April Revenue Collapse Swings State Budget Into Red

Admin Still Bullish On Tax Relief, May Tap $1.7 Bil Escrow Fund

MAY 3, 2023…..The sudden thud of collapsing state tax revenues echoed through the halls of Beacon Hill on Wednesday, inverting a projected surplus of hundreds of millions of dollars into a shortfall nearly as large and reshaping debate about government spending and tax relief plans.

Massachusetts collected $4.782 billion in taxes in April, a drop of $2.163 billion or 31.2 percent from the same month a year earlier and $1.435 billion or 23.1 percent below the most recent monthly benchmark projection, the Department of Revenue announced Wednesday.

With only two months remaining in fiscal year 2023, the Healey administration said the state so far has collected $703 million less than budget chiefs first forecast Massachusetts would have hauled in by this point. Through March — just one month earlier in the cycle — revenues were running roughly $870 million above the original benchmark pace.

“That’s a pretty substantial shortfall, and it really does change the tax trajectory for the fiscal year,” said Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University. “I don’t think it imperils state spending or the solvency of the current fiscal year, but I do think it means there’s not going to be a lot of money to play around with at the end of the year. It really does tighten the rings of this fiscal year.”

The announcement prompted reassessment of Gov. Maura Healey and the House’s tax relief plans as well as the financial footing of the fiscal year 2024 state budget bill due to emerge in the Senate this month.

Healey administration budget experts signaled they do not believe they will need to execute emergency 9C budget cuts nor adjust their spending and tax relief plans for next year.

An administration official who agreed to speak only on background said the executive branch can tap into a $1.7 billion “transitional escrow” account, largely built using federal pandemic relief funds and unspent surplus dollars from previous years, to bandage any gap. Other money will likely be available from reversions when state agencies do not spend their full annual appropriations.

Capital gains tax revenues above a certain threshold also get automatically deposited into the state’s “rainy day” long-term stabilization fund, rather than the general fund, so lackluster performance on that front will not necessarily carry a one-to-one impact on the budget.

For now, the official said, the administration is not looking to draw down money from the rainy day fund, which House Democrats said had a balance of more than $7 billion in mid-March.

Difficult decisions about reining in spending might be unfamiliar to some elected officials on Beacon Hill. Gov. Charlie Baker cut $98 million from the budget in 2016, early in his first term, and those kinds of deliberations largely vanished in subsequent years, especially when the state recently posted blistering revenue collection numbers.

“We remain confident in our ability to work with our partners in the Legislature to adjust and utilize available resources to manage the budget and close the fiscal year in balance,” Administration and Finance Secretary Matthew Gorzkowicz said in a statement.

The Raise Up Massachusetts coalition, which led the successful campaign to impose a surtax on high earners, said the latest revenue report should serve as a “red light” to senators who could soon roll out their response to the House’s tax relief bill.

“If we give away hundreds of millions of dollars each year in new tax breaks for the ultra-rich and large corporations, we won’t be able to make the investments in housing, childcare, and transportation that are needed to make Massachusetts truly affordable, equitable, and competitive,” the coalition said in an unsigned statement.

Paul Craney, a spokesperson for the right-leaning Massachusetts Fiscal Alliance, instead blamed the shortfall on the income surtax on wealthy households that voters approved last year after top Democrats supported it.

“While April’s DOR numbers are showing signs of an economic downturn, don’t let legislative leaders fool you into thinking the minor tax relief bill they are working on should be the first on the chopping block,” Craney said. “The House just passed a bloated $56.2B budget full of earmarks and pet projects. There are some people on Beacon Hill that will try to use this data to tell Massachusetts taxpayers that they just don’t have the money for tax relief now, but it’s only through significant tax cuts and eliminations that will keep people here.”

The House’s $56.2 billion fiscal year 2024 budget approved last week is built on the assumption that Massachusetts will collect $41.4 billion in tax revenue next year — the same “consensus revenue” figure that the Healey administration does not plan to change — as well as the initial impacts from a tax relief bill whose eventual size could grow to $1.1 billion annually.

Senate Democrats are expected to roll out and then approve their own budget bill this month, and they have avoided committing to a specific timeline for a response to the House’s tax relief proposal.

Through April, the Department of Revenue collected about $32.317 billion in taxes, $2.174 billion or 6.3 less than the same span in FY22 — a year that produced such a sizable surplus state government had to provide nearly $3 billion in rebates to taxpayers.

The year-to-date haul is $703 million less than the original forecast, $1.17 billion below an updated projection produced partway through the cycle, and $841 million less than the most recent year-to-date benchmark when accounting for the net impact of a pass-through entity excise.

The administration attributed the precipitous drop to a pair of factors: capital gains tax collections fell below expectations, and more members of pass-through entities claimed credits owed to them that reduced their tax obligations.

Budget analysts inside state government and at independent organizations had said for months those two sources of revenue could drag, but most expected the slowdown to stretch over a longer period rather than be concentrated so potently in April.

Massachusetts Taxpayers Foundation President Doug Howgate said the consensus revenue estimate crafted by legislative and administration budget chiefs assumed the impacts from a capital gains slowdown and PTE credits would be “staggered over ’23 and ’24.”

“The number is jarring, but I’m not sure ‘surprising’ is the right word. The reason I say that is when we spoke about revenue projections back in January, we and others highlighted two big known risks: cap gains and the pass-through entity excise,” Howgate said. “The question was less if, but rather when we’d see them affect revenues.”

Other sources of state revenue fared comparably well in April, like withholding taxes ($13 million or 0.9 percent below benchmark, $75 million or 5.8 percent above April 2022) and sales taxes ($17 million or 2.3 percent above benchmark, $22 million or 3 percent above April 2022).

The administration official said the volume of PTE credits claimed in April could also reduce the state’s exposure going forward. Those credits are offered to entities who paid a voluntary excise tax, but last year, many eligible taxpayers did not tap into them, leaving about $1.4 billion unclaimed and contributing to a fiscal year 2022 budget surplus, the official said.

Howgate agreed with the administration that the April revenue figures do not warrant a significant revision to fiscal year 2024 revenue projections or budget proposals. The assumptions for next year, he said, “were predicated on this kind of activity.”

“If you ask me what I’m most panicked about right now, I would put ahead of this that we reached our debt ceiling [at the federal level],” he said. “If that happens, all bets are off.”

Legislative leaders largely voiced confidence in the state’s fiscal standing in response to Wednesday’s report.

Senate Ways and Means Committee Chair Sen. Michael Rodrigues, his chamber’s point-person on budget and tax matters, said senators have “deliberately been cautious” in their approach.

House Speaker Ron Mariano and House Ways and Means Committee Chair Rep. Aaron Michlewitz put out a joint statement pointing to past efforts to bulk up savings and committing to continued funding for state programs.