THE GENERALLY nonstop tax revenue growth the state has experienced for the last several years came to a halt in April, when revenue came in more than $2 billion lower than a year ago and $1.4 billion less than what the state had forecasted for the month.
The Healey administration said it should be able to manage the downturn in revenue without resorting to emergency spending cuts or paring back plans for a roughly $1 billion package of tax cuts. Legislative leaders sounded similar themes, saying they had been preparing for an eventual slowdown in revenues.
Evan Horowitz, executive director at the Center for State Policy Analysis at Tufts University, traced the downturn to over-optimistic assumptions about revenue growth.
Traditionally, Horowitz said, April as a month accounts for 12 percent of state tax revenue. Last year, largely due to unusually strong capital gains tax growth, that percentage rose to 16 percent. Horowitz said he felt the state would revert to the 12 percent pattern this year, but Beacon Hill leaders decided to go with the 16 percent estimate, which turned out to be wrong.
“This is a big shortfall. The problem isn’t the shortfall. It’s the expectations,” Horowitz said. “If nothing else, it’s a reminder that our expectations are subject to the laws of fiscal gravity.”
The state Department of Revenue said tax revenues in April totaled $4.78 billion — $2.16 billion less than a year ago and $1.43 billion, or 23 percent, less than forecasted.
It appears capital gains tax revenues came in less than expected. Wealthier residents taking advantage of a state scheme to reduce their federal tax payments also played a role. Those residents paid higher taxes in 2021 as part of a workaround to a federal tax change. Now those residents are claiming credits for their earlier payments, and pushing tax revenues down.
With just two months left in the current fiscal year, tax collections are running $2.17 billion, or 6.3 percent, behind last year’s pace and $1.17 billion, or 3.5 percent, below the forecasted amount.
Beacon Hill officials issued statements on Wednesday suggesting the shortfall won’t have a huge impact. The Healey administration said it has no plans to revisit revenue estimates for the fiscal year starting July 1 and no plans to retreat from its support for a tax relief package in the $1 billion range.
Matthew Gorzkowicz, the governor’s secretary of administration and finance, said the downturn in April revenues represented a “previously understood” exposure to declining capital gains tax revenues and rising claims of tax credits as part of the workaround to avoid paying federal taxes.
“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,” he said.
Doug Howgate, president of the Massachusetts Taxpayers Foundation, agreed that the causes of the April downturn were on the radar screens of policymakers and analysts, but their timing was unclear.
As for tax relief, Howgate said, it is sound from a policy standpoint and doable from a financial perspective over the long run.