The good times, it seems, are ending.
After years of sometimes record-breaking budget surpluses, state tax revenue plummeted in April, falling nearly $2.2 billion below what the state collected in that month a year ago and leaving Massachusetts running — by one measure — $700 million below projections for the year to date.
Lawmakers and budget officials have long braced for a slowdown, but the extent of the drop for April, typically the strongest month, caught some on Beacon Hill by surprise. Collections fell more than $1.6 billion short of what officials originally projected for the month, according to data released Wednesday, and quickly cratered what had been an overachieving revenue picture.
The state had closed March with $868 million more in revenue than it originally anticipated. The reversal in fortunes last month now opens the possibility that the state may need to tap a roughly $1.7 billion escrow account it built using surplus money from a year ago to close any potential gap in the $52 billion budget.
Legislative leaders, budget officials, and others who’ve embraced plans for wide-ranging tax relief this year cautioned that the sky isn’t falling. Governor Maura Healey’s budget office said that despite the drop, it doesn’t believe it will have to make any painful emergency cuts to balance spending this year, and House leaders said they’ve long “anticipated and prepared for potential revenue declines.”
Matt Gorzkowicz, Healey’s budget secretary, said officials were already planning for more modest tax growth, with tightened budgets in the years ahead.
“I don’t think we’re going to enjoy surpluses and certainly some of the revenues that we’ve seen over the last couple of years,” he said.
The sobering news landed at a key time in the budget cycle, and reinvigorated a debate over what the state can afford. The House in recent weeks passed both a $56.2 billion budget plan for next year, and a tax relief bill that, ultimately, could cost the state $1.1 billion a year. The package mirrors many aspects of Healey’s own plan.
The Senate is now expected in the coming weeks to craft its own spending and tax plans. As the budget season proceeds, it remains to be seen whether the new revenue picture will give policy makers pause about pursuing a wide-ranging relief package that has been a hallmark of Healey’s early agenda.
In a joint statement, House Speaker Ronald Mariano and the chamber’s budget chief, Representative Aaron Michlewitz, said they’ve relied on “prudent budgeting” and will monitor revenue figures in the months ahead to “ensure the sustained health of the Massachusetts economy.”
Senator Michael J. Rodrigues, the chamber’s budget chairman, said in a statement that the Senate, too, has been girding for a drop in revenues. But he did not address what impact, if any, it could have on the Senate’s tax plans.
“We remain confident that, by working closely with our partners in the House and the administration, we will advance a balanced and strong fiscal year 2024 budget and maintain the long-term fiscal health of our Commonwealth,” the Westport Democrat said.
But progressive groups that have railed against aspects of the tax relief proposals, including plans to slash the capital gains tax rate, seized on the figures. The Raise Up Massachusetts coalition, which successfully pushed a ballot question last year raising taxes on the wealthiest, said in a statement that lawmakers should reconsider the tax cuts, should the state face budget shortfalls in the future.
“Senators should treat this report as a red light,” the group said.
Others cautioned not to read too far into the figures. Jim Rooney, president of the Greater Boston Chamber of Commerce, said they shouldn’t “warrant the sounding of an alarm,” given the state’s flush coffers in recent years. Doug Howgate, president of the Massachusetts Taxpayers Foundation, a business-backed budget watchdog, said that while jarring, the numbers aren’t surprising given that some pots of revenue were never going to sustain the peaks of years past.
“Today’s revenue collections doesn’t change the underlying need for sensible tax relief,” Howgate said.
The state had originally projected collecting about $6.39 billion in April, before actually taking in $4.78 billion.
The sudden drop appears driven by two main factors, budget officials said: The state collected less in capital gains revenue than projected, and more members of pass-through entities collected their share of $1.4 billion in available credits than anticipated.
The state in 2021 adopted a change in law enabling the pass-through entities — such as partnerships or certain limited liability companies — to avoid the federal cap on state and local taxes paid by allowing them to pay income tax on members’ behalf. But for every dollar the company paid in so-called PTE excise taxes, the pass-through business owners are then entitled to 90 cents of credits against their personal income tax.
That members are now collecting credits is just one factor, said Evan Horowitz, the executive director of the Center for State Policy Analysis at Tufts University. Pass-through entities also likely saw a decline in profits, which impacts what they pay in taxes, he said.
“It’s the first month that all the weirdness of COVID was flushed out of the tax system,” Horowitz said. The revenue drop, he added, is a “reminder that the unusual times we’ve been living through were quite unusual.”
Other revenue buckets, including from sales and meals tax or collections from corporations, were relatively in line with projections, officials said, leaving them confident that those and other indicators of a potential economic downturn are still holding steady.
Healey’s budget office cautioned that the current shortfall may not fall entirely on the state budget.
Excess capital gains revenues, for example, are required to flow into the emergency savings account, known as the rainy day fund. If capital gains collections — typically a volatile source to begin with — are ultimately a primary culprit for the decline in revenue this year, that could mean the rainy day fund gets less, but the budget could still be in balance.
Gorzkowicz said the April revenue collections also don’t change the administration’s belief that the state can afford to pursue a potential $1 billion tax relief plan, noting that the likely reasons behind the revenue drop were “known exposures.”
”Our tax package and the reason why the governor filed it is still very much a relevant issue, which is affordability and competitiveness. We think that’s still important,” he said.
The situation, nevertheless, is a reversal from past years. The state ended last fiscal year with a nearly $5 billion surplus, and revenues were so strong, the state triggered a then-little-known 1980s-era law that was intended to limit tax revenue growth to the growth of total wages and salaries.
It ultimately meant the state sent taxpayers their share of a $3 billion refund last fall, a development that played into lawmakers’ decision not to pursue a tax relief plan then, elements of which had been a signature of then-governor Charlie Baker’s final-year agenda.