2021-12-21 00:00:00 - Fiscal Year 2023 Consensus Revenue Hearing

[SEN RODRIGUES:] the chair of the6 Senate Committee on Ways and means and Senate8 Chair of the joint committee on ways and means and I take this opportunity to welcome everyone To the fiscal year 2023 consensus revenue hearing. We appreciate you all being president with us today remotely. I'd like to recognize my colleagues and to partners and I will give them an opportunity to say a few words in a minute. Secretary of administration and finance mike Heffernan and House ways and means Chair Aaron Michlewitz I look forward to building upon Our partnership and formulate a consensus revenue estimates and develop a meaningful spending plan for Fy 23. I'd also like to acknowledge my colleagues in the Senate who have contributed their voices to this process, including Vice chair Senator Cindy Friedman, our assistant Vice chair Senator Jason Lewis in our ranking59 minority member, Senator Patrick O Connor. Thank you63 to each and every one of our experts will be providing65 testimony today Over these last two years.

We the legislature have worked collaboratively with the baker political administration to invest in the needs75 of our people, navigate the unknowns brought on by this persistent pandemic and build a more equitable future for our communities through actions we took in the respect of Fy 21 fy 22 budget and the comprehensive ARPA legislation thanks to robust tax revenue growth In Fy 21. A continuing trend of tax revenues running strong and well above benchmark To date for Fy 22 healthy rainy day fund account And more than $2 billion dollars available in opera resources. Our commonwealth is well positioned to lay the foundation for another fiscally responsible114 and impactful operating budget For fiscal year 2023 that will aim to few further shape our recovery, help those most in need.

As we head into the next year, Our current stabilisation fund balance sits at a record level of $4.6 billion dollars and because of strong tax revenue growth to date the fund could if trends continue, approach to the $6 billion once we effectively close the books next fall on Fy 22 ensuring the commonwealth will maintain healthy reserves for the foreseeable future and hopefully years beyond the pandemic.153 However, as we begin156 fy 23 budget process uncertainties remain despite recent economic gains according to mass bunch box. Most recent analysis, significant concerns168 persist regarding inequalities and unemployment declines in labor force size, volatility in the labor market between available job openings and workers leaving positions and181 inflation.

With the existence of these headwinds. Today's hearing is critical for us to understand our state's fiscal health, the economic ramifications of the ongoing pandemic and the underlying factors driving our revenue collections While we face uncertainty, our collaborative work over these last two years has proven despite the disruptions elsewhere that we can work together to bridge differences and put forward responsible spending plans that212 meet the moment reflect our values and demonstrates our commonwealth durability and resiliency. I want to thank all of you for participating in this year's process once again, albeit remotely to provide your expertise. I look229 forward to hearing your testimony today and working with our respective colleagues in the administration and the house Laying the groundwork on the FY 23 budget. Thank you. And I'd like to turn it over now to uh, my partner and co chair um Representative Aaron Michlewitz Thank you.

[REP MICHLEWITZ:] Chairman. Thank you. Mr. Chairman, appreciate it. Ah, all right. I want to thank everyone for254 joining us today. Either those that are testifying virtually or watching at home today, we begin to work As Chairman Rogers said on fiscal 2023 budget by beginning the conversations on setting a responsible consensus revenue number that will allow the commonwealth to produce a balanced budget that serves all our residents predicting future revenue figures can be a challenging process in normal times. But in the covid era, it has been all the more daunting for nearly two years. The commonwealth has gone through some of the most turbulent budgets that this building has ever seen throughout those uh, these unprecedented times. The commonwealth has seen historic highs in terms of our revenue numbers.

One of the main drivers of this has been the unprecedented amount of assistance the federal government has given through numerous spending packages and policies. Without that assistance from Washington, it is safe to say that we would be dealing with an entirely different budgetary situation today. Unfortunately, this level of support is not permanent and going forward. We must keep that in mind as we plan for the future of the commonwealth. As we continue317 to deal with the devastating effects of this pandemic.319 We must continue to strive to build budgets to protect our most vulnerable while still allowing our economy to grow and prosper. I want to thank my co chair Senator Rodricks and Secretary Mike Heffernan for first being here today, but also for help for helping us334 every step of the way.

The three of us have been in constant communication with one with one another over since this crisis began and have worked very well together. I want to thank also344 my colleagues in the House including Speaker Mariano for all their support and all their input throughout the last couple of years in building these budgets. I look forward to continuing this productive relationship in the weeks and months ahead as we tackle the challenges laid out before us. Let me now turn it over to Secretary Heffernan.

[MICHAEL HEFFERNAN (SECRETARY EOAF):] Thank you, Good morning and again, thanks to all of you for being here yet again, virtually. And I just want to thank my friends and partners Chair Michlewitz J. Rodricks. Um and again, I think we said this last year, what a difference 22 months, 22 months make. But the challenges are still great Maintaining fiscal stability in Volatile Times is a balancing act and I'm very grateful for the partnership with the legislature as we've navigated these challenges that COVID-19 has brought. Our teams have worked closely across a wide range of issues, many of them unprecedented. And I'm proud of what we've been able to accomplish together. As we look towards the rapidly approaching fiscal year 2023. I again look forward to our continued not enough coffee this morning, continued collaboration and crafting a plan that supports our economy's recovery and continues our shared tradition of fiscal responsibility. The consensus revenue forecast will lay the groundwork for this for this next year's budget. And I want to thank all of you for taking part in this step of the process predicting revenue is certainly challenging and unpredictable times we're living in, but it remains critically, critically important. I want to wish you all a happy holiday season and a happy and healthy new year. And now I'll turn it back over to our to chairman to introduce the first panel.

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[GEOFFREY SNIDER (COMMISSIONER DOR):] Thank you very much. Good morning. Secretary Heffernan, Chair Rodricks and Chair Michlewitz and members of the House and Senate, my name is Jeffrey Snider Commissioner of the Department of Revenue. And as Chair Rodricks said with me today is casa mosier, chief economist and director of the Office of Tax analysis. Michael fatally. Dohr is acting general counsel and Rebecca forder Deputy Commissioner for Tax policy. Thank you for inviting us here today. We are pleased to present the department's updated outlook for massachusetts. State tax revenues for Fy 22 F Y 23. Although our focus today is on Fy 22 F Y 23 a brief recap of Fy 21 will provide528 some helpful context. Revenue collections for fiscal year 21 totaled $34.137 billion. 5.047 billion above the FY 21 benchmark And 4.5 to 8 billion more552 than the amount collected in fiscal year 20. The positive results reflect the commonwealth's ongoing economic recovery, federal fiscal and monetary policies, Financial market performance and the easing of COVID-19 restrictions.

Fy 21's positive results were broad based with each major revenue category exceeding both benchmark and prior years results. No, That meals tax a component of sales tax did in fact declined by about $130 million Fy 20591 but collections improved towards the end of the fiscal year. We face a number of Areas of uncertainty for both. FY 22 and FY 23 Tax collections will vary depending on many factors including the trajectory of the pandemic with new covid variants, Delta and omicron and the status of public health measures, the persistence of the global supply chain issues and labour shortages and their impact on production processes and product availability, the rate of inflation and its impact on consumer spending and economic growth. The impact of the Federal Reserve's recently announced winding down of its large scale bond buying programs and the likely increase in interest rates and their effect on inflation, financial and real estate markets, business investment and consumer spending as well as other global and political economic factors.

The assumptions used to project the impact of these and other factors generate varying economic scenarios and tax revenue forecasts. Our Fy 22 and 23 forecasts are based in part on the projections provided by our economic vendors, moody's analytics and I. Hs markets. Both vendors have produced multiple economic scenarios and we have incorporated those into our forecasts. In addition698 to the vendors projections, Our Fy 22 and 23 forecasts do reflect The FY 22 year to date. Preliminary tax collections as of november of this year. Fy 22 Year today collections through November totaled $13.612 billion. That was 914 million above the year. Today benchmark And 2.145 billion more than collections in the same period in fiscal year, 21 year to date collections for each major tax type were above the year today benchmark and exceeded prior year collection. Similar to Fy 21. These positive results reflect improved labor-market conditions, financial market performance, strong retail sales and continued easing of COVID-19 restrictions on august 27th of 2021.

The Secretary of administration and Finance established the Fy 22 revenue tax revenue benchmark estimate of $34.401 billion based on our vendors most recent economic projections In the FY 22 year to date tax collections. The D. O. R. Forecasts fy 22 revenue to be in the range of 35.726 billion To 36.6 to 3 billion. This represents an increase of 1.3 to 5 billion 2.2-2 billion From the fy 22 tax revenue benchmark estimate For Fy 23 d. O. are forecast revenue to be in the range of 36.484 billion to 37.684 billion, Which is between 2.1% and 2.9% higher than our revised Physical year. 22 forecast range. Now, I would like to provide some detail around the forecast for each category. I would like to remind you that massachusetts state tax revenues consists of the following major tax types income tax, Which in Fy 21 accounted for 57.4% of revenue Followed by sales tax, which represented 22.9 corporate and business tax at 12.1 And all other taxes at 7.6%.

So let's start with income tax income tax revenues are driven by employment wages and salaries, capital gains income from dividends and interest and non corporate business income. According to the U. S. Bureau of Labor Statistics. U. S. Total nonfarm payroll employment rose by about906 5.8 million over the 12 months ending november 21st November of 2021 And by 18.5 million since April of 2020. However, it is still down 2.6% from its pre pandemic level in February of 2020. As of November929 2021, the US employment rate is 4.2%. A significant significant decline from its937 high of 14.8% at the end of the recession in April of 2020 But again still higher than its February 2020 pre pandemic level of 3.5%. Massachusetts employment followed a similar pattern to that of the US. According to the U. S. Bureau of Labor Statistics massachusetts total nonfarm Payroll employment increased by 197,000 over the 12 months ending October 2021 and by 500 and 1000 since April of 2020,

However, it is still down 5.1% from its pre pandemic level In February of 2020. Total income taxes using the most current economic projections from our vendors, fy 22 income taxes are forecasted to be between 348 million And 753 million. Higher than the FY 22 benchmark of 19.941 billion In Fy 23. They are forecasted to increase By between 2.3% and 3.1 From our revised Fy 22 income tax forecast. Now, let's move on to withholding. In Fy 22. Withholding tax collections are forecasted to be between 166 million And 251 million higher than the FY 22 benchmark of $15.310 billion dollars In Fy 23.1052 They are forecasted to increase By between 3.2 and 5.4 From the revised Fy 22 forecast capital gains taxes are a volatile revenue source and with years of rising capital markets, we recognize the potential for growing reserves of unrealized gains.

However, capital gains revenue collections have been very strong over the past several years And hit an all time high in Fy 21 and that leads to uncertainty about how much more unrealized gains remain. We forecast the capital gains to be between 2.409 billion and 2.713 billion, Which compares to the FY 22 capital gains benchmark of 2.615 billion In Fy 23, we forecast capital gains to be between 2.198 billion and 2.35 $6 billion sales tax total sales tax receipts through the first five months of Fy 22 have increased by 19.1% from the same period in Fy 21, With regular sales1152 tax increasing by 15.2 Meals tax increasing by 52.1 And motor vehicle tax increasing by 8.7%. Sales tax receipts in Fy 22 are forecasted to be 490 million to 613 million higher than the Fy 22 total sales tax benchmark of $7.864 billion In Fy 23, they are forecasted to increase By 1.8% to 3.0% from our FY 22 revised sales tax forecasts corporate in business, fy 22 year to date corporate and business tax collections, another of the more volatile revenue categories are up 39.1% over the same period in fy 21 Excluding one time tax settlement and judgment payments.

Fy 22 corporate and business tax revenue collections Are forecasted to exceed the FY 221232 benchmark of $3.97, $9 billion1235 dollars By between 264 million 615 million For Fy 23. Corporate and business tax receipts are forecasted to increase by 2.4% to 2.9 From our revised Fy 221257 corporate and business tax forecasts. Other taxes Collections in the all other category through the first five months of1274 Fy 21 have increased By 30.1 of Fy 22 Excuse ME Have increased by 30.1% as compared to the same period in Fy 21, reflecting mostly increases from the state room occupancy deeds and motor fuel taxes. In Fy 22. The all other tax category is forecasted to exceed the FY 22 benchmark of 2.6171309 billion By between 224 million 242 million. In Fy 23. The all other category is forecasted to increase by 0.5% to 1.5 From our Fy 22. All other tax forecasts to recap The Department of Revenue forecasts Fy 22 tax revenue in the range of 35.72, 6 billion To 36.623 billion.1346 This range is 3.9% to 6.5% more than the FY22 total tax revenue benchmark of 34.40 billion. The department Forecast Fy 23. Tax revenue in the range of 36.484 billion to 37.684 billion, Which is between 2.1 To 2.9 above DlRS, revised Fy 22. Tax revenue forecast

The FY1385 22 year to date. Tax revenues? Our 914 million above the year today benchmark And 2.145 billion more than collections in the same period of Fy 21, like the national economy. The massachusetts economy is recovering from the pandemic induced recession as evidenced by1422 labour and financial market performance, strong retail sales and wage and income growth. However, there is uncertainty regarding the sustainability of these positive economic trends going forward accordingly. We will continue to closely monitor them and the impact they have on state tax revenue collections. There is a significant degree of uncertainty in these forecasts, The trajectory of the pandemic and the new COVID-19 variants inflation, labor and supply chain constraints, the impending tightening in the financial markets and overall global economic uncertainty have all combined to create challenges and revenue forecasting for the commonwealth. We've distributed copies of our supporting documents and we are available to respond to questions. Thank you for your time.

[RODRIGUES:] Thank you Mr Commissioner. Any questions, Chairman, Michlewitz

[MICHLEWITZ:] MR Commissioner, thank you for the detailed description. I really appreciate it. Very helpful in understanding where we are and where we want to go. Um, one question I just had is related to those variants1504 and you know, that's how you closed in terms of the uncertainty, particularly in the omicron1509 um discussion uh, that's obviously been percolating over the last1513 couple weeks here. Is there anything in the revenue uh numbers are indications that is showing any type of effect on on our I mean I'm sorry, is there anything within the numbers that are showing that that is having a you know an effect or is it too little too early to tell on exactly what that effect is going to have on our economy.

[SYNDER:] Some current collections have yet to really display any effect um that that we can deserve relative to Omicron, I would point out that oh Macron and it's implications are not specifically captured in the vendors forecast either. So that adds another degree of uncertainty as we1561 look forward.

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[EILEEN MCANNENY (MASS TAXPAYERS FOUNDATION):] Hi good morning morning Secretary Heffernan Chairman Rodricks. Chairman Michlewitz and members of the ways and means committee and Eileen McEneny, President of the Mass Taxpayers Foundation and I thank you for the opportunity to testify this morning. I'm joined by my colleague Andy bagley who is available to answer any of the tough questions that you may have. I certainly appreciate the difficulty of projecting tax revenues over the past two years and for the upcoming one as well. We were talking prior to the start of this, um, some of the presenters and we were all saying just, you know, how difficult it has been, I liken it to a roller coaster ride right, complete with dips and turns. And unfortunately I think we have one more loop before that this ride is over and to put a finer point on this.

As you know, massachusetts experienced a startling $4.5 billion 2021 representing 15% growth in the midst of a pandemic In tax revenue has flourished to date for fiscal year 2022 and I think um in both of these instances has been doing large part To the $113 billion Commonwealth to individuals. Two businesses to the Commonwealth itself and two subdivisions. We expect revenue growth to remain robust in fiscal year 2022, Reaching 37.2 billion or 3.1 billion above fiscal year 2021 results. This growth of 9% is fueled by employment bouncing back, wage increases, asset value spikes, increased spending on durable goods and motor vehicles with higher prices due to1742 inflation and healthy profits for corporations Fiscal year 2023, however, is a completely1751 different story, reverting back to a period of stalled growth. Tax revenue growth slows to 1.1 Or 400 million more than fiscal year 2022

Providing budget writers with 37.6 billion for the next fiscal year and let me break down how we derive our estimate. So mdf projects. Job gains will be approximately seven will jump by approximately 70,000, bringing the number of employed Back to the pre pandemic levels of about 3.7 million. Moore workers combined with higher wages as employers navigate an increasingly competitive labour market Well dr withholding income tax revenues up by nearly 600 million in fiscal year 2023.1806 Unfortunately, these gains and withholding taxes will be offset by a steep decline in capital gains and other non withholding income taxes. Together, these two totalled 5.4 billion in fiscal year 2022

In this surge in capital gains over the past 18 months, as commissioner Snyder had indicated, is driven by a strong stock market Market Index. Market indexes have risen dramatically since their lows of March 2020 and have actually doubled As of their closes on 14 December 2021 Moody's analytics projects. These indexes will either stabilize or decline through 2023, Upon capital gains revenues to be reduced to 2.4 billion from the estimated 2.9 billion that will receive in fiscal year 2022, about a $500 million dollar drop. But even with this reduction, it would still be the third highest amount ever collected.

Capital gains are notoriously volatile as you know. And as the commissioner pointed out in this volatility creates budget challenges when there is a precipitous drop which has happened several times in the past. Um And you can see that in the graph depicted in figure two in my written remarks, but so we're concerned about that, Excuse me, um in sales tax revenue turning to sales tax revenue, we predict it will grow moderately in fiscal year 2023-1%, and that's for1908 two reasons. First, an uptick in spending on durable goods over the past 24 months will shift back to services. Secondly, Mt have also expects inflation rates to slowly decline over the next 18 months from the current levels, particularly for some big ticket items1930 such as motor vehicles. And so this will suppress the sales tax revenue growth we've experienced resulting from higher prices.

Corporate profits and taxes are projected to remain strong for many companies, robust consumer demand and lower business costs resulting from reduced travel, reduced real estate holdings will counterbalance higher wages, supply chain challenges in general inflationary pressures. The biggest headwind for companies may be the difficulty they have in finding jobs and in fact labor force issues are now a defining issue for massachusetts economic future. And this is because long term demographic trends that mt F. Has been pointing out for several years now take firmer hold1986 massachusetts working age population, The 22-64 year olds was already in decline prior to the pandemic and when we grow older still, in addition, the pandemic has accelerated retirements among baby boomers and caused a number of voluntary quits,2007 sometimes referred to as the great resignation. Making the trend more pronounced, massachusetts may be able to offset some of this labor shortage with higher productivity per worker, highly educated workers tend to be more productive and as you know, massachusetts workforce is highly2029 educated.

So however, the steep employment gains in fiscal year 2022 of 233,000 begin to taper off in fiscal year 2023 to about 69,000, and then flatten for the foreseeable future. So in other words, employment growth recovers to pre pandemic levels and then stalls and increased productivity will not be sufficient to counterbalance those work force constraints access to talent moves to the forefront as a pressing economic issue as well. While massachusetts, his historically been very successful in attracting top talent. The pandemic and the2075 broadly accepted remote work paradigm threatens that competitive advantage. The fight for talent is fierce and global. In massachusetts historic advantages may be waning people no longer need to be in massachusetts to have access to our2094 innovation economy and its high paying jobs and in fact higher cost structure makes us more susceptible to worker and employer relocation.

So to retain2106 and grow our talent pipeline, massachusetts must provide residents on the margins of the economy with the education and skills training. They need to be gainfully employed.2118 This is imperative for the state's future growth. As a recent Mckinsey report entitled, preparing for the future of work in massachusetts indicates The state will have to re skill approximately 30 to 40,000 people From 2025 to 2030 30 and that's approximately2139 10 times the capability of our current programs. Fortunately though, the state has resources to bring to bear and skilling up our2149 workforce money from Arpa to the fiscal year 222153 21 surplus tax revenues and What we anticipate to be fiscal year 2022 anticipated tax revenues can and should be dedicated to various types of workforce training and skill development.

And I know in your most recent Arpa spending bill, um you dedicate about 108 million and that's an important down payment, but I think more will be needed and how well we spend that money and how, how well we measure the results of that spend2185 will certainly shape the state's competitive future in closing a word about outside factors that impact our forecast. So in the past couple of forecasts, I certainly provided a detailed analysis about the externalities that could material materially change it. I didn't go into great length in this year's written remarks but I do reiterate now the global pandemic and many geo geo political risks that could alter certainly the global and national economic outlook and in turn the2221 massachusetts state revenue projections very briefly among them are just stronger and more destructive storms that we've been experiencing due to climate change. Geopolitical tensions, certainly china Russia and the Middle East bears watching cyber threats to public and private sectors across the globe and the continued divisive political climate.

I would also say the failure to pass the bill back. Better legislation could slow the economic recovery And that's according to moody's analytics chief economist Mark Zandi. He um, he had indicated2264 that in remarks yesterday and it's important to point out like the commissioner and D. O. R. S. Forecast. MTs forecast is based on moody's analytics. So that was not factored into these numbers. Also, this discussion is happening against the backdrop of a mutating covid virus and the spikes in cases and hospitalizations, how quickly the current surge ends and the impact it could have on return to work to supply chains and importantly the national psyche Could also have a meaningful impact on state tax revenues for the remainder of fiscal year 2022. So I'll end where I started. I think this role of this um roller coaster ride may not be over quite yet, but I do thank you for the opportunity to testify. I wish you all a very happy holiday season and I'm happy to take any questions that you may have.

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[MICHLEWITZ:] Eileen, I just want to thank you for all your work on that roller coaster ride with us. Uh appreciate it and as well as going forward. So, thank you very much appreciate all your detailed testimony today.

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[HEFFERNAN:] Eileen is always and we have a constant dialogue with them TF and thanks again for your good work.

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[ALAN CLAYTON-MATTHEWS :] well, thank you. Secretary Heffernan and chairs Robinson Michlewitz uh for inviting me2484 to testify again. Um I have a different outlook and I'll explain why it's different and what the risks are too. It Fiscal year 2021, Total Department revenues 34.138 billion. Mhm. My projection for fiscal year 22 is 38.301 billion 12.2% above the prior fiscal year. And for fiscal year 23 40.79506 .5%. About fiscal year 22. And for capital gains tax revenues For2528 fiscal year 22 3.19 billion 23.5% above the fiscal year 21 And fiscal year 23 3.84 billion 19.2% above fiscal year 22. Some comments about assumptions and2551 aspects of this forecast primarily this forecast has a very sanguine economic outlook. Us2560 economic output conforms with the projections of the Wall Street Journal survey of economists and the2567 Federal Reserve Board. And these are probably consistent also with moody's and and global insight as well. The federal economic stimulus has2580 largely achieved its objective By offering the macroeconomic effects of COVID-19 on the economy.

It also is sanguine because it assumes that inflation will2594 subside substantially next year. The inflation outlook is based upon the Federal Reserve Board's october outlook for inflation. So, so they expect inflation to subside. This is uh that is also consistent with many other economists outlooks, importantly corporate profits and financial markets that is the stock market will continue to respond positively to economic conditions. Now, this point is the largest point of2634 uncertainty in this forecast. The stock market is extremely difficult, virtually impossible to forecast. However, given what's happened in financial markets2648 and corporate profits, things like capital gains are reliably forecasts.

Uh And so this forecast also assumes the strong start mumps uh strong stock market has contributed to revenues to a surge in capital gains realizations and we'll be expected to in the next fiscal year as well. And that said, because this outlook is sanguine, the risks are almost entirely on the downside, particularly with respect to capital gains revenues. Uh A point on withholding tax revenue. So withholding tax revenue2699 has been boosted by withholding from unemployment insurance programs. And these are the estimates I have for the fiscal years, fiscal year, Withholding from unemployment insurance added 258 million to withholding revenues In fiscal year 21, million to withholding revenues. Fiscal year 22 is expected to add about 137 million. And by fiscal year 23

I would add about 58 million to withholding revenues. And that's a normal level, 58 million. So we are seeing the waning effects of unemployment assistance support to to revenues on the other hand, of course, if if unemployment is falling employment and therefore wage and salary income and income revenues are rising for that reason, but also not all uh not all2767 liabilities are withheld for unemployment insurance programs. And according to the estimates I have, you would also expect additional revenues come the spring season when when liabilities are reconciled and payments made and those are expected to add to have added about 400 million in calendar in From calendar year liabilities. That would be in fiscal year 21, million added to revenues because of that calendar year 21 with an additional 91 million in tax liability student. None withheld ui That would have boosted

Fiscal year. That should boost fiscal year 22 revenues by about 90 million And would boost fiscal year 23 revenues by about 20 million. So those are now very small figures in the scheme of things. Looking at the economic indicators behind these expectations. U. S. GDP grew 1.6% in fiscal year 21 uh is expected to grow by 4.5% in fiscal year 22 3.4% in fiscal year 23. And again, these are expectations consistent with uh the Wall Street Journal survey of economists and the Federal Reserve Board massachusetts gross state product historically has been growing practically in step with US GDP for the past several years, but also for the past several decades. And that's expected to continue Over the next couple of years. four, fiscal year 22, 3.4% in fiscal year 23 Payroll employment is expected2885 to grow 5.3% in fiscal year 22 And slow down to 3% in fiscal year2893 23. And by the end of Calendar year 23, by the fourth quarter of 23, this projection is employment is expected to achieve the pre pandemic Peak

Mhm. Thereafter, I agree with Eileen, it's going to be difficult for employment to continue to grow at these rates unless and this is not an impossibility unless population is boosted by uh migration2931 into the state. Given the industrial structure of the state and the projections of the Bureau of Labor statistics for future employment by industry and occupation, those are real possibilities for massachusetts going forward. That we could see increased migration both from other states, net migration, that is both from other states and internationally, that could support further employment growth beyond 2023 personal income. Uh State personal income. These are in nominal figures, not real figures Expected to grow 1.5% fiscal year 22, in fiscal year 23. Why the slowdown in fiscal2984 year 22, while it's primarily in the transfer income component In fiscal year 21, that grew 23.3% boosted2994 by federal stimulus, That's largely disappeared. So that's why in fiscal year 222999 Transfer income is expected to decline by about 21%.

Uh and3007 in fiscal year 23 x four Wage and salary income 4.5% growth in fiscal year 21, 8.3% in fiscal year 22, largely due to the rapid employment growth, also increases in nominal wages 3.8% in fiscal year 23. Again, these are nominal figures not real. When you take inflation into account the growth in wage and salary income and fiscal year 23 Real growth will be close to zero. Core inflation. As I mentioned, is expected to3045 wane. Core inflation excludes fuels and food, so it has somewhat less volatility than3056 overall consumer price inflation, But that's expected to be 4.8% in fiscal year, I'm sorry, 3.6% in fiscal year 22 And slow or declined to 2.3% in fiscal year 23. An important part of these expectations has to do with effects on capital gains, which is affected by the stock market, which is affected by things like corporate profits and those are expected to continue to rise healthily 21 expected 23.2% in fiscal3099 year3099 22 and 10.5% in fiscal year 23, these are based on the Federal Reserve Board's expectations for corporate profits.

And as I mentioned, um in my model, although stock markets are extremely difficult to predict, I base them on corporate profits and that would suggest stock market growth. This is from december of one year to the next uh Would be 23% in fiscal year 22, for example, the s. p. 500 would grow 23%. Uh from from December 31, Mhm 2000 to December 31 of this year, 23% growth. And that that would affect of course the spring filing season for non withholding income especially and similar growth for The December ending in 2023, from the prior December. Let me make a point about reliability of stock market growth. Um The model I have basing a stock market growth on corporate profits,3192 explains only 8% of the variance uh in stock market growth, other forecasters can appreciate that. That essentially says that it's nearly unpredictable. So my viewpoint and Eileen's viewpoint or which is moody's are uh are both very real possibilities.

Uh And it's hard to, it's hard to know which is going to happen. Uh That said um I did run a scenario assuming no growth in the s. p. 500 Uh from this date through fiscal year3239 23. Um And that affects revenues by About 930 million in my model. So roughly a billion3250 dollars. And that that would be instead of uh the stock market growing 13.6% uh in Next year, it only grows, it grows 0%,, And so uh 13% difference in stock market growth results in about a billion dollar difference in revenues. Um So that's, that's a delta that we can work with, which would make mhm. The viewpoint say, of mass taxpayers, uh consistent based upon expectations about stock market growth. So a billion dollars for 13% difference in stock market growth. one Moore 1 other point about this uh in this forecast, um the stock market growth has actually occurred from capital gains realizations are much more predictable than stock prices. In the model that I use a capital gains realizations are driven essentially by changes in stock prices in the last calendar year and in the two calendar years preceding, Uh that model explains almost 2/3 of the variation in capital gains realizations.

So my point is that capital gains realizations based upon3351 what has actually happened in the stock market are fairly give fairly reliable predictions. And so the capital gains expectations in my marla pretty much cooked in because they're essentially based on what's happened to the stock market through the end of this month. I gave those estimates and just as another, another example of what to expect in coming up in this filing season for april 20 This upcoming April April 2022. Um my expectations are that total revenue for April 2022 will be as Carl Sagan would save billions and billions ah 5.88 billion of total revenues received in april of this coming year, three billion of that would be a non withholding income reflecting a a large amount of capital gains which will be realized of course in in the non income tax components, estimated payments, ah returns with payments and smaller refunds.

So going towards the individual tax components, This graph displays tax revenue growth over the prior fiscal year for fiscal years 22 and 23 by components. And the next slide will break some of these components down further. Let's focus3457 on, can you see the mouse here to the total budget lines, the next to last one on the right. So uh My expectations are in fiscal year 22, they'll grow 12.2% over fiscal year 21 And in fiscal year 23 6.5% over fiscal year 22. Uh Looking at some components in the middle income, A total income 11.3% growth in fiscal year 22/21 and 7.1% in fiscal year 23 over 22 and of income just focusing on on the right here. Non withholding income 27.4% Growth fiscal year 22 This fiscal year and fiscal year 23, 7.2% growth um Corporate and business 19.6% growth, Fiscal year 22 and 15% growth Fiscal year 23 and all other taxes 13.8% fiscal year 21 and a small decline In fiscal year 23.

Looking at end on some3544 more detail, looking at estimated payments. So first of all, uh withholding, I mean, personal income components, Estimated payments 22.8% growth in fiscal year 22, uh 19.1% fiscal year 23 payments with returns 9.9% fiscal year 22, fiscal year 23 refunds Decline of 17.4% in fiscal year 20 want to And about no change to the next fiscal year 23. Now, of course, the distribution between these components is, you know, can change quite a bit, but the net effect is shown on the, on the prior slide to be very strong this fiscal year. And his relative to history also very strong in the next fiscal year, 23. Withholding revenues expected to grow 5.9% this fiscal year and 3.1% next fiscal year. Why a smaller growth In fiscal year 23 for two reasons. One smaller employment growth, it's harder to get back the last portion of what we lost in the pandemic. But also because the job gains3628 are going to be concentrated in leisure and hospitality and other sectors with lower than average uh wages.

So that's another reason why wage income Growth relative to the prior year will slow for fiscal year 23 and therefore withholding uh withholding sales taxes for regular sales taxes, strong growth this year 6.2% fiscal year 22 slower growth the next fiscal year, because these are based primarily on goods goods has grown very rapidly in the past couple years. How many more goods can can people by? And we're seeing3679 a slowdown in goods growth nationally. Personal income of consumer spending will be shifting towards services as those rebound and and that's why the smaller growth and regular sales taxes and meals very strong growth this fiscal year because of how depressed that sector was and A fairly robust growth in fiscal year 23 as well. Motor vehicles. Uh good growth in both fiscal year is very strong in uh in this fiscal year 22, slower growth in fiscal year 23. Uh and so I'll end my comments there again. This forecast assumes continued growth in the stock market and and capital gains realizations that are historically consistent with that type of growth. So thank you.

[MICHLEWITZ:] Thank you. Dr Clayton Matthews, I have one quick question. Does your forecast include any consideration of the bill back better?

[CLAYTON-MATTHEWS:] Uh Yes, a very one, one very small part. Only one very small part. And3765 that is the extension of3767 the child tax credit, but only that part. That's3772 a relatively small part. So essentially, no.

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colleagues.

[HEFFERNAN:] So Thank you a quick question when when you do your3790 0 um growth in the stock market calculation and a billion in revenues. Is that spread out across all of the revenue categories? Was primarily in capital gains,

[CLAYTON-MATTHEWS:] Well, primarily in capital gains. And so that that would be primarily in the filing season. However, uh the stock stock market affects many parts of revenues as well, for example, uh it's important in a sales tax revenues and regular sales tax revenues, especially because of the wealth effect. So those would be affected by different stock market outlooks Also, it's very closely tied with business um revenues and business related revenues for a couple of reasons. Uh Well well 1 1 is that business profits are are highly correlated with stock market prices. Uh And uh and and those tax revenues are are highly related with business profits. So3856 if you expect the stock market not to grow or to fall, that's that's that's very likely also an expectation about corporate profits as well and therefore corporate revenues. What other tax components3869 do we have?3870 Motor vehicles is also affected by the stock market and again, that's through the wealth effective people feel they have, they have good savings, they go3878 out and buy um Mhm And to a smaller3884 extent meals, I guess about primarily capital gains.

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[MICHAEL GOODMAN:] Chairman, Rodrigues Chairman. Michlewitz Secretary Heffernan, Members of the Joint committee. It's my pleasure3950 to be here. I want to talk as I usually do about some of the context for the economic and fiscal outlook, some of the implications for revenues and some of the wild cards I think that are in the offing that are worth keeping in mind as you prepare your consensus revenue forecast. Obviously the following reflects my personal and professional assessment of the evidence and I'm not speaking in my um as a the occupant of my day job. Um Taking a step back if we look at recent economic history and this compares us GDP growth to the mass benchmarks, current index and a hat tip to Alan for preparing that index. You can see that we've had a rather extraordinary period. We all lived through the middle period of3991 2020 with the historic decline and historic rebound.

And then since then, I think we've seen up until the third quarter, some fairly robust um recovery and rapid recovery that I think is expected to increase in pace in4007 the fourth quarter and then moderate a bit going into 2022. And so uh we've had, we've had a number of headwinds, including supply chain disruptions, which have constrained consumption, labour supply issues that have been mentioned by a couple of the previous um uh witnesses and continuing pandemic impacts. If we take a look at the job market in particular here, this is indexed to the pre pandemic peake in February 2020. As that line grows, we want to get back to 100, which would be where we started were just under 5% away from that period now, but as you can see, Especially as compared to the last two cycles, this4050 isn't terribly surprising the labor market recovery, the job creation recovery has been much faster coming out of this pandemic induced, very brief recession.

Uh but obviously constrained and I'm sure you're hearing from business leaders and constituents uh and looking at the data yourselves that that's been constrained by labour supply in key sectors of the economy, but the job market and the underlying economy have been pretty strong despite a number of these headwinds, um what we've been observing and this is national data, but I think it's also playing itself out here in massachusetts is significant wage growth. I think that's both the function of some of the labor supply and recruitment challenges facing employers, they are competing for for fewer workers who are available to work, are interested in working at this point. Uh and for a change, we've seen most of the lift in wage growth at the lower end of the occupational spectrum.

Even to the point where it's actually representing real wage growth, that is wage growth in excess of the inflation rate, which has been widely reported has been, has been quite high, particularly of late. But despite a lot of the lift in wages, we haven't seen the workforce returning to the labour market quite as rapidly as one would have expected under normal conditions. This is a survey done by the job search site. Indeed, asking folks why unemployed people, why they're not returning to the labour market again, National data that I think has some implications for the commonwealth and our current condition, as you can see the expiration of unemployment insurance payments didn't appear to really have much of an impact.4153 That was something that may have been holding back a relatively small number of folks from returning to the labour market.

But if you see the cluster of reasons for not coming back and searching for work urgently as they described it, people continue to be concerned about the pandemic and covid folks4168 were able to accumulate some savings during that downturn and therefore aren't in some cases feeling the financial pressure or able to rely on the spouse's second income or they have care responsibilities care for a child care for an elder care for a family member. And so you can see there's a number of good reasons. And folks who responded to the survey were able4190 to select more than one. So there's there's a lot going on that's keeping people out of the labor market, despite what's been particularly at the lower end of the occupational distribution, some real meaningful wage increases. Um If you take a look again nationally, this is data tracked by the Federal Reserve Bank of Atlanta, which is attracts wage growth. And I highlight this because in a tight labour market, a labour seller's market or workers market, if you will.

Um The folks who are seeing the largest increases are the people who are voting with their feet and choosing to take offers from other employers to have seen a lot of churn. Uh and the wages at for those who are switching jobs have been increasing more rapidly, which of course induces more switching. And so there has been a considerable amount of poaching or competition for scarce labor. And so um a lot of the employees who have stayed in place haven't seen the same kind of wage increases yet, although I think that's expected certainly in the public sector, we're seeing that through pending collective bargaining agreements. But uh incumbent workers, I think are looking elsewhere for opportunities to raise their wages, both in response I think to an extended period of uh of work from home in some cases which forced them to think differently about how they want to spend their time, what sort of jobs they want to do and what their reserve wage for re entering the labour market looks like.

But also I think because there are there are greener pastures in some cases at least in terms of working conditions and4283 wages and so that's really4285 been what's going on with the labor market. A lot of competition, reluctance to return for a number of reasons that I think4291 makes sense uh in light of current conditions and expected conditions and a reward for switching jobs. I think the other thing and it was mentioned earlier and it's come up, I think over the last several years in particular is the demographic pressure on our workforce, I think certainly nationally, but also more acutely here in massachusetts where the age composition of our population skews older unlike the last couple of recessions, the the recession around the turn of the century, some called the dot com bubble bursting and then the so called great recession in 2000 and nine, we saw more people who were induced to staying in the labour market because they needed to recover lost income or they needed to, you know, to make up the Get to the point where they were ready to retire financially.

We have not seen the same phenomenon coming out of this COVID-19 recession as you can see the the effect appears to be in the opposite direction. That is folks who might have otherwise been able to hang in there for another few years are throwing in the towel. Some of these um issues may be connected if you think back to the reasons why the unemployed are reluctant to re enter the labour market care responsibilities are there we all know here in massachusetts especially that high quality of childcare is very, very expensive And so I suspect we have some grandparents uh in our labor force who are, you know, making the hard decision not so hard in many cases to spend more time with their families to continue to provide their Children and grandchildren with the kind of care and support that they became accustomed to when, when lots of remote work activity was going on. And so I think a number of people and this is certainly consistent anecdotally with what I've observed here4398 are choosing to exit the labour market and to retire whether they might be persuaded to return I think is another matter as we just rise.

That will be an interesting thing that bears monitoring. But bear in mind that all of these things have the same general effect, which is to reduce the size of the labor force and the labor force participation. Um I do think it's important, especially as you're considering revenues that may be growing at a fairly rapid rate as you've seen some others testify to keep in mind. Um and I know you are aware of4428 this, that inflation has been rising quite substantially of late um you know, at the fastest rate in november that we've seen in several decades, even if you just look at the so called core CPI which excludes food and energy, which I think makes sense for policy making at the national level that I think keeping in mind that food and energy or things that were rising prices find their way into a whole variety of different prices in the broader economy and have a disproportionate a very difficult impact on low and moderate and even middle income Holmes in some cases as we enter the colder parts of the winter.

Um when you take a hard look at the data, this larger debate that's been going on about whether or not this bout of inflation is going to be quote unquote transitory or temporary or or enter into some longer extended period of elevated prices. The track record of inflation forecasting is rather poor, so I won't go there. But if you take a look and this is a little uh data dense, you can see that the factors are the commodities or the products that have been driving the price increases do appear to be particularly vulnerable to these supply chain disruptions And sudden growth in demand that we've seen coming out of the COVID-19 recession. So energy prices have been driving this as have certain certain products durable goods, including new and used cars now are those price increases sustainable, I think not.

And as those supply chain disruptions, uh, moderate and I think as consumers who can't get a hold of good start to spend more of their disposable income on services, I think you should see this evening out, but so you can put me on team transitory, but transitory might be quite a while, it could be through the, through the end of next year depending on what assessment of the supply chain you are, you're looking at. This is pretty significant, particularly not just for4550 consumers who wish to purchase goods and are bidding4553 up the price of those goods, but also for many of our technology, uh, dependent and uh, manufacturers and other employers. Now it looks like as of, as of october was 20 weeks to get a chip. This is I think a large part of the story of why products like new and used cars have been rising so rapidly because access to those components has been so highly restricted.

Um, similarly, we've become quite reliant on imports from Asia, not just and use consumer products, but also these intermediate goods that are key components to products that are, that are invented and designed and manufactured and sold here in massachusetts. And so how, how long one thinks this is going to take to unravel itself, I think is going to have a lot to4600 say with how long prices remain high and I think that's going to be meaningful when you're, when you start your budget process for fy 23 because you know, you can expect that the pressure to raise wages and to retain key state employees is going to be here certainly for the next budget cycle when you ask chief financial officers across the United States. And this was late september. Um, so maybe a bit dated. But the most recent data collected by Duke University and the4630 Federal Reserve Banks in Richmond and, and in Atlanta, you can see that there's sort of a plurality of chief financial officers across the United States that I think this is going4639 to be quite a while, like to through the second half of 2022.

So not, not like some of us lived through in the late 70s or anything like that or what some have, I think very irresponsibly even predicted would be hyperinflation or anything like that. But I think the shipping and production delays and availability of key components in certain areas. It's not something that's going to go away quickly. Um, I think it also, you know, uh, speaks to the incredible demand that we've experienced coming out of the pandemic period. If you look at measures of goods that are being imported into the United States, big part of the problem4677 is the sheer volume of some of these imported durable goods is overwhelming. Some of our key points of entry imports, particularly on the west Coast where shipments are coming from Asia. Um, also, I think the broad and and uneven distribution of the vaccines that are helping to moderate the pandemics. Most negative health impacts are really emerging as4704 a key indicator of whether or not economic activity in our various trading partner amongst our trading partners is going to be positive or negative going forward.

This from4715 the International monetary fund, which comes to the pretty intuitive conclusion that the higher the vaccination rate given county, the more consumer spending and the less unemployment that you see. You can imagine how that might play at south worldwide as we try to prognosticate on when we can imagine we're going to get the goods that we need from from other parts of the world. If you can slip to the right. You see that the distribution of the vaccine, particularly uh in the emerging and low income and developing countries, which I think are to represent an important part of the global supply chain and a real human challenge throughout all of this has been less than even certainly we're seeing here within the United States with in massachusetts. Even the distribution of or the reluctance for vets for vaccinations remains stronger in some areas of the state and in some communities than in others. And so a lot of our economic trajectory going forward is going to continue to be dependent in important ways on very difficult to predict pandemic conditions.

And so those represents I think a major wildcard for the for the outlook going forward. Although I do think there is some reason to be optimistic, even though I think we've been deluged by negative news as we think about a micron. One of the things that I think has not been as well reported, although I believe the state Department of Public Health and the governor's office released something yesterday. What we're seeing is a surgeon hospital admissions but overwhelmingly um you know, amongst folks who are unvaccinated or who are members of highly vulnerable population, particularly uh the elderly and or those who have significant comorbidities and4818 other vulnerabilities that would make them vulnerable in any uh any sort of respiratory infections. So that's not to to sort of sugarcoat this. But I think with the broadening of the vaccinations with the emergence of treatments, we are starting to4836 see. I think the evolution of the pandemic into more of an endemic where it may be that infections aren't in and of themselves the only main concerning indicator.

We do have hospital capacity issues because we still have many of our neighbors4852 who for reasons that befuddle me. Um I haven't really seen the clear connection between being vaccinated and the dramatic reduction in the risk of negative health outcomes. You can see that more starkly here. Obviously we've all learned now that vaccines are not a force field of invulnerability they did not stop us from getting sick. In fact, I suspect given the omicron um, predictions that over the next 68 weeks we're going to see a significant uptick in the number of positive cases. But for those who have been vaccinated and ideally received a booster shot now you4891 can see that negative health outcomes measured as time spent in the hospital or or mortality have been incredibly low. And so I think as you think about your policy steps, you know, extending vaccinations4906 and making4907 it easier for venues and institutions to know who is vaccinated and who's not vaccinated is going to be.

I think very important topic to consider as we try to ride out whatever whatever the next surge might look like with a minimum amount of disruption while maintaining of course the highest level of public health. Uh they're recognizing that the link between infection and hospitalization and profoundly negative health outcome has been changing. I think it's going to be important even though I think it's sort of counter too much of the narrative about the pandemic. Um uh, at both extremes, I think especially after the last couple of years, I want to try to wind up with a little bit of humility, right? I don't think any of us really know what's going to happen yet.

You can see that a fairly wide range in the expectations on the left, we have the Dean of the Brown University School of Public health and I think anyone with the television or radio has heard of4965 who is starting to make the case that I think I just wanted to raise about the difference between infections and negative health outcomes and of course the current chair of the Federal Reserve Board indicating I think a fairly plain reality that none of us really knows with any certainty where the economy will be a year or more from now. I do think there is a lot of reason to be optimistic, particularly cautiously optimistic about the outlook for the state economy. Um and of course the bottom line for state revenues and so you can count me more on the Alan Clayton Matthews end of the predictive spectrum here when we look at all the things that are expected to change in the real economy, the pressure upward on job growth, increasing in increases in wages, the the performance of the stock market and and this year hard to predict next year, but certainly it looks like it's going to be a reasonable bonus season this year, which may lead to a larger surplus in the current fiscal year.

Um And of course the pent up demand for spending, which is up according to one measure by over 25% year over year through mid november. All of that, I think bodes well for strong revenue growth but we do continue to have major wild cards particularly related to the pandemic inflation and the supply chain disruption and labor supply. One last note, I would say the labor supply issue as others have suggested is not one that's going to go away any time soon and I think reinforces the need for us to5055 make sure that we extend as many opportunities for our uh neighbors and colleagues to enter and reenter the labour force by knocking down systematically the barriers that are preventing from getting their which include access to reliable child and elder care. Uh And I think safe working environments with that would be happy to take questions.

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[DEB GOLDBERG (MA TREASURER):] Okay then Secretary Heffernan Chairman Michael, its chairman Rodricks and members of the committee. I always appreciate the opportunity to have an open conversation with all of you uh about our revenue projections about the fiscal outlook and anything whatsoever that you would like to talk about. Um But I'll begin today with prim since that's very good news With the latest valuation at the end of October the Massachusetts Pension Reserves Investment Trust Fund reached a record $101 billion dollars crossing the 100 billion Mark For the first time ever and more than doubling in size over the past 10 years. In fact5167 when I arrived it was 59 billion. So you can imagine how exciting this was. And for me personally, These results followed the record setting fiscal year ended June 20 Uh in which the print fund was up approximately 30% with a net investment game of 22.1 billion uh 6.7 billion or 9% above benchmark For the September quarter.

The results continued to be strong, returning 2.4% net of fees despite global markets posting modest losses. It also moved ahead with its future initiative which was a strategic5214 plan to accomplish goals as set by the investment equity legislation which both the House and the senate passed this past january. This initiative will reduce barriers for diverse managers as we work to ensure that at least 20% of the funds, investment managers and vendors are women, people of color or persons with disability. Additionally, the fund stands at the forefront of5243 E. S. G. Investment research with a groundbreaking partnership with M. I. T. Sloan school and other institutional investors from around the globe.

Not just the state, this research will enable prime to be among5257 the first investors in the world to literally utilize more reliable E. S. G. Ratings in order to design and implement more impactful investment programs while conducting an assessment of crims investment poorly portfolio carbon footprint over time without a negative impact to return. That's the whole idea behind it. The board continues to diligently monitor and discuss market risks including what Mr Goodman just referred to and is confident that the long term, all whether I call it portfolio sunny or rainy will continue to perform well no matter the state of the market.

In terms of our debt management, certainly Massachusetts, its financial results have been stronger than originally expected during the COVID-19 pandemic and recession. Our state's finances have been bolstered by the strong and I want to applaud right here. Strong stabilization fund heading into the recession and budgets based on conservative revenue forecasts and the influx of significant federal aid. I want to thank the Legislature and the administration for your continued commitment to sound fiscal practices including replenishing the stabilization fund. The Rainy Day Fund has a current balance of $4.6 billion 5.8 billion.

This balance is viewed as strong by the rating agencies. It's the third largest5362 in the nation in absolute terms, overall the rating agencies acknowledge the commonwealth robust economic base and it's prudent management practices to help navigate these challenging periods. We continue to experience strong investor demand for our bonds and low interest rates. Our debt management team has successfully, sorry about that has successfully used all available mechanisms to generate savings for the state. We look forward to working alongside you to maximize the impact of the incoming federal infrastructure funds.

Now turning to what is often many people's favorite topic, the massachusetts state lottery, as you may recall. And I remember sitting in front of you, sales of all lottery products dropped sharply at the onset of the pandemic despite the challenges posed by the pandemic, The lottery ended up exceeding projections for fiscal year 2021 And produced a record net profit of 1.1 12 billion by responsibly adjusting our business operations. Working closely with5443 our retail partners, we were able to generate record setting sales of instant tickets while also5450 realizing a jump in sales of mega millions and powerball tickets due to significant jackpots. The lottery has project projected 995 million in net profit for5463 the present fiscal year 2022 lottery products continue to provide a valuable source of revenue for many small businesses across the state, including our convenience and corner stores, supermarkets, gas stations, package stores, restaurants and bars, enhancing local aid and supporting our network of retail partners remains critical, especially as customers have increasing access to new entertainment options.

Looking forward to fiscal year 2023, The lottery is projecting one billion in that profit Outcomes for fiscal year 2022 and projections for fiscal year 2023 could be impacted by potential supply chain issues. Yes, we have them to believe it or not With various specialty paper products. The lottery has taken a proactive approach to remain adequately stocked at the present time, but we have experienced a few glitches which gave us a heads up and made us make sure that we were looking at this, staying on top of our vendors and preparing for possible alternatives to5541 standard supplies if needed, acknowledging the increased consumer preference for online and mobile engagement. The lottery developed a mobile cashing feature on the lottery app. It's a very interesting um5556 feature.

It allows customers to claim prizes Of $601, which this wasn't allowed to be done before 2 5000 and have their winning securely deposited electronically into their bank accounts. It's not only convenient, but interestingly enough has positive environmental impacts. Since launching this feature this year, over5583 4500 prize claims have been processed. Totalling over $5.5 million dollars in prizes, eliminating these vehicle trips to are claim centers has saved5596 customers on average around 9300 gallons of gas resulting in 183,000 plus pound reduction in carbon emissions And 31,000 and gas cost savings, which could conceivably go up this following year.

These numbers will continue to grow with greater customer use while we continue to evolve our operations to meet the latest technological standards and consumer trends. Your continued operating and capital support of the lottery is essential and for that we are most grateful unclaimed property. The thing that so many people call find mass money. I am pleased to report. The division continues to provide superior service to the people of massachusetts Unclaimed property is on track to revert 98.75 million in fiscal year 2022 We will have an increase in fiscal year 2023. The division anticipates a total reversion of 145 million. A net gain of 46.25 million over fiscal year 2022 estimate this significant increase is possible because of liquidation of stocks which is required to be done every three years. So the stocks are now available to be sold and the cash will be coming back to the commonwealth.

Moving on to the abc see as you know, the pandemic has taken a major economic toll on restaurants and bars across the state to meet these challenges. Head on the abc. See partner directly with the Legislature and the administration alongside affected communities. Industry leaders and small businesses. Together, we have identified programs to assist in alleviating the pressure of the pandemic on licensees. I want to truly thank you for this ongoing partnership and support of licenses as they rebuild recover and possibly even now have to go through greater stress through this winter. As you know in 2021, the legislature waived many of the requirements of the annual retail license renewal. This action allowed hundreds, not just a couple hundreds Of licences to hibernate through the winter of 2020, keeping their license active5756 at no additional cost.

With the intent of reopening in the spring of 2021. Very few licenses because you may remember back, we speculated we could lose up to 25% of our licenses. Very few licenses opted not to renew even if their businesses were not operating. The annual licence renewal process for5780 2022 is now underway with all license renewal requirements in place, including the fee.5787 As a result, this annual renewal should5790 provide us a more accurate understanding of the impact of the pandemic on licenses and I look forward to sharing that information with you. Yeah, In fiscal year 2021, the ACC see brought in 5.85 million. We project project 5.8 million for fiscal years. 2022 2023 However candidly, this projection may change based upon the annual renewal numbers across license classes and even offline we will be happy to keep you informed of this. My team at the A B C C will continue to monitor the impact of this pandemic on local businesses and we stand ready to work with you to continue to find innovative solutions to assist and revive these economic engines.

So thank you again for inviting me to testify today. I know we will have many more conversations both online and offline about these issues in the weeks and months ahead. And I look forward to our continued collaboration because that's how we take care of the people of massachusetts. Now, I'm happy to answer any questions that you may have.

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[GOLDBERG:] Uh we're here to collaborate. We know that we're on a bit of a roller coaster, but you also know that the work I've done on nationally to advocate for states and local communities, um has worked out very well and that we will continue to monitor and work together and knowing that I believe that we can keep our state strong5939 no matter what comes at us. So working with people like you really makes the difference. Absolutely. We're all on this roller coaster together. Thank

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[EVAN HOROWITZ (TUFTS UNIVERSITY):] It's great to be here. I'm looking forward to providing some um I do. I thank you for inviting me to testify today. It really is a privilege to be able to to help the commonwealth prepare for the uncertain future. Um So my name is Evan Horowitz. I'm the executive director of the Center for State Policy Analysis at Tufts, which I pronounced. See spar CSP Spar. So we provide timely relevant research on live policy issues in a strictly nonpartisan way. We don't work on on fiscal and economic policy assess the impact of ballot question is going to keep doing that this year. Some interesting ballot questions uh and provide consulting services and technical support to state legislative committees and other organizations. So today I want to talk about about three things. Um First, I'll summarize our tax revenue projections for Fy 2023. A little bit about 2022 second, I'll share some thoughts on how the state's fiscal situation, while relatively healthy is not quite as secure as it might seem. And third, finally, I'll say a few words about the role of inflation.

So for Fy 2023, we estimate that state revenues will tax revenues will not roughly 36.5 billion. About 6% above the current Fly 2022 Benchmark. That estimate is based on a predictive model that uses us GDP to gauge likely state taxes Historically, there's been a nearly 1-1 correlation between national GDP and Massachusetts tax revenues because GDP6058 reflects exactly the kinds of things that the state tends to attack, namely income and spending. And building off this relationship, we can project state tax revenues using existing estimates of U. S. GDP which are produced by a range of reputable private and public organizations including the conference board, The Wall Street Journal Economic forecasting survey. So gathering these together, we find a general consensus that real GDP will grow just over 3% in Fy 23, which translates into state tax revenues of 36.5 billion are central estimate. That's the that's the first point I wanted to. The second6090 is about the unappreciated risks and weaknesses in our current fiscal situation.

So over the past few years, pandemic uncertainty has created a mix of downside economic risks but also hopeful possibilities. When we met last year, we talked about several times last year, we talked about the dire prospect of new strains, but also the odds that faster than expected vaccine production could push revenues higher than anticipated. Um which part of the reason we had higher than anticipated revenues at this point. However, with consumer spending above its long term trend, the job market approaching pre pandemic highs asset prices extremely at extremely high valuations and the Federal Reserve planning to raise rates. There are many more downside risks than upside possibilities or put differently. There are a lot more ways for our6138 economy to stumble and a lot fewer chances to accelerate from here. In terms of state tax revenue, massachusetts may already be overdue for a correction with the volatile6148 parts of our tax system, the capital gains6150 and estimated taxes having outrun the more stable parts like income withholding and sales tax, Focusing on these more stable pieces, especially income tax withholding was really key to understanding what was going on.

In Fy 21 steady gains in those areas prove that the forces driving revenue growth last year were deep seated and not incidental. The same logic applies now only in the opposite direction. Thus far. In Fy 22, the more stable revenue streams are through November. The numbers through November, the more stable revenue streams6180 are only slightly above the state benchmark, two or 3%. Meanwhile, estimated income payments, including from pastor businesses are 16% above benchmark and corporate taxes are 25% above such high corporate tax collections and estimated income payments are unlikely to be sustainable or reflect some new normal for the state more. Probably they reflect a one time pandemic area jump in profits and asset prices, which will either fade out or get clawed back. Now. I wanted to demonstrate this with a chart so I'm going to try to share my screen if I can find the chart. Um hopefully folks can see this. Someone should holler because I can't see your face is while I'm looking at this yet, we see it great.

So what you're6223 looking at here, um thus far is a chart showing the relationship between state tax revenues and US GDP Going back every six-month period every half year, going back to 2002. You can see it's a very tight relationship. I mean, it's interesting Alan mentioned before that his model for predicting stock market returns had about explained about 8% of variation. That's a very, very good model for stock market returns effect could probably start a very profitable hedge fund um with that little advantage. But just to give a sense of the difference when this model, if you have us GDP that explains about 94% of the variation in state tax revenues. So these things are very, very closely related and have been in virtually every six-month period, we talk about the little fluctuations, but what I wanted to look at is what happened the last or since the pandemic. So that's that's what's happened since the pandemic and to be clear. this little kind of jump, It's not because of federal aid, that's not what's going on here, because the at least mostly because the federal aid, but the federal aid did, was it put a boosted GDP.

And what we're talking about in6291 this charter, as shown in this chart6292 is state tax revenues um in excess of what you'd expect from GDP. So this is the6300 kind of ancillary tax increases in areas like capital gains and corporate profits, which have happened over the last 18 months to two years. And one of the interesting things about the discussion that we're all having today is that it seems quite different than the discussion we were having a year ago then it was really a question of what we thought was going to happen to GDP. How was the strong was the economy is going to be and what would that tell us about revenues? Whereas the discussion, and to the extent that there are disagreements, disagreements today aren't really about that? I don't seem to be, they seem to be about this excess stuff.

How strong is the, how strong is the stock market going to be? How strong are corporate profits going to be in excess of what you'd accept expect from GDP? So I have included two potential paths here. So there's a lot of uncertainty about what happens next. So one path is that we kind of return slowly to trend. Um but we maintain a lot of the benefits. Another path is that actually we fall below trend and we have to kind of repay today's or yesterday's excess capital gains with tomorrow's slightly under Cabral under expectation of privacy under expectation. If you can see if I had, if I knew how to draw on these. I think I try to put in like the line, don't put words in Allen's mouth. Um but like a line for Allen's model which would kind of extend this excess a little bit further out. Um So you would continue to have very strong capital gains and above expected revenues. That is even relative to GDP um Try try to turn that sharing off if I can. I have I have managed to turn sharing off. You have.

Okay, so I just wanted to share that as a sense for I think what we're talking about and and what the sort of open questions are now exactly when the overheated parts of our tax system will revert to trend or fall below trend is really hard to say. I think that's a big part of what we're discussing and debating today. But the risk that today's high collections will be matched by tomorrow's disappointing ones is a reason to um to maintain a healthy balance in the stabilization fund for fy 22 enough revenue has been banked that we think it makes sense to raise the benchmark for the year by a billion dollars from 34.4 million to 35.4 billion. That adjustment still allows for the possibility that collections could slow in the second half of the year. But it also enables targeted spending increases to areas that are struggling with hiring another pandemic challenges In Fy 23, however much more likely to see a reversion in estimated payments and corporate taxes, which is the big reason are central estimate envisions a relatively meager increase in total tax revenue between Fy 22 and FY 23.

The last point I want to make is about inflation which adds another dark cloud to the state's revenue situation. Um I want to clarify from the outset and this is to agree with the comments that my good man was making that I'm not particularly concerned about runaway inflation or stagflation or any of the more dire economic scenarios are read of the latest data is that inflation is likely to slow in the coming year, particularly with the more hawkish stance of the Federal Reserve. Nonetheless, it's still the case that inflation is much higher right now and over the last 12 months than anticipated, which means that while the state may be collecting many more dollars than expected, each of those dollars is also less valuable than expected um which is exactly what inflation means. So another way to phrase this is that the cost of running state government has risen more rapidly than we've seen in a generation. Even a maintenance budget for FY23 designed simply to maintain current government programs, we'll have to reckon with the fast growing cost of hiring people of procuring materials, providing housing support and and a great deal besides all this makes the current revenue collection numbers less cheering than they might otherwise be uh to add some concreteness, I noted earlier that are central estimate of 36.5 billion in fy 23 revenue as a tax revenue is about a billion more than we think the state can count on for fy 22.

But once you account for inflation, that's actually a slight decline in revenue,6548 meaning the state could have fewer real dollars to work with for fy 23. Um, I'm gonna stop there except to say that I want to agree with everyone about the uncertainty around this. And just to to pinpoint my sense that a lot of this uncertainty has to do not with the state of the economy, but with these ancillary areas that have really benefited state coffers6569 in recent years having to do with um windfall, very high corporate profits and very high returns on assets.6578 I'd like to thank you for your time. I'm happy to answer questions and more generally to say that that's the spot is ready to provide additional research on on any topic that you thank you.

So

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