Governor Patrick's recent decision to restore $41 million of the October 9C cuts due to the recent spate of good news on the revenue front may prove to be a rush to judgment. Presently, year to date tax revenue collections are $230 million over the revised FY10 benchmark of $18.279 billion. But more than half of these funds are attributed to one-time corporate settlement money ($120 million). The receipt of $110 million over projections halfway through the fiscal year – following the worst economic downturn since the Great Depression – is nothing to get excited over. Furthermore, had we not revised the FY10 benchmark in October, the state would currently be $85 million below projected year to date tax revenues.
Fiscal year 2009, which recently ended only six months ago, was one of the worst time periods for tax revenue collections. Income tax collections declined 15.2%, corporate and business taxes went down 17.6%, financial institution tax intake declined 55.7%, and capital gains spiraled downward by an incredible 75%. Over $3 billion in tax revenue was lost. When combined with exposures, the total amount of solutions (i.e. Stabilization Fund draws, Federal Stimulus, and cuts) needed to close the gap for FY09 was nearly $4 billion. Despite the Governor’s recent claim that the “economy is recovering,” it is far too early to be reversing recently implemented fiscal solutions in light of a few decent months for revenues. What’s more, the strength of the income tax relies largely on the amount of people employed – the more people working, the more people paying income tax. As of November, the state’s unemployment rate is stubbornly lingering at 8.8%. Unsurprisingly, the unemployment rate is expected to average 9.1% to 10% for FY11.
More importantly, Governor Patrick's decision is based on a small rise over projections. When collected revenues are compared to actual collections from the previous fiscal year, the current collections fall below the already-weakened revenues from the prior period. For instance, even though year to date revenues are $230 million above projections, they are actually $348M below the same period in
FY09. Keep in mind the state lost over $3 billion in tax revenue in FY09. When observed from this perspective, the economy is hardly in a recovery phase.
Prudence dictates we should not increase the FY10 revenue benchmark by any increment, nor should we reverse any solutions to fill the projected $600 million revenue gap that was just recognized only three months ago. Continuing to abide by the revised benchmark seems to be the best course of action for now. Besides, since the Stabilization Fund lost over 70% of its contents in just one fiscal year (2009), the state has much to make up for when the economy slowly makes its way back – very slowly.