Monday, December 5, 2016

Joint Committee on Ways and Means Consensus Revenue hearing

The agenda, such as it is, is here. We have a handout of list of speakers, however.
Posting as we go. 

House Chair Brian Dempsey is opening the hearing, introduces House members
"serve as a guide to the tax resources that are available"
 in five of past six years, have come in on target
have received highest marks on projections
seven consecutive years of tax growth
Senator Spilka thanks others for their work
"what a pleasure it's been working with" others
thanks others for the testimony, vital part of developing budget
"developing a state budget is an enormous responsibility"
"must preserve investments for our most vulnerable"
"every dollar reflects an impact for our children, our families, and our communities"
"Commonwealth's overall position is strong"
"our economy continues to grow"
among the states that are recovering the best from the recession
people are feeling they could leave their jobs to find another: economy is doing that well
"uneven recovery...growing inequality"
"must prepare for future shocks"
Have lost nearly $600M due to income tax rollbacks
facing uncertainty at federal level
Secretary Kristen Lepore, Admin and Finance
consensus revenue represents collaborative relationship between executive and legislative branch
many panelists to help inform us as made revenue adjustments
"ensure the state is in sound standing to weather the next economic downturn"

Commissioner Nunnelly: Mass DoR
Dr. Ozyurt, Office of Tax Policy Analysis, Mass DoR
Bill McNamara, Deptuy Commissioner, Mass DoR
Nunnelly: have submitted forecast in writing and will be online
"negative to the benchmark in the last quarter of fiscal '16"
lower tax liability on investment income (due to drop in S&P)
slowing in sales
"revenue dollars were continuing to rise, but at a somewhat slower rate"
picture is mixed
state economy shows a small but distinct outperformance
recent performance of equity markets has been a positive
two negatives:
"long lived but never very robust recovery"
"would not be prudent to project the bounce as certain"
actual is year over year
baseline assumes there had been no tax law adjustments and adjusts for fluxuation
"remains unchanged" 3.1% over '16 collections
refreshed range of 2.8% to 3.2%
upgrading online platform (went live at 8:30 this morning)
time differences relate only to when revenue is recognized, but it happened to include months end
as of 2016, 5.5% to 5.1% income tax rate: hit is $78M
$26.81B to $27.1B
actual growth of 2.9 to 4%; baseline 3.7% to 4.7%
increase $9B in revenue, or 3.5% over FY17
assume income tax rate with drop again to 5.05%
assume no marijuana sales revenue
national economy is projected to grow 2 to 2.4% for full fiscal year
concern over Trump admin, Brexit, income of strong dollar, and concern on economic growth
income tax driven by employment, wages, and salaries, capital gains
Massachusetts employment has shown recent strength; "state unemployment rate is impressively low"
increase in total income taxes is expected to range from 3.5% to 4.3% increase
"capital gains continues to be a volatile revenue source and therefore most difficult to predict"
capital gains in FY16 decreased by 15.7%
projecting a range of -9.5% to -10.1 for FY17
projecting -2.9% to zero for FY18
sales tax to growth by 2.9% to 3.9 in FY17 and 3.5 to 6% in FY18
baseline growth in corporate and business tax project to range 3.7 to 4% in FY17 and 3.5-4% in FY18

Spilka: with tax revenue fluxuating, do we have any idea why some of this is happening in an economy by all indictions doing well?
does decrease in sales tax have to do with online sales
Nunnelly: it's a long-term trend in online sales; looking to capture more; real issue at the federal level
had a rather sudden drop (in growth), late cycle of recover
nearly 20% drop in global financial markets last years
uncertainty builds up over presidential economy
"can't completely bake in those recoveries into the numbers"
"not heroic in our expectations"
Lepore: why FY18 we'll hit the income tax trigger
Nunnelly: show a baseline growth in the tax receipts
"much more normalized" this year
"think it will go back to that pattern"
Dempsey: project that to be $83M?
net 2.6%, but seeing a reduction on what is projected
corporate numbers are very very impressive
what are indicators?
Nunnelly; corporate notorious very hard to predict
"incredibly volatile"
Q: more in FY18 than in FY17?
"That's one of the only categories that's up over fiscal 17"
A:think that with the recovery and consumer confidence will drive recovery in sales
"still have a positive growth rate in doesn't take much for that to drop"
Q: what we're losing in online sales?
Q: are we losing population?
A:"don't have in front of me, but it's growing"
"outmigration and inmigration is very hard to track"
"Boston metro is one of the wealthiest income areas in the country after DC and San Francisco"
"income tax does actually growth faster than population"
Q: capital gains still projected to be down
A: notoriously hard to predict, people have to decide to buy or sell
something of a correlation with financial markets and real estate markets
Q: do you consider demographics, aging population
A: not best to respond to that question

Treasurer Goldberg
Michael Sweeney, Mass State Lottery
Joe Connarton, Jim Lamenzo, both Public Employment Retirement Commission

Goldberg: reminds that 1% of sales tax goes to rebuilding school building
"buy local and buy a lot"
"how important it is to address our stabilization fund in FY18"
continued structural imbalance and and reduction to our reserves may result in consequences in the not-too-distant future
"I take that risk very seriously"
"must work together collectively in a way that will best serve Massachusetts"
"progressively replenish our reserves now"
pension fund: in top 15% of peers with return of 2.3% in last fiscal year
"conservative but prudent steps acting realistically given our unfunded liability"
recommend state maintain commitment to continuing the annual contribution of 10%
believe pension fund is positioned well from a risk perspective
will require disciplined fiscal management and prudent investment standards
"those recond numbers come by a very thin margin" on lottery
73.41% returned as prize payouts
close to $300M earned in commissions and bonuses
spent $102.7M on admin cost, "which continues to be the lowest ratio of any lottery in the country"
instant tickets are experiencing a slump; could be down as much as 2% this year
difficult winter could make numbers even worse
"let's focus on making the lottery more appealing to millennials"
file a bill to make smartphone lottery
lottery most profitable and efficient in the country
Alcoholic Beverages Control Commission: generated $7.4M
commission anticipates collecting $4.3M on a budget of $2.34M
"will require additional resources if we want to continue supporting local communities"
would like to comment on recreational marijuana: have regulatory agency in place by March
don't expect industry to get underway until midway through FY18
request for qualification issued to project an electronic tracking and licensing system
concerned about 3.75% tax rate
expects to need additional funding to carry out oversight
Spilka: assumed rate of return in line with other states, what is goal on long term rate of return and how is that factored in
Goldberg: hope to reduce the assumed long-term rate of return
"we feel we're in a good place right now"
"staying the course is the right route to go" right now
Spilka: any insights what will be done in assumed rate of return moving forward?
Goldberg: have been greater volatility  this fall "than we've seen in a very long term"
have to find where the growth is and rebalance our portfolio
"everyone out in the investment world is looking to have a very conservative approach for what our returns will be"
Lepore: related agencies looking for in a budget?
Goldberg: S&P do not want to see any more spending from our stabilization fund
reduced returns, reducing from 10% to 7% is very concerning, "not only to me, the rating agencies, it's very concerning to them"
Dempsey: what is the hierarchy of importance with respect to bond ratings?
Goldberg: downgrade in bonds, would impact MSBA, but "it also has an intellectual effect"
previously would have said top is to transfer into stabilization fund
then less in anticipated revenues
"very focused on the stabilization fund" but now have shifted over to look at unfunded liability
"need to show progressive steps in the right direction"
Q: any idea how much new agency managing recreational marijuana will cost?
A: trying to find a way, other than borrowing from stabilization fund, to fund
will know a great deal more after RFQ comes in
do know that 75 licenses per category don't generate very much for funding
not until the retail is up will we see real revenue
Q: early retirement on pensions?
A: don't have final numbers but but believe it's a small enough number that I don't believe it will impact liability on that
Q on agency for marijuana
A: thinking as a very strong agency for oversight
cites excise tax in Washington state
somewhere between 3.75% and where the states that are making money are
Q: pension liability from early retirement from a year and a half ago?
Goldberg: was a provision to match impact in pension fund with transfers
"always hard to predict"
her staff says "not meaningful related to early retirement"
Q: what was the size of the transfer?
A: $230M, annual payment of $29.1M
in the net, small gain
need to transfer $28M a year for ten or twelve years to cover

Mass Taxpayers: Eileen McAnneny, Andy Bagley, and David Tuerck
McAnneny: projects 2.65% increase in FY18 in revenue
"extending trend of slow tax collection growth for another year"
tax revenues fell below benchmark in second half of 2016; revised downward twice over year
"suggesting that state tax revenues will growth at a rate substantially higher than was experienced over past 11 months"
"headwinds" against otherwise positive economic signs
two troubling trends
November numbers continue the softening revenue trend
declining number of population 16-64
international migration has averaged by over 10,0000, more than offsetting the thousand so people who have left the state each year
Trump campaign "made many promises and fewer details" thus making it much more difficult to predict
repeal of the Affordable Care Act would have an impact
changing Medicaid to a block grant program
immigration program
protectionist trade policies
even boosting economy to 4% could have substantial impact
"very little slack in our economy as it stands"
could drive inflation, push Federal Reserve to raise rates
be mindful of global changes; intensived around Brexit, some concern about Italy withdrawing from EU or spark an economic crisis
China's economy is slowing and debt-fueled growth
"many external forces at play"
Spilka: "wow"
Q: policy or legislatively to increase fiscal strength?
A: "supporting repeal of the film tax credit"
Q: any other tax credits that you would say the same thing about
A: a higher gas tax with money dedicated to transportation
"have to get our arms around the non-discretionary spending"
"other ways we can reduce the costs" lists school building assistance, "or really across the board"
markets have shown growth at levels the US economy has not

Tuerck: predicting 4.5% for FY17 and 5.2% over FY18
based entirely on historical revenue numbers
"assess reasonableness and context"
"haven't heard anything by encouraging news in the Trump plan"
"hopeful the other aspects of the Trump deregulation plan will help the economy as well"
think Trump will try to retaliate against Mexico ...and give it up as fruitless"
"will remove the burden of the Affordable Care Act on smaller businesses...and back tracking on clean power plants" will get electrical rates down

Professor Clayton-Matthews, NE University
Professor Michael Goodman, UMass Dartmouth
Clayton-Matthews: If Beacon Hill is the Papa Bear forecast, and MassTaxpayers is the Mama Bear forecasts "mine's got to be the baby bear forecast"
4.1% increase for FY17, 3.7% in FY18
forecasts of economic indicators are from Sept. 2016
fiscal year averages of real GDP are expected to be 2% for both upcoming years
employment 1.4% in FY17 and 1% in FY18
consumer spending less food and energy is expected to be up 1.7% in FY17 and 1.8% in Fy18
payroll employment is expected to grow 1.9% and 1.2% for the state
slowdown in employment growth related to baby boomer retirements
"predominately downside risk to predominately upside risk" on WSJ monthly survey
Goodman: broader economic context and to highlight some of the risks
Note that Goodman's full remarks can be found here. 
overall performance in the state continues to mask overall imbalances across the state
encouraging signs in rising tide lifting other boats
areas of the state that were lagging moving
consumer spending growth has slowed, but somewhat due to slowing auto purchasing (which was higher than usual last year) and weak stock market in previous year
sluggish productivity growth and structure of state population (relatively few young people joining work force)
weak global economy, largest threat to to the state economy
"weaker than expected growth in the US through October"
can't expect to maintain steady economic growth" in fact of weak global economy
risks have become more pronounced
"stated policies of incoming Trump/Pence administration" of concern
Commonwealth's electricity rates

"urban K-12 achievement gap"
troubling gaps in zoning laws and regulations: impact on housing and work force and affortable housing
"meeting Commonwealth's transportation needs"
"only become costlier to address the longer we wait to deal with them"
"the cost of inaction is rising"
cost is already being paid by citizens
"pennywise and pound foolish"
"price of inaction is high and it is rising"
"world-renowned education economy" depends on federal government for grants
state expects "our disproportionate fair share" of these grants
university "have essentially been the engine of the Massachusetts innovation economy"
federal reimbursement rates on Medicaid to decline over decade
House has voted to repeal over 60 times
candidate for Health Secretary "arguably biggest opponent to ACA in the House and that's saying something"
Spilka: what can be done?
A: investments in the state both in human capital and infrastructure
need to keep our highly educated workforce
and that is also key to reducing income inequality
"And that requires more revenue, because we have a structural deficit"
moving here "drawn by the quality of our public schools"
Goodman: Foundation Budget Review Commission ID spending less than constitutionally required, leaving state vulnerable to another lawsuit that sparked ed reform in the 90's
Spilka: hope that we do take a look at the Foundation Budget Review Commission this year
Goodman: look at tax rate on marijuana, but there is a black market that current exists
talks about his car hitting a pothole and needing to replace the tire: people are paying already
"trains don't run on time through management improvements"
cost benefit analysis on film credit: "return investment on is very poor"
Q: about alternative energy automobiles
A: diminishing returns over time
Q: sales tax revenue projection
A: slow steady trend, forecast takes into account
assumption that slow is temporary and will go back to normal levels
online sales trend has been increasing over time
Q: suspect you weren't here in 1993, but as we look at substantial new investment in education, what was it like?
A: not sure...substantial new investment
Dempsey: were able to do just about everything back in the 90's
A: we did raise taxes in that recession to 5.95%
"one of the lessons from that is if you make those investments, you can have payoffs"
Q on baby boomers aging
A; not being replaced by equal numbers of young people, exerting a drag on the labor force
below the employment rates we were before the recession for young people and for white males
still is room for growth, "a couple percent points for jobs is a lot"
Goodman: insufficient numbers of high school graduates with insufficient skills for what they need
"a substantial amount of slack"
would require significant training and effort; not a good fit with where they fit and what they need to be able to do
and end

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