I feel stupid. I’ve predicted huge State government layoffs based on declining tax revenues. That’s not going to happen in 2020. I didn’t realize Massachusetts taxes unemployment benefits. Some would call this double taxation. A Massachusetts worker’s employer pays UI tax into the fund at around 0.8% of total wages and when the worker takes it back it’s taxed again at around 5%. (I also believe MA taxes the Federal Stimulus payments).
What will happen when there is no more money to tax from the 400,000-800,000 people out of work in MA? The ever-changing lower tax estimates from the State (below) belie the Governor’s assurance that the State can afford its current payroll.
States report their revenues to the Census Department. Unfortunately, the Fed-to-State funding from the CARES Act has thrown a monkey wrench into the Census’ standardized reporting. Nonetheless, some interesting observations. For example, one can see that tax revenues from “amusements” dropped from $42 million to $0.3 million in the 2nd Quarter of 2020! You can check any State here at a new site I’m developing, Rate52.com
Back in August, I modelled future continued claims based on a 26-week life of benefits (assuming worker didn’t get a new job in those 6 months). An extension program, PEUC, was instituted, but I’m not sure how many people qualified. The data suggests not many.
The gray line is my August projection. The orange line is what the actual continued claims have been from January through November, (four months additional data, after I ran the model). The model was designed to predict continued claims in the autumn. In that I feel it’s done well. The blue line calculates continued claims assuming extended benefits. I feel more confident in predicting that without further government funding, most people laid off during the pandemic will run out of income by March, 2021. The data also suggests that contrary to DOL survey data (which sparse in my opinion) the labor market is not improving.
Another factor I overlooked in past calculations is that current workers are paying into the system and that money can go straight to those receiving benefits. That continuous funding explains why Massachusetts is no longer borrowing from the Fed at a high rate. Or maybe there is another reason.
What I love about the State borrowing from the Treasury is that it represents hard data, real money payments to the unemployed.
The Massachusetts Department of Unemployment Assistance expects to end the year owing the U.S. Treasury (UST) $2.4 billion. It projects owing $4.8 billion in 2021. That would imply MA borrowing around $175 million a month. So why $54 million in November? Not sure what’s going on.
All States seem to show the abrupt fall-off in borrowing. Either they are using money from the CARES act to pay claims or continued claims are shrinking at the near exponential rate my model indicates.
Looking at State UI alone, let’s assume that $400 million a month was paid to residents who lost their jobs and that it was a little bit less than half their pay. Let’s estimate that there is around $1 billion a month of wages no longer being paid from the pandemic. That would add up to $50 million a month in lost payroll tax revenue of 5% to the State. MA predicts more, so let’s work with another statistic.
Before the pandemic, MA had around $500 billion in total wages. That works out to $2 billion a month at a 5% income tax. That’s too high. Wage income taxes are about 60%, so let’s say $1.3 billion. A loss of 10% would be $130 million a month. Again, hard to figure out because Massachusetts doesn’t work to make it easy to understand.
So the good news is that MA can afford for all the people who lost their jobs during the pandemic to stay unemployed for a few years. MA has over $3 billion in its “Rainy Day Fund”
The bad news is no one knows their economic multiplier when it comes to paying rent, mortgages and keeping other people in business.
No one seems to be sure what comes next. The most recent MA cash flow report, from October 28th, 2020 is confusing.
How is FY 2021 “Tax Revenue” going to come in at $33.3 billion, almost $4 billion more than the $29.3 billion in 2020!?
The Massachusetts is trying to catch the proverbial falling knife. Just 3 months ago, when compared against the FY 2021 cash flow of June 8th, 2020 estimated “Tax Revenue”, shows MA estimates have declined to $33.3 billion from $36.2 billion. The whole amount of the Stabilization Fund!
The cash flow letters from Treasurer Deborah B. Goldberg make for interesting reading:
The pandemic seems to have cost MA around $700 million in lost 2020 tax revenues. Because of tax extensions and other financial complexities of the pandemic, that has been lost in the Boston media.
She goes on:
Where is that $27.592 number? It doesn’t exactly match the cash flow report. Anyway, she points out that tax revenues are expected to be almost 12% less in 2021 and that they’ll need to pull money from the Stabilization Fund but it doesn’t need to be reflected in the cash flow report. I’m not an accountant, but I feel it should be footnoted at least.
Another footnote missing is what happened to the $1.7 billion credit line the State set up with a commercial bank disclosed in the June 8th report? Did MA borrow it all, or nothing, or something in between?