Beacon Hill Insider Looks into Crystal Ball for 2023

Left as a loose end from the chaotic and then delayed end of serious lawmaking this session, tax policy is poised to reemerge as a major focal point when the next governor and Legislature get to work early next year. But the next head of an influential advocacy group on Wednesday ran through a litany of other things he will be keeping his eyes on come January, including a looming change for MassHealth, a fresh look at workforce development and a government reorganization.

Doug Howgate, a longtime Beacon Hill fixture who will move up into the president's job at the Massachusetts Taxpayers Foundation in the new year, held court with Rasky Partners for an hour Wednesday to assess where state policy and finances stand and where they could be headed under Gov.-elect Maura Healey and an even more Democrat-dominated Legislature.

"We're winding down this session and we're headed into what will be a really fascinating legislative session here in Massachusetts, a lot of changes, a lot of stuff going on," Howgate said. "I think we thought this would be a good opportunity to kind of orient folks to where we're at fiscally, but then also kind of maybe do a little bit of prognostication, and informed speculation about what things might mean for a couple key policy areas we work on a great deal."

One area that Howgate said is "primed for action" in the new session is health care policy, a topic where the two branches of the Legislature have landed on different pages in recent years.

"Last session, you had the Senate do a major drug cost bill that the House never took up, and you had the House do a major hospital expansion oversight bill that the Senate never took up," he said. Howgate added, "And so do you continue to see these separate legislative tracks for these kind of more targeted bills, or is there a return to the kind of health care omnibus bills for that we did from say 2006 to 2018 that can end up pretty unwieldy but can also strike these kind of grand bargains across areas."

On the health care front, state budget writers will need to keep an eye on MassHealth. The state's Medicaid program is one of the largest drivers of spending in the state budget, though Howgate said it has not been the same kind of "budget buster" in recent years even as enrollment has climbed 30 percent while eligibility redeterminations have been paused. But whenever the federal public health emergency around COVID-19 ends, the enhanced federal reimbursements that Massachusetts has benefited from will "stop on a dime" while trimming enrollment through redeterminations will take some time.

"It's gonna take a year to redetermine 2.3 million people, right, and so you're gonna have this real mismatch between the finances of MassHealth related to the public health emergency and some of the cost side in terms of the members," Howgate said.

Howgate also said he will also be on the lookout for a possible Article 87 government reorganization plan from the Healey administration. The governor-elect has already announced plans to split the Executive Office of Housing and Economic Development into two Cabinet posts, but a reorganization could also include a new safety oversight structure for the MBTA and other transportation services, he said.

"That's something you see new administrations do oftentimes. I think you could see it in labor," Howgate said, referring to the Executive Office of Labor and Workforce Development. "Here's the challenge, right, is one, they may want to do it to break housing out of economic development. You could see them doing something on the MBTA safety side. And so kind of how many do you do at the same time?"

Howgate said that figuring out how the state can better coordinate the various workforce development programs it has strewn across industries and regions is "one thing that the Baker administration has been focused on, and the Healey administration absolutely needs to focus."

"Right now the budget has like 26 workforce programs governed by 12 different agencies, right? That's not going to work if we need to really upskill and train hundreds of thousands of people," he said, keying off of the findings of a Baker administration report that estimated the state needs to retrain 30,000 to 40,000 employees per year to keep up with evolving demand and needs.

Tax policy will surely be on the table in the new session. The House and Senate had each unanimously approved slightly different changes to the state's estate tax and had agreed to provide $500 million in tax rebates to middle-income taxpayers, but abandoned those plans when the final economic development bill was passed earlier this month. Healey, who supports the tax reform plan that Gov. Charlie Baker proposed this year, has consistently called on the Legislature to finish the work they started.

Coloring all policy discussions -- but especially tax policy discussions -- is the fact that Massachusetts has experienced "two and a half years now of absolutely unprecedented revenue growth," Howgate said, allowing lawmakers to boost state reserves to their highest level ever and avoid the kinds of painful budget decisions that many predicted as the pandemic first took hold. State tax revenues grew so much -- essentially a decade's worth of growth in just two years, Howgate said -- that many taxpayers are getting a slice of $3 billion that the state had to refund.

"For all of us who read the news and deal with existential dread about where the world is going from time to time, there are some worrying signs on the horizon, right, about the economy and what that means for Massachusetts," Howgate said Wednesday. "So preparing for the good times kind of coming to an end or at least slowing down, I think, absolutely makes sense. And I think that all leads to some fascinating questions around tax policy and what's going to happen in the next couple years. Obviously, we saw the vote on the income surtax last week. We also had a major tax relief package that had enjoyed broad consensus earlier this year but didn't become law. So a lot of interesting discussions around tax policy."

During his hour-long chat with Rasky Partners, Howgate ran through practically all aspects of state government and policy. Here's a sampling of his insights on other topics:

• Income Surtax: "We've got this income tax surtax, but keep in mind that goes into the Constitution, right, that does not amend the General Laws. And as you're implementing a tax policy, you probably want the General Laws to reflect what you're doing -- who collects it, how does it interact with other tax policies? And so will you see legislation to effectuate the income tax surtax ... and then if you do, what does that legislation look like? ... does it address some of the issues that I think gained some traction during the election cycle in terms of, geez, how do we treat home sales? How do we treat the sale of a small business? How do we treat some of these cases that maybe cause some concerning ramifications for the plan?"

  "It's effective January 1 ... but because of the timing on collections, I don't think you're likely to see full revenues fully materialized until 2025, which is a real policy challenge, right? Because I think one of the things we've been focused on is what are going to be the behavioral aspects of this in terms of certainly tax avoidance, potentially, but also in terms of people relocating. And because we know there's going to be a pretty significant lag between when the final returns for that first tax year are going to come in, it's going to be hard to assess how much of those location decisions and how much of a kind of a negative drag on the economy this has. There's going to be kind of a pretty significant waiting game there."

• Federal Funds: "Let's assume that we enter 2023 with significant federal dollars remaining. What's the plan for spending that? The pattern for the last couple years has been really to wait until the end of the year and do a large supplemental budget that uses federal dollars. The timing on that gets, starts to get, a little tough. We need to obligate all federal dollars by the end of 2024 and just the nature of setting up or expanding some of these programs means that you start to really run up against the clock. And so could you see a more collapsed timeframe, more consistent with the budget process, for spending any remaining fiscal recovery fund dollars?"

  "Close to $8 billion in spending on ARPA, COVID relief stuff over the last two years. How much of that spending is actually going to happen as anticipated? And how much of it are we going to end up saying, 'You know what, we appropriated $200 million for new program X, we're not going to spend anywhere near $200 million, what do we do with the money we thought we were going to spend?' And I think you're gonna see more conversations of that coming up in the future as well."

• In-State Tuition Retention: "One of the kind of major new policy areas you saw develop in the final [economic development] bill that wasn't in an earlier iteration was in-state tuition retention for state universities and community colleges. So basically, right now, if you pay tuition to Mount Wachusett Community College, that tuition payment actually goes to the state's General Fund and then there's an appropriation to the college. What that has meant over the last 20 years is community colleges and state universities focus much more on fees and not on tuition. So you end up with this goofy thing where tuition is low, but fees are super high. The governor vetoed the sections that would have allowed community colleges to keep -- and state universities -- to keep tuition like UMass. ... What he said was, 'Listen, I'm not averse to this proposal, but we should do this in the context of the budget because then it's a little more thoughtful.' And so I think on public higher ed, that's clearly going to be an issue of the day heading into the first six months of next year."
• Municipal Government Finances: "Just because the state has a banner tax collection year, that doesn't necessarily mean the local communities have banner revenue collection years. And in fact, because municipalities collect the vast majority of their revenue through property taxes, which is constrained by the state's prop two and a half law, their revenues aren't built to have windfall years, and the good news is they're also not built to have kind of catastrophic years. It's a pretty predictable source of revenue. But what that has meant is that the state has had significant resources that they can deploy to implementing the Student Opportunity Act or maybe some one-time capital investments. Municipalities really haven't had that same level of local revenue growth to do that. And so the fiscal pressures at some of the local levels can be much more acute than what we're seeing at the state level right now."