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THE GENERAL COURT Senate and House Committees on Ways & Means Revenue Hearing Thursday, October 8, 2009 1:00 pm Gardner Auditorium ‘© Navjeet Bal, Commissioner, Department of Revenue & Howard Merkowitz, Director, Office of Tax Policy, Department of Revenue ‘+ Michael Widmer, President, Massachusetts Taxpayers Foundation + Dr. David Tuerck, Chairman, Suffolk University Department of Economics and Executive Director ofthe Beacon Hill Insitute & Paul Bachman, Director of Research, Beacon Hill Institute ‘* Dr. Alan Clayton Matthews, Northeastern University * Yolanda Kodrzycki, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston xs %, 8 cas Massachusetts 7 5 Tax Revenue Forecasts for nee FY 2010 and FY 2011 The Beacon Hill Institute at Suffolk University 8 Ashburton Place, Boston, MA. 02108, www beaconhill org 617-573-8750 October 8, 2008 ‘The Beacon Hill Institute at Suffolk University is pleased offer its revised revenue forecast for FY 2010 and FY 2011 at today’s Updated Consensus Revenue Hearing.’ We divide our report {nto three sections, in which we provide (1) our latest forecast, (2) background information on the national and state economies and (3) a summary of the methodology used to provide our forecast (@) Current Forecast BEI predicts that tax revenues will be: + $18.55 billion in FY 2010, an increase of 1.6% from FY 2009, and + $19,211 billion in FY 2011, an increase of 36% from FY 2010. Both forecasts are updates of forecasts we provided in May 2009. The FY 2010 forecast offered. here represents a decrease from the estimate provided at that time ($18,987 billion)? ‘The FY 2011 forecast is new. "The staff ofthe Beacon Hl Institute at Suffolk University, including Paul Bachman, Frank Conte and David G. Tuerck, assisted inthe preparation ofthis report at the cequest ofthe Senate Commitee Chairman. * Beacon Hl Institute at Suffolk University, “Massachusetts Tax Revenue Forecasts for FY 2099 and FY 2010," (May 2008) hp: www beaconhilLorg/RevenseForecastsBHURF2009- AOREV/BHIMAF orecetFY2010-050509fnal pa "its test Ta Ree oat FY 210 9nd FTO TO Te Peete @) Background on the National and State Economies ‘The US. Economy. The US. ecoromy showed signs of stabilizing after the deep plunge in late calendar year 2008 and early 200, when real GDP dropped 6.3% in the final quarter of 2008 and 6.4% in the first quarter of 2009 In a revision announced recently, the Bureau of Economic ‘Analysis (BEA) reported that second quarter real GDP declined by only 0.7% from the prior quarter. Nonresidential and residential investment, exports and the inventory components of “BP -experienced-smaiier decreases tharrin-the-priorquarters-while goverrmentrspending at all levels increased during the quarter. These improvements were offset by a recovery in {imports and a continued drop in consumer spending, ‘The labor market has continued to shed jobs, although at a slowing rate, In just the second quarter of 2009, the US. labor market lot over 1.3 million obs. This is on top of the two million jobs lost in the first quarter ané the three million in all of 2008. The unemployment rate continued to inch higher, from 85% in March 2009 to 9.8% in September 2009 and is likely to rise to over 10% by the end of the year. Despite improvements in other economic indicators, labor suffers from weak demand. Employers are clearly looking for stronger signals of recovery before adding to their workforce, If job growth were to return a recovery could be sustained. But this takes time. In the past two recessions, the labor market continued to lose jobs even after economic growth turned positive Most conventional analyses indicate that this trend will continue when the current recession tums to recovery. However, given the depth and speed of the job loses, a smaller upturn in ‘demand in the current recession will produce stronger employment growth than in the past ‘The housing and financial markets continue to show improvement. The Case/Shiller 20 City Home Price Index fell by 13.3% in the year to July 2009, with all 20 metro areas recording a slowing of the rate of decline from June 20095 Furthermore, the 20 city index increased 2.0% since May with 15 of 20 cities regstering an increase over the May 2008 period. The first-time hhome-buyers tax credit continues to help boost demand in the housing market* Private 'US. Department of Commeres, Burau of Bonomle Analysis, "News Relene: Grote Dometic Product (GDP) and Corporate Profits” htp/www-bea gov/newsreleass/nationalgdp/gdpnewsreleare htm accessed October 7,208) ‘US. Department of Labor, Bureau of Labor Statistics, “The Employment Situation: September 2008," hupswww.ble gov'news.zleaelempsitreOhim (accessed October 7, 2008). $ The McGraw-Hill Companies; Standard and Poor S&PCase Shiler Home Price Indices, Release 04284 pa accessed October 3, 2009) {Davi Souitela "Wher Home Fics Cah ny, Siu ofa Rebound” New York Tiny May (accessed May 5,209). @ re tnt ha meas