Massachusetts tax revenue came in far below expectations in April, destabilizing the already precariously balanced $39 billion state budget and raising the specter of additional cuts to government services.
So far this fiscal year, the state has brought in $462 million, or 2.2 percent, less tax money than expected, according to figures released Wednesday by the state Department of Revenue. In other words, authorized spending is on track to exceed actual revenue by almost half a billion dollars.
And since the fiscal year runs from July through June, Governor Charlie Baker could have a big hole to fill in a short period of time to ensure a balanced budget.
Baker budget officials said they will work with state agencies to figure out a way to bridge the gap. In past budget crunches, the administration has moved money from different accounts and held off on purchases, contracts, and bills due until the next fiscal year.
But such a large gap could also portend unilateral budget cuts, particularly if May and June revenues also fail to meet expectations.
The poor revenue numbers are also likely to ripple into the next fiscal year, constraining spending.
The Department of Revenue reported that tax revenue for April was 7.8 percent below what was expected and is less than what the state brought last April.
Revenue Commissioner Michael J. Heffernan said in a statement that it is “unlikely” the state will meet its yearly revenue target. April is usually the biggest month for tax collections.
The state budget includes funding for services ranging from health care for the poor and disabled to pensions to law enforcement, education, environmental protection, and aid for cities and towns.
Each year, the budget is built on an informed guess in January of how much money will come into state coffers from July through June of the next year. The Legislature and governor take testimony from expert economists and agree on a revenue number. But the reality doesn’t always match the estimate.
In the fiscal year that ended in June of 2016, state tax revenue grew by just under 2 percent. Still, policy makers were optimistic and predicted that state tax revenue would grow by 4.3 percent this fiscal year.
After some bad fiscal news, they downgraded that number to 3.8 percent. And then, in late 2016, Baker made emergency cuts that presumed a growth rate of 3.1 percent. But through April, year-to-date tax revenues are up just 1.1 percent.
Baker’s budget chief, Kristen Lepore, said in a statement that “April’s revenues are part of a long recovery period of modest revenue growth that the entire nation is experiencing, and while we are seeing positive revenue growth for the year (1.1 percent), it is not the level of growth that economists projected or upon which we based our budget assumptions.”
Administration officials emphasized that after the Legislature passed the current budget, Baker, a Republican, vetoed about $265 million in spending. Democratic lawmakers restored $231 million of those vetoes. And then, in December 2016, Baker used his unilateral budget-cutting power to slice $95 million in executive branch spending.
Cuts early in the fiscal year are easier to make because they are spread out over many months. But making cuts this close to the end of the fiscal year, on June 30, is much harder.
Eileen McAnneny, president of the business-backed Massachusetts Taxpayers Foundation, said closing the gap “will be incredibly difficult to do with so little time left in the fiscal year” and given that policy makers have put tapping the state’s emergency, or rainy day, fund effectively off limits.
She said the implications for the next fiscal year are equally problematic. That budget assumes an almost 4 percent growth in revenue, “an assumption that now appears increasingly unrealistic and makes it likely that lawmakers will once again need to strip hundreds of millions of dollars from the budget during negotiations.”
While many indicators show an economy humming along — a buoyant stock market, cranes on the Boston horizon, millions of people at work — the revenue figures come on the heels of other yellow flags. A report released last week found the Massachusetts economy contracted “modestly” in the first quarter of this year. And the state has seen an uptick in the unemployment rate in recent months.
Within the tax revenue data, signals for the broader economy were mixed. Withholding taxes — taken out of people’s paychecks — were on par with expectations and, fiscal-year-to-date, about 4 percent higher than this point in 2016, a good sign.
But weaker-than-expected sales tax revenue could be a bad sign.
Still, there may be other factors at play. Some Massachusetts residents could be putting off transactions that will incur a tax until next year, when the Republican-controlled Congress may have lowered rates.
“The April revenue numbers are troubling,” said Noah Berger, who has followed the state budget for years and is president of the liberal-leaning Massachusetts Budget and Policy Center.
“It is unclear, however, if they indicate a trend or a temporary problem,” he continued. “The income tax withholding numbers, which reflect current income, are pretty good. Revenue from 2016 tax returns, which reflects income last year, is down significantly.”
There are other factors at play, too.
In an e-mail to state employees on April 25, Baker outlined his take on “modest” revenue growth.
“Despite the rise in employment, personal income growth overall has been modest over the course of the past few years. This is probably due to a number of factors, but two seem pretty clear — many people are not working as many hours as they were before the recession of 2009-2010, and wages overall have shown modest growth,” the governor wrote.
In addition, Baker continued, the price of taxable goods have remained, more or less, flat, leading to little growth in sales tax revenue.