In December of 2003, The Beacon Hill Institute at Suffolk University (BHI) provided a tax revenue forecast before the Legislature’s Joint House Ways and Means Committee.

To present its forecast of revenues for the coming fiscal year, BHI economists utilized a combination of regression methods with simulations of its Massachusetts State Tax Analysis Modeling Program (STAMP®). This approach accounts for the effects of tax-rate changes on economic activity, along with information about the effects of cyclical fluctuations in the economy. Other models commonly fail to recognize the effects of tax rate changes and assume a static view of the state economy. BHI’S STAMP attempts to capture the dynamic effects of any tax changes.

As a result of taking a broader view of the state’s economy, BHI came closer than any other forecasters for predicting FY 2004 tax revenues. In December 2003, less than halfway through FY 2004, BHI predicted that the Commonwealth would receive $15.532 billion in tax revenues for the fiscal year. (See chart below.) The actual FY 2004 revenue figure came in at $15.954 billion showing that BHI’s forecast was within 2.6% of the actual amount. BHI’s estimate proved to be closer than other forecasts including those provided at the 2003 hearing by the Massachusetts Taxpayers Foundation and the Department of Revenue.

In December 2004, the Joint Ways and Means Committee once again invited BHI to appear before the legislature to offer a tax revenue forecast this time for FY 2005. The following chart nearby shows the monthly estimates of Massachusetts tax revenues made by BHI as compared to the actual preliminary tax revenues available from the Massachusetts Department of Revenue. As the chart notes, the estimates for each month vary around the actual figures; yet for the cumulative five-month total the BHI estimate remained only 2.33% below the actual tax revenues. However, forecasts remain much an art as they do a science susceptible as they are to surprises.

Recent revenues have exceeded the expectations of all forecasters. Massachusetts collected a record $2 billion in taxes during April 2005 — an amount not one forecaster anticipated. This new surge in revenue pushed the BHI five month cumulative forecast to a shortfall of $440 million or 5.7%. Barring significant tax revenue shortfalls in May and June, the institute’s FY 2005 estimate should come in below the actual tax revenue collections. However, by accounting for stronger growth in personal income than other forecasters, BHI was once again able to offer an optimistic estimate closer to actual revenues.

What accounts for the surge in revenue? Observers note that the surge may be due in part to a brief upswing in capital gains taxes — which they warn are unpredictable. Tax-cut critics argue that the recent surge is too volatile to roll back the state’s personal income tax to 5 percent. Fair enough. But this phenomenon of surging revenues hasn’t stopped the legislature from finding ways to spend the “new” cash.

page modified on 25-May-2005 1:17 PM