is better for lawmakers to under-promise and over-deliver. It's not just true for lawmakers, it's true for a lot of us. But the best thing for lawmakers is to build a budget on, let's say, $30 billion in tax revenue and then collect $31 billion, because then you have this extra money that you haven't planned for that looks like largesse. Whereas if you build a budget planning for $30 billion and you get $29 billion, that's terrible, because now you have to break some spending promises. More than that, the governor actually gets to intervene directly and has more control over it. So, it's always better from the lawmakers' perspective to sort of guess low and end up high.

Having said that, we overdid it by a tremendous amount this year and there should have been mid-year revisions to this process. The budget, at this point, we're likely to come in $3 or $4 billion ahead of the current budgeted expectation. That's enough money that it should go through proper budget channels. It shouldn't look like largesse. And I think we missed an opportunity in the fall to really grapple with the fact that revenues were healthy, were strong, and federal support was sufficient to prop up the economy, and that our budget should reflect that.