The Healy administration announced Friday that tax revenues for fiscal 2023 fell nearly $500 million below initial projections, meaning the city of Beacon Hill could face a budget deficit as it puts less money into savings.
The Massachusetts Department of Revenue announced Friday that it had raised $39.164 billion in donations during the 2023 fiscal year ending June 30. That’s nearly $2 billion less than the previous year’s record revenue.
Total tax collections are $454 million or 1.1% below the original baseline used to formulate the state’s annual budget and 605 million below the latest projections the Healy administration made within weeks of taking office in January. dollar fell.
It will be the first tax shortfall since fiscal 2020, when revenue fell short of expectations by about $693 million early in the coronavirus crisis. It is also a reversal after two years of historic budget surpluses that gave elected officials billions of dollars in extra spending and savings.
But every dollar of the revenue shortfall (estimated at $39 million to $177 million, depending on how lawmakers proceed) doesn’t lead to a budget deficit.
The Healey administration said most of the slowdown, about $593 million out of $605 million by the latest standards, was related to collecting capital gains taxes. Massachusetts can only spend a certain amount of income from capital gains taxes directly each year, and “excess” collections above that level must be put into savings.
Tax revenues from the capital gains tax were lower than expected but still above the spending cap, suggesting that lower collections have impacted how much the state saves more than disrupting the FY23 budget outlook. means.
“Despite disappointing April tax collections, May and June tax revenues exceeded revised baselines, helping to narrow the gap,” said U.S. Treasury Secretary Matthew Goszkowicz. “We did,” he said, adding that the state was “on track to end fiscal 2023 in 2023.” You can secure your balance without depositing it in a “rainy day” savings account.
A Healy administration official, giving only background, estimated Friday that the tax revenue available for fiscal year 23 is about $39 million less than what lawmakers and former Gov. Charlie Baker have factored into the state’s annual budget.
The difference widens to $177 million, the official said, taking into account income from a 4% surcharge tax on household incomes above $1 million. Beginning July 1, income from voter-approved levies, which will be automatically transferred to separate accounts to fund investments in education and transportation, will be collected in fiscal year 23. Additional taxes other than capital gains that are paid are in a somewhat gray area.
Approximately $138 million (this estimate is still subject to change as some filers requested an extension to file their tax returns through October) of additional tax revenues collected in fiscal year 23 held in the General Fund of If lawmakers choose to keep the funds there, the tax revenue shortfall will be $39 million. If, instead, they chose to lump fiscal 2023 surcharge income into the same account as all future surcharge income, the difference would widen to $177 million.
The official said there are several options to close the tax gap without draining savings. Returns when departments don’t use all their allotted funds are fairly common, and other sources of income, such as commissions, can help as well.
Massachusetts still has about $1.3 billion from last year’s surplus and temporary federal pandemic relief in a “temporary escrow account,” but officials don’t need to use that money, if needed. said it might not.
Beacon Hill budgeters initially expected to collect enough excess capital gains tax revenues to contribute about $1.5 billion to the Rainy Day Stabilization Fund in fiscal year 2023.
Following the disappointing results, the state government plans to contribute $750 million to the Rainy Day Fund, bringing the balance to nearly $8 billion. Massachusetts will also pour $41.7 million into a trust fund for state retirement benefits and another $41.7 million into a pension liability fund.
Tax collections dropped significantly in April, and while performance improved in May and June, it wasn’t enough to fully recover the gap that had arisen.
DOR reported Friday that it had raised $4.137 billion in June 2023. This is about $6 million or 0.1 percent lower than June 2022 and $394 million or 10.5 percent above the most recent monthly base. After adjusting for the net impact of pass-through entity sales tax, collections in June were $9 million, or 0.2 percent lower than the same month last year, and $274 million, or 7.5 percent higher than baseline.
A representative for Gov. Maura Healy released the latest revenue figures two days after she signed into law the $56 billion fiscal 2024 budget, about 6.2 percent more spending than the budget enacted last summer.
Democrats in both houses of Congress, who negotiated a compromise budget a few weeks ago, have not changed their assumption of $40.4 billion in tax revenue this year, and it has been seven years since Congress committees neither raised nor lowered their projections. It’s been a while.
Doug Howgate, chairman of the Massachusetts Taxpayers Foundation, said he believes it “makes sense” to stick to the original revenue projections for FY24 despite the revenue shortfall in FY23.
“Actually what you’re talking about is that we’re within 1.5 points of revenue that we were expecting. For me, $600 million either way, but that’s not what you get. “We now have enough information to make a significant change to our $40 billion outlook,” Howgate said.
The administration and Howgate said Friday they remain optimistic about the state’s outlook and the room for increased spending in the 2024 budget.
“We never want to end the year below baseline, but given the range of sentiment in April, we are fundamentally better now than some expected two months ago. I think we’re in a situation,” Howgate said. .
Howgate said he did not expect policymakers to need “any extravagance to end the year on a balance note,” adding that there are other options besides taxes, such as refunds, that could help bridge the gap. He pointed out that there are other forms of revenue.
He praised Healy’s veto of Congress’ proposal to use approximately $200 million from a one-time transition escrow account as part of the FY24 budget, minimizing risk going forward. He said it was the “right approach” to keep it to a minimum.
“While we are by no means in a financially catastrophic situation, we cannot unwisely assume that we will end up with a $2 billion annual surplus,” Howgate said.