Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016

Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 The Beacon Hill Institute at Suffolk University 8 Ashburton Place, Boston, MA 02108 www.beaconhill.org 617 573 8750 bhi@beaconhill.org January 22, 2015 The Beacon Hill Institute is pleased to offer its revenue forecast for Fiscal Year (FY) 2015 and FY 2016 for the annual Consensus Revenue Hearing. 1 We divide our report into three sections, in which we provide (1) a summary of our latest forecast, (2) background information on the national and state economies and (3) a summary of the methodology used to provide our forecast. (1) Current Forecast BHI predicts that tax revenues will be: $24,512 billion in FY 2015, 4.9% over FY 2014, and $25,801 billion in FY 2016, 5.3% over FY 2015. The 4.9% increase for FY 2015 and the 5.3% increase in FY 2016 are largely driven by a stronger recovery in the growth of state personal income. The New England Economic Partnership projects state personal income to increase by 5.8% and 6.3% in Calendar Year (CY) 2015 and 2016, respectively. 2 1 Prepared by the staff of the Beacon Hill Institute at Suffolk University, including Paul Bachman, Frank Conte and David G. Tuerck. The authors would like to thank BHI Fall 2014 and Spring 2015 interns Lucas Bavaro (Dartmouth College, Class of 2017), Sereyreach Cha (Suffolk University, Class of 2015), Audrey Davis (Brown University, Class of 2014), and Pedro Jardim (Tufts University, Class of 2014) for their assistance. 2 New England Economic Partnership, Fall 2014 Massachusetts Economic Outlook, Fall 2014 Forecast: Summary Tables. Available upon request. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 1 of 12

(2) Background on the National and State Economies The U.S. Economy Real U.S. Gross Domestic Product (GDP) grew by 5% in the third quarter of 2014, according to the final estimate by the Bureau of Economic Analysis. 3 In the second quarter, growth finished at a revised 4.6%. Average GDP growth for all of 2013 was finalized at 1.9%. Growth remains slightly below the 3.3% annualized postwar average and is considered by some economists to be still underperforming. 4 Most economic signs are positive, however. In 2014, consumer confidence, as tracked by Bloomberg, rose to its highest level in seven years. The December reading put consumer confidence at its highest level since October 2007, before the recession hit. 5 Gallup s U.S. Economic Confidence Index has shown improvement as well and is at its highest level since it began tracking confidence in 2008. 6 A driving force in this index is Americans positive outlook on the economy. Forty five percent of Americans believe that this is a good time to find a quality job; the last time they felt this way was May 2007. 7 Also, confidence as measured by Reuters University of Michigan reached a near eight year high. 8 The fall in energy prices is a positive shock to the national economy. The Organization for Economic Cooperation and Development (OECD) is predicting 3.1% growth in 2015 and 3% in 2016 for the United States. Europe is expected to trail the United States yet again. The OECD expects growth in the Euro zone to rise to only 1.1% in 2015 and 1.7% in 2016. 9 As we did last year at this time, we expect U.S. growth to follow a new normal path below the previous normal of about 3% annually. The Wall Street Journal Economic Forecasting Survey for January 2015 estimates that the economy will grow by only 2.9% in calendar year 2015 and 2.8% in calendar year 2016. The 52 economists surveyed predict growth in the range of 3.7% on the high end and 2% on 3 U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product: Third Quarter 2014, (December 23, 2014). http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. 4 Christopher Condon, ʺGreenspan Throws a Wet Blanket on Hopes for Growth Breakout,ʺ Bloomberg, December 30, 2014, http://www.bloomberg.com/news/2014 12 30/greenspan throws a wet blanket on hopes for u sgrowth breakout.html. 5 Nina Glinski, ʺAmerican Consumer Comfort in 2014 Was Strongest in Seven Years.ʺ Bloomberg, (December 31, 2014). http://www.bloomberg.com/news/2014 12 31/american consumer comfort in 2014 was strongest in sevenyears.html. 6 Justin McCarthy, ʺU.S. Economic Confidence Index Continues Upward Trek Gallup. January 13, 2015. http://www.gallup.com/poll/180908/economic confidence index continues upwardtrek.aspx?utm_source=alert&utm_medium=email&utm_content=heading&utm_campaign=syndication 7 Frank Newport, ʺAmericans Become More Positive About Jobs in January,ʺ Gallup, January 12, 2015. http://www.gallup.com/poll/180905/americans become positive jobsjanuary.aspx?utm_source=alert&utm_medium=email&utm_content=heading&utm_campaign=syndication 8 Mark Makela. ʺU.S. Consumer Sentiment at Eight year High.ʺ Reuters. Thomson Reuters, 12 Dec. 2014. http://www.reuters.com/article/2014/12/12/us usa economy sentiment iduskbn0jq1jq20141212 9 Ibid. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 2 of 12

the low end for 2015. 10 Meanwhile, The Economist poll of forecasters predicts that U.S. GDP growth will fall within the range of 2% and 2.3% for 2014 and 2.2% and 3.5% for 2015. 11 The U.S. employment situation is improving but the labor force participation rate remains a problem. The December 2014 unemployment rate declined to 5.6%, as the number of unemployed persons decreased 383,000 to a total of 8.7 million. The number of long term unemployed (without a job for 27 weeks or more) was little changed, at 2.8 million. These individuals accounted for 31.9% of the unemployed. The civilian labor force participation rate for December dropped to 62.7%. The labor force participation remains at forty year lows. Not all of the decline in labor force participation during the Great Recession can be explained by demographic shifts. The number of persons employed part time was at 6.8 million in December, and the number of persons who were only marginally attached to the workforce was 2.3 million. 12 The economists surveyed by the Wall Street Journal see unemployment in June 2015 at 5.4%. 13 Corporate profits increased $64.5 billion in the third quarter compared to $164.1 billion in the second quarter but were up 8.4% and 3.1% over the same quarters in the previous year. 14 Auto sales are up 5.9% from last year, and there is an expected rise in sales this year due to low fuel prices. 15 On an annual basis, productivity is up by 2.3%, in the third quarter of 2014. Also, manufacturing productivity increased 2.9% in the third quarter. 16 The Standard & Poor/Case Shiller Home Price Indices, the leading measure of the U.S. housing market, showed that home prices slightly declined, with eight cities showing gains. The index recorded a 4.6% annual gain in October 2014 versus a 4.8% gain in September 2014. 17 The National Index reported a 0.2% in October 2014 while the Composite Index was 0.1%. An estimated 1,032,900 housing units were authorized by building permits in 2014. This is 4.2% above the 2013 figure of 990,800, according to the latest release from the U.S. Census Bureau. 18 In November 10 The Wall Street Journal, Economic Forecasting Survey, (January 2015). http://projects.wsj.com/econforecast/ r=5&ind=gdp. 11 The Economist poll of forecasters, November averages (November 8, 2014). http://www.economist.com/news/economic and financial indicators/21631054 economist poll forecastersnovember averages. 12 Bureau of Labor Statistics, Employment Situation Summary: December 2014. http://www.bls.gov/news.release/empsit.nr0.htm. 13 The Wall Street Journal, ʺEconomic Forecasting Survey,ʺ (January 2015). http://projects.wsj.com/econforecast/ r=20&ind=unemp. 14 BEA, (December 23, 2014). http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. 15 Mike Ramsey and Mike Spector. ʺU.S. Auto Sales Surge in December.ʺ Wall Street Journal, January 5, 2015 http://www.wsj.com/articles/nissan u s sales rise 6 9 in december capping record year 1420457354. 16 Bureau of Labor Statistics, Third Quarter 2014, Revised, (December 3, 2014). http://www.bls.gov/news.release/prod2.nr0.htm. 17 S&P/Case Shiller Home Price Indices, Pace Eases While Eight Cities Show Faster Gains, (December 30, 2014). http://www.housingviews.com/wp content/uploads/2014/12/cshomeprice_release_oct2014 results.pdf. 18 U.S. Census Bureau News, New Residential Construction in December 2014. (January 21,, 2015). http://www.census.gov/construction/nrc/pdf/newresconst.pdf. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 3 of 12

total existing home sales fell 6.1%. However, the National Association of Realtors reports that sales are up 2.1% from November 2013. 19 Consumer spending continues to rise. Retail and food services sales increased 3.2% since December 2013. 20 Households are carrying low debt service ratios. 21 Consumer prices are especially tame; prices fell by 0.4% (seasonally adjusted) in December 2014. 22 However, according to the National Retail Federation, Black Friday spending dropped 11% from 2013. 23 Consumer spending during the Black Friday weekend fell to $50.9 billion from $57.4 billion in 2013. According to the Rockefeller Institute of Government, total state revenues decreased by 1.2% in the second quarter of 2014 but are expected to be stronger in the third quarter. Overall collections showed growth of 1.8% for fiscal year 2014 compared to fiscal year 2013, with sales taxes growing by 4.1% and personal income tax collections decreasing by 6.6% in the second quarter. The Rockefeller Institute noted that states have regained most of the nominal revenues lost during the Great Recession but the stronger growth trend is not a sure thing going forward. 24 Forward looking market indices trended upward in 2014. For 2014, the Dow Jones Index is up 7.5% and the S&P is up 11.4%. 25 Meanwhile, the tech heavy NASDAQ is up 13.4%. 26 The mix of loose monetary policy and tighter fiscal policy has set the United States and the United Kingdom apart from the Eurozone and Japan. The failure to extend unemployment benefits to the long term unemployed, the budget sequester, the fiscal cliff and the lack of early infrastructure spending have had little impact on growth. Market economies do find their way back to the GDP trend eventually. Thus, the warnings about austerity have clearly missed the point. Deficit reduction, rather than liberal spending, has helped contribute to current economic growth. Those who predicted an oncoming recession based on crude aggregate demand management and low public spending have been proved wrong. 27 The unemployment rate and the deficit are down and GDP is expanding. The Federal Reserve has made every indication that it will begin raising rates in 2015. But history 19 National Association of Realtors, Existing Home Sales Lose Momentum in November as Inventory Slightly Tightens, (December 22, 2014). http://www.realtor.org/news releases/2014/12/existing home sales losemomentum in november as inventory slightly tightens. 20 U.S. Census Bureau News, Advance Monthly Sales for Retail and Food Services, (January 14, 2015). http://www.census.gov/retail/marts/www/marts_current.pdf. 21 The Federal Reserve Board, ʺHousehold Debt Service and Financial Obligations Ratio,ʺ (December 29, 2014). http://www.federalreserve.gov/releases/housedebt/default.htm. 22 U.S. Census Bureau, Consumer Price Index December 2014, (January 16, 2015). http://www.bls.gov/news.release/pdf/cpi.pdf. 23 Lauren Coleman Lochner, ʺBlack Friday Fizzles With Consumers as Sales Tumble 11%.ʺ Bloomberg, (December 1, 2014). http://www.bloomberg.com/news/2014 11 30/u s consumers reduce spending by 11 over thanksgivingweekend.html. 24 Lucy Dadayan and Donald J. Boyd, Personal Income Tax Revenues Decline for the Second Consecutive Quarter,ʺ Rockefeller Institute of Government, (November 2014). http://www.rockinst.org/pdf/government_finance/state_revenue_report/2014 11 05 SRR_97.pdf. 25 Calculations based on Stock Performance Guide. Yearly Stock Returns Index, 1Stock1, http://www.1stock1.com/1stock1_140.htm. 26 Ibid. 27 Jeffrey Sachs, ʺPaul Krugman and the Obama Recovery, Project Syndicate, (January 5, 2015). http://www.project syndicate.org/commentary/krugman budget deficit support by jeffrey d sachs 2015 01. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 4 of 12

suggests that the central bank will be patient. It is all a question of timing as to whether the Fed wants to act on information dominated by the poor employee wage growth. James Bullard, President of the St. Louis Fed, thinks any action in 2015 tests conventional monetary policy. A liftoff date at the end of the first quarter of 2015 would already be well past what is called for by a standard monetary policy rule. 28 The Fed, in a survey of its own members, suggests that their best estimate of the long run change in GDP is no more than 3.2%. 29 The Fed sees unemployment at 4.9% likely in 2016. The Massachusetts Economy Emerging, as it is, out of the Great Recession in better shape than most states, the Massachusetts economy is expected to gain momentum from CY 2014 through CY 2016. In its most recent forecast, the New England Economic Partnership (NEEP) suggests a healthy return to stronger growth trends: 4.6% (FY2014); 5.8% (FY2015) and 6.3% (FY2015). 30 The size of Massachusetts s economy, measured by nominal GDP, is more than $450 billion. 31 Based on final results for 2013 (the latest available), the Massachusetts economy grew by 1.6%, according to the Bureau of Economic Analysis. Massachusetts was ranked the 28 th best state for 2013 growth. GDP State figures for 2011 and 2012 were revised upward 1.7% and 2.2% respectively. 32 The contributions of the Massachusetts real estate, rental and leasing sector contributed.52 points of 1.6 percentage point change in real GDP. Professional, scientific and technical services contributed.35 percentage points. Meanwhile transportation and warehousing, educational services, information and other services excluding government were all negative. Massachusetts growth trails both well performing resource rich states such as Texas (3.7%) and other high tech states such as California (2.0%). In November 2014, the Massachusetts unemployment rate was 5.8%, the same as the national rate that same month. 33 The Education and Health Services (+18,100 jobs) and the Profession and Business Services (+13,000 jobs) sectors saw the most gains since November 2013. There was also a combined gain of 2,000 jobs during the same period for federal, state and local government jobs. In another positive note, the state s labor force increased in November with more than 80,300 workers added above November 2013 levels. The state s labor force stands at 3.56 million. 28 James Bullard President and CEO, Federal Reserve Bank of St. Louis, ʺThe FOMC: Ahead on Results, Behind on Rates,ʺ October 2, 2014, Presentation in Tupelo, Mississippi. http://research.stlouisfed.org/econ/bullard/pdf/bullard Tupelo MS 2 October 2014 Final.pdf. 29 Federal Reserve Bank, Economic projections and the target federal funds rate projections made by Federal Reserve Board members and Federal Reserve Bank presidents for the September 17 18 meeting of the Federal Open Market Committee, (September 17, 2014). http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.pdf. 30 New England Economic Partnership, Fall 2014, Economic Outlook, http://www.neepecon.org. 31 BEA, http://tinyurl.com/knep34d. 32 Bureau of Economic Analysis, ʺWidespread Economic Growth in 2013: Advance 2012 and Revised 2009 2011 GDP by State Statistics,ʺ (June 6, 2013). http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm. See also http://www.beaconhill.org/economicindicatorsproject/2014 0611BHI DataPoint StateGDP.pdf. 33 U.S. Bureau of Labor Statistics, ʺMassachusetts Economy at a Glance.ʺ January 9. 2015, http://www.bls.gov/eag/eag.ma.htm. See also http://lmi2.detma.org/lmi/news_release_state.asp. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 5 of 12

Manpower Group, the research arm of the renowned recruitment company, found that Massachusetts employers are more optimistic than they were last year. 34 Although they intend to hire more employees, firms surveyed were less optimistic about first quarter 2015 employment compared to fourth quarter 2014. Still, approximately 75% expect to maintain their current staff levels. This sentiment is also reflected in the most recent Beige Book from the Federal Reserve Bank. 35 The trend is positive, generally. According to the Jobs Calculator at the Federal Reserve Bank of Atlanta, the Bay State needs another 14 months of adding a monthly average of 4,420 to get down to 5.4% unemployment (the 20 year average). 36 Sustaining and expanding high tech jobs, given the sector s high wages, should be a priority. High tech employment comprises roughly 10% of all private sector employment in the Bay State. Between 2001 and 2013, Massachusetts high tech industries lost over 33,000 jobs. Supplementing BLS data used in a Massachusetts study, BHI found that high tech employment in the state declined by 10.4% between 2001 and 2013. 37 Out of the 11 industries that make up the high tech sector, four have shown positive growth from 2001 to 2013. On the other hand, scientific research has expanded by 51.7% since 2001, adding 17,233 jobs. The pharmaceuticals industry has expanded by 15.0% or 1,528 jobs. More modest gains of 14.8% and 7.1% were seen in computer systems design and software publishing, respectively. The manufacturing industries within the high tech sector continue to lose jobs, with a total of 42,189 jobs lost between 2001 and 2013 in the computer equipment, communications equipment, semiconductor, and electronic instrument manufacturing sub sectors. The high tech sector in Massachusetts should be greatly helped by the repeal of the so called Medical Devices Tax, enacted as part of the Affordable Care Act. Congress is considering repealing the tax this year. Medical device manufacturing is a $9.5 billion industry in the Bay State comprising 2.5% of the state s GDP. 38 Trade remains important to the Bay State economy and passage of Trade Promotion Authority by Congress would expand markets. In 2013, consumers in 210 countries bought over $25 billion in goods and $22 billion in services from local companies. 39 Massachusetts ranked 16th in the United States in 2013 and first in New England with $26.8 billion in exports. 40 The rate for Massachusetts. which was 4.6% exceeded the U.S. rate of 2.1%. 34 Manpower Group, ʺHealthy Job Market Expected for Massachusetts, Manpower US Pressroom,ʺ December 9, 2014, http://press.manpower.com/reports/2014/healthy job market expected for massachusetts 3/ 35 Board of Governors of the Federal Reserve System, ʺBeige Book,ʺ (January 14, 2015). http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201501.htm. 36 BHI calculation based on Federal Reserve Bank of Atlanta Jobs Calculator available at http://tinyurl.com/k7zml95. 37 Numbers reflect BHI updated calculations for 2013. See Bureau of Labor Statistics, Regional Report, High Tech Industries in Massachusetts: Employment and Wage Trends during the 2001 to 2009 period, (November 2011), http://www.bls.gov/opub/regional_reports/mass_hightech/201111_mass_hightech.pdf. 38 Carey Goldberg, What s All This Federal Fuss Over An Obscure Medical Device Tax? WBUR 90.9FM, http://commonhealth.wbur.org/2013/09/medical device tax repeal. 39 Frank Conte, Bay State benefits from foreign trade, Boston Herald, June 19, 2014. http://www.bostonherald.com/news_opinion/opinion/op_ed/2014/06/conte_bay_state_benefits_from_foreign_tra de. 40 Massachusetts Benchmarks. Due Diligence, FY 2015, First Quarter, http://www.massbenchmarks.org/statedata/data/duediligence.pdf. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 6 of 12

The Massachusetts housing picture brightened in the past year. The Boston component of the Case Shiller 20 City Composite Index rose by 4.36% in October 2014 over October 2013. 41 Massachusetts continues to rank high (#1) in the Institute s measure of competitiveness and the forthcoming update of the ranking appears to show that the Bay State will remain on top. 42 With its diverse industrial sectors, the Commonwealth continues to be a leader in high tech, education and finance. However, preliminary results for the forthcoming index show that Massachusetts declined slightly in the Government and Fiscal Policy Sub Index from 28 th to 33 rd. The decline in commodity prices for energy may yet take a toll on natural resource endowed states such as Texas and North Dakota. But both are in better positions than in the past to cushion the blow expected by lower state tax revenues. Whether a great reversal of fortune as seen in the 1980s and 1990s, where Massachusetts thrived and Texas struggled, will reappear is uncertain. 43 Meanwhile, Massachusetts consumers are benefiting from lower gasoline and home heating oil prices. However, they are failing to take advantage of the lower natural gas prices found in other states because of severe supply distribution constraints in New England. New England business respondents to the Federal Reserve s Beige Book survey project a positive outlook for 2015. 44 Future state tax policy appears to be predictably stable with no major rate increases planned. Demographics continue to be favorable, with most of the state s in migration due to international arrivals. 41 See Case Shiller, http://us.spindices.com/indices/real estate/sp case shiller 20 city composite home price index. 42 Beacon Hill Institute at Suffolk University, State Competitiveness Report (13), (March 2014). http://www.beaconhill.org/compete12/bhicompetepr 2013 0320NAT.pdf. 43 A cursory look at past trends might offer some insight. When energy prices fell during the 1980s, Massachusettsʹ unemployment rate was significantly lower than that of Texas. In 1986, Texasʹ rate skyrocketed to 9.3%, the highest ever recorded for Texas, while in miraculous Massachusetts the rate was 4.0%. Upon arrival of the 1990 recession, Massachusettsʹ unemployment soared above Texas by nearly 2%. Oil seems to matter less in the 21 st century. After the recession started in 2007, the unemployment rates of both states increased and now have begun to decline post recession. Since the 1980s, Texas has diversified its economy and its ranking on the BHI SCI has improved dramatically over the last nine years. 44 Board of Governors of the Federal Reserve System, Beige Book, Boston. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 7 of 12

Methodology The Department of Revenue indicates that tax law changes will reduce revenue collections for a variety of taxes. According to DOR, the tax law changes will reduce revenue by $4.5 million in FY 2015 and $176 million in FY 2016. However, the largest portion comes from tax changes enacted in previous years, which we include is already included in the data set. However, we do include tax changes that were enacted for FY 2014 and FY 2015 and anticipated in FY 2016, including the personal income tax rate cuts, the gasoline tax increase and other smaller tax changes. As a result of these adjustments, we increase our estimates by $59 million FY 2015 and do not change our estimates for the new tax law changes for FY 2016. Table 1 Economic Forecasts for Massachusetts, 2014 through 2016 Actual Actual Actual Actual Actual Actual Forecast Forecast Forecast US economy CY (calendar year) 2008 2009 2010 2011 2012 2013 2014 2015 2016 Personal income ($ billion) 12,430 12,088 12,429 13,202 13,888 14,167 14,859 15,602 16,382 % change per.annum (p.a.) 0.7 2.8 2.8 6.2 5.2 2.0 4.9 5.0 5.0 Employment (millions) 143.4 138.0 139.3 140.9 143.3 144.7 147.4 150.4 153.4 % change p.a. (0.6) (3.7) 0.9 1.1 1.7 1.0 1.9 2.0 2.0 Unemployment rate, % 5.8 9.3 9.7 8.5 7.9 6.7 5.6 5.3 5.1 Massachusetts (calendar year end) 1 Real Gross State Product 336 327 341 358 372 381 399 422 448 % change p.a. 1.9 2.6% 4.3 5.0 3.9 2.5 4.6 5.8 6.3 Real Personal income ($ billion) 308 296 302 344 351 356 366 379 394 % change p.a. 3.3 3.8% 1.8 14.0 2.0 1.3 2.8 3.5 4.2 Employment (ʹ000) 3,291 3,180 3,190 3,257 3,310 3,358 3,409 3,461 3,521 % change p.a. 0.3 3.4% 0.3 2.1 1.6 1.5 1.5 1.5 1.7 Unemployment rate, % 5.4 8.2 8.3 7.3 6.8 7.1 6.0 5.8 5.7 BHI forecast, MA taxes, (fiscal year) Actual Actual Actual Actual Actual Actual Actual Forecast Forecast Personal income tax ($ million) 12,484 10,584 10,110 11,576 11,911 12,829 13,202 14,039 15,043 % change p.a. 8.8 (15.2) (4.5) 14.5 2.9 7.7 2.9 6.3 7.2 Sales Tax 4,087 3,869 4,612 4,905 5,059 5164.0 5495.8 5,779 5,972 % change p.a. 0.53 (5.3) 19.2 6.3 3.2 2.1 6.4 5.2 3.3 Corporation Excise 1,512 1,549 1,600 1,951 1,771 1821.6 2049.0 1,966 2,134 % change p.a. (15.82) 2.4 3.3 21.9 (9.2) 2.8 12.5 (4.1) 8.6 Business Excises 1,037 550 520 276 549 439 461 493 553 % change p.a. 52.3 (46.90) (5.57) (46.87) 98.71 (20.0) 5.0 6.8 12.3 Motor Fuels 673 654 655 661 662 652 732 758 775 % change p.a. (0.5) (2.8) 0.1 0.0 0.2 (1.6) 12.4 3.5 2.3 Total Taxes 20,879 18,259 18,544 20,517 21,115 22,121 23,369 24,512 25,801 % change p.a. (0.5) (12.5) 1.6 10.6 2.9 4.8 5.6 4.9 5.3 Notes: 1 From New England Economic Partnership, Fall Economic Outlook, 2014. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 8 of 12

BHI revenue forecasts assume that there will be no additional major change in Massachusetts tax policy for the forecast period, which runs through June 2016. Table 1 shows the forecasts by year and by major tax. For the first six months of FY 2015 (July 2014 through December 2014), tax revenues grew by 4.1% over the first six months of FY 2014, led by a 26.3% increase in business excise taxes, an 11.3% increase in other tax revenues (estate, room occupancy and deeds) a 4.9% increase in personal income tax revenue and a 4.7% increase in sales tax revenues. Motor fuels tax revenues saw an increase, while cigarette tax revenues decreased 3.1% and corporate income taxes fell by 3.7%. We see this trend continuing for the rest of the fiscal with sales tax revenues increasing by 5.2% and personal income tax revenues by 6.3%. Corporate income tax revenues will decrease by 4.1% and business excise taxes revenues slowing to an increase of 6.8%. For FY 2015, we expect total tax revenues to increase by 4.9% over FY 2014. For FY 2016, we forecast a 5.3% increase in tax revenues over FY 2015. Personal income tax revenues will increase by 7.2% and sales tax revenues by 3.3%. Corporate income tax revenues will rise by 8.6%, and business excise tax revenues will increase by 12.3%. Business excise taxes have experienced the most volatility in the year over year collections, and, as a result, remain the most difficult to forecast. Other tax revenues will fall by 11.3% and alcohol taxes will rise by 2.0%. Motor fuels taxes will rise 2.3%, while cigarette taxes will fall 0.9%. We prepared tax revenue forecasts for 11 categories for every month through June 2016. Three steps were needed to develop these forecasts. 1. We used projections of personal income to derive month by month growth rates of personal income, allowing us to project personal income on a monthly basis through June 2016. Information on personal income in Massachusetts is available on a quarterly basis. Monthly estimates were obtained by interpolation. 2. For each tax series, we estimated a regression equation that extrapolates from historical data to predict the future. For estimated and withheld income taxes and other taxes, we included personal income as an independent variable. We used dummy variables to pick up the effect of major changes in the tax code. 3. In estimating the regressions, we paid particular attention to the structure of the errors, in order to pick up the effects of seasonal, quarterly and monthly variations in tax collections. This was done by estimating the equations with autoregressive (AR) and moving average (MA) components. The number and nature of the AR and MA lags were determined initially by examining the autocorrelation and partial correlation coefficients in the correlogram, and then fine tuning after examining the structure of the equation residuals. The details are given in Table 2. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 9 of 12

Table 2 Revenue forecasts, disaggregated, for FY15 and FY16, including technical estimation details Income tax % change FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 AR MA Vars/Dummies Dates Estimated payments 2,602 2,759 3,013 3,063 13.8% 6.0% 9.2% 1.7% 1,2,5,12 3 PI, PIEST( 12) 79:6 13:11 Tax Withheld 10,015 10,509 11,036 11,836 2.5% 4.9% 5.0% 7.2% 13,16,24 1,12 PI 79:6 13:11 Returns & Bills 2,112 1,942 2,109 2,238 23.5% 8.0% 8.6% 6.1% 1,12 1,12 79:6 13:11 Refunds 1,900 2,008 (2,120) (2,093) 2.6% 5.7% 5.6% 1.2% 1,2,12 3,12 PI 79:6 13:11 Income Net 12,829 13,202 14,039 15,043 7.7% 2.9% 6.3% 7.2% Sales & Use taxes 5,164 5,496 5,779 5,972 2.1% 6.4% 5.2% 3.3% 1,12 1,12 C 79:6 13:11 Corporation Excise 1,822 2,049 1,966 2,134 2.8% 12.5% 4.1% 8.6% 12 1,3,12 PI 79:6 13:11 Business Excises 439 461 493 553 20.0% 5.0% 6.8% 12.3% 3,24 3,12 C 79:6 13:11 Alcohol Beverages 76 78 80 81 0.3% 1.9% 2.7% 2.0% 1,3,12 1,12 PI 79:6 13:11 Cigarettes 440 521 519 514 2.4% 18.3% 0.4% 0.9% 1,24 1, 12 83:7, 93:1, 96:10, 02:8, 08:7 79:6 13:11 Motor Fuels 652 732 758 775 1.6% 12.4% 3.5% 2.3% 1,12 1,12,13 PI 79:6 13:11 Other taxes 699 831 819 727 10.1% 18.9% 1.4% 11.3% 1,12 3,12 PI 79:6 13:11 Effect of Tax Law Changes 59 Total Taxes 22,121 23,369 24,512 25,801 4.8% 5.6% 4.9% 5.3% Notes: AR refers to Autoregressive lags used in the regression. MA refers to Moving Average lags used in the regression. Dummies gives starting dates of each Dummy variable used (e.g. 01:1 is a dummy that is set equal to 1 from January 2001 onwards and to 0 otherwise). Dates refers to period of data used in regression estimates. (PIEST) 12 refers to the income tax estimated payments data lagged by 12 month. PI refers to Personal Income and C, a Constant variable. We directly incorporated into our estimates the cigarette and motor fuels tax increases. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 10 of 12

The left side of the table contains the revenues and the percentage increases from the previous year broken out into the individual tax categories the actual revenues for FY 2013 and FY 2014 as well as the BHI projections for FY 2015 and FY 2016. The right side of the table provides the model specification used to forecast each tax and the timeframe for each data series used in the model. 45 45 A complete breakdown of revenue forecasts by month and by the eleven tax headings is available upon request. BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 11 of 12

8 Ashburton Place Boston, Massachusetts02108 2770 phone: 617.573.8750 fax: 617.994.4279 email: bhi@beaconhill.org web site: www.beaconhill.org BHI: Massachusetts Tax Revenue Forecasts for FY 2015 and FY 2016 /January 22, 2015 Page 12 of 12