Pandemic relief, federal funds, and surges of economic activity in state and local government have had a large impact on revenue growth.

Given the limited options for local revenue and the constraints on increases in property taxes, however, there is a need for state aid to cover some of the inflationary pressures on local budgets.

Overview

Massachusetts and its localities have received a significant infusion of funds from the federal government since the start of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security Act of 2020 provided immediate, one-time relief for sudden expenses incurred by state agencies, municipalities, and school districts.¹⁷⁴ In 2021, the American Rescue Plan Act provided approximately $8.7 billion to the Commonwealth and its municipalities, which increased opportunities for state and local governments to expend funds for various projects for a number of years.¹⁷⁵

After ending FY 2020 with a $693 million budget gap due to the COVID-19 pandemic,¹⁷⁶ the Commonwealth began generating revenue at a rate higher than anticipated at the beginning of FY 2021. By the end of FY 2021, the state had generated an unprecedented $5 billion in revenue above benchmark, leaving the state with a significant surplus.¹⁷⁷ FY 2022 will be the second consecutive year with significantly higher tax receipts than anticipated by the consensus estimate, as the state generated $6.65 billion in revenues above benchmark.¹⁷⁸ Much of this excess will be allocated to categories required by law, such as the state’s stabilization (or “rainy day”) fund to guard against future fluctuations in revenues, and the remaining balance can be used by the Legislature to fund programs and incentives. For example, the state’s $5 billion surplus in FY 2021 whittled down to approximately $2 billion after these required transfers and offsets, and the FY 2022 surplus was similarly cut down to $5.33 billion.¹⁷⁹ In addition, the available FY 2022 surplus will significantly decrease as a result of the Auditor’s Chapter 62F determination that the growth in revenues exceeded wage and salary growth.¹⁸⁰

At the same time, municipal governments in Massachusetts experienced some security from their own surpluses. Free cash data from FY 2021 and FY 2022 reveal that certifications across communities increased by over $383 million—a 20% increase.¹⁸¹ At least 279 communities increased free cash certifications during this time to help offset future expenditure increases.¹⁸² Given the limited options for local revenue and the constraints on increases in property taxes, however, there is a need for state aid to cover some of the inflationary pressures on local budgets. This report has identified critical commitments, such as the rollout of the SOA and the broad categories of transportation reimbursements

174. Wagman, N. (2021, March 25). Where’s the relief? The distribution of federal funding in Massachusetts. Massachusetts Budget & Policy Center. https://massbudget.org/2021/03/25/wheres-the-relief-the-distribution-of-federal-funding-in-massachusetts/

175. Commonwealth of Massachusetts. (2022). Coronavirus state and local fiscal recovery funds. https://www.mass.gov/coronavirus-state-and-local-fiscal-recovery-funds.

176. Schoenberg, S. (2020, September 30). “Massachusetts ends fiscal 2020 with $700 million budget hole.” Commonwealth Magazine. https://commonwealthmagazine.org/state-government/massachusetts-ends-fiscal-2020-with-700-million-budget-hole/

177. Massachusetts Department of Revenue. (2021, August 3). “FY21 Revenue Collections Total $34.137 Billion.” https://www.mass.gov/news/fy21-revenue-collections-total-34137-billion.

178. Stout, M. (2022, August 5). “Massachusetts has a nearly $5 billion surplus. Now what?” Boston Globe. https://www.bostonglobe.com/2022/08/05/metro/massachusetts-has-nearly-5-billion-surplus-now-what/?s_campaign=8315/; Massachusetts Department of Revenue. (2022, August 4). “Fiscal Year 2022 Revenue Collections Total $41.105 Billion.” https://www.mass.gov/news/fiscal-year-2022-revenue-collections-total-41105-billion; Massachusetts Taxpayers Foundation. (2022, September 29). MTF Brief – Update on the FY 2022 Fiscal Picture. https://www.masstaxpayers.org/sites/default/files/publications/2022-09/MTF%20Bulletin%20FY%202022%20Fiscal%20Picture.pdf

179. Massachusetts Taxpayer Foundation. (2021, October 21). MTF Bulletin – The FY 2021 surplus and fiscal recovery funds. https://www.masstaxpayers.org/fy-2021-surplus-and-fiscal-recovery-funds; Massachusetts Taxpayers Foundation. (2022, September 29). MTF Brief – Update on the FY 2022 Fiscal Picture. https://www.masstaxpayers.org/sites/default/files/publications/2022-09/MTF%20Bulletin%20FY%202022%20Fiscal%20Picture.pdf

180. Mohl, B. (2022, July 27). “Long-forgotten tax cap about to be triggered.” Commonwealth Magazine. https://commonwealthmagazine.org/state-government/long-forgotten-tax-cap-about-to-be-triggered/; Massachusetts Office of the State Auditor. (2022, September 15). Determination of whether net state tax revenues exceeded allowable state tax revenues. https://www.mass.gov/doc/determination-of-whether-net-state-tax-revenues-exceeded-allowable-state-tax-revenues-fiscal-year-2022/download

181. Massachusetts Department of Revenue, Division of Local Services. (2022, August 15). Category 1 - Free Cash as a % of Budget. https://dlsgateway.dor.state.ma.us/reports/rdPage.aspx?rdReport=Dashboard.Cat_1_Reports.CertifiedFreeCashBudget351

182. Id.