3 things you should know about Massachusetts’ near $600M tax shortfall

Tax revenues for fiscal 2023 in Massachusetts fell short by nearly $600 million compared to original projections. The tax shortfall now puts the commonwealth’s savings account at risk for a reduction and may place the state with a budget deficit.

The state collected $39.164 billion in taxes during fiscal 2023, but that’s $2 billion less than the previous year.

Tax collections were $454 million below the original budget projections, and $605 million below the updated projection made shortly after Gov. Maura Healey took office, the Boston Globe reported.

The majority of the tax shortfall – which was nearly $593 million of the $605 million – can be attributed to lower-than-expected capital gain taxes, according to the State House News Service.

Massachusetts can only allocate a certain amount of money from capital gains taxes toward direct spending, the news service said. Any other excess amount must be placed into the state’s savings account.

The Healey administration estimates the state is nearly $39 million short, the Boston Globe reported.

But the budget gap could be increased to $177 million. The state estimates that it reaped about $240 million from the “millionaires tax” $103 million of which came from capital gain taxes.

Although the capital gain revenue from the “millionaires tax” doesn’t affect the budget’s bottom line, the remaining $138 million is still in the commonwealth’s general fund.

If lawmakers choose to keep the $138 million in the state’s general fund, the tax shortfall would remain at $39 million, the news service reported. However, if they choose to put the funds into the fiscal 2023 surtax revenue into the same account where all future surtax revenue will go, the budget gap would increase to $177 million.

House and Senate Democrats who negotiated the compromise $56 billion budget in August didn’t change their assumption of a $40.4 billion in tax revenue for fiscal 2024, State House News Service reported.

“The reality is you’re talking about revenues that came in within less than a point and a half of where we thought they were going to come in. $600 million one way or the other, to me — that doesn’t give you enough information to make a major change on a $40 billion projection,” Doug Howgate, the president of the Massachusetts Taxpayers Foundation told State House News Service.

Both the Healey administration and Howgate said they were optimistic about the state’s budget and spending for the current fiscal year.

The budget shortfall will lower deposits into Massachusetts’ emergency savings account, a retirement trust fund and pension liability fund, the Boston Globe reported.

But, the commonwealth will place $750 million into the emergency savings account, which will increase its balance to nearly $8 billion, the news agency reported. Massachusetts will also allocate $41.7 million to a trust fund for state retiree benefits and $41.7 million into its pension liability fund.

Tax collections fell sharply in April. And even though the performance was better in May and June, it was not enough to recover fully from the gap that emerged, the SHNS said.

“Despite a disappointing month for tax collections in April, tax revenue in May and June exceeded revised benchmarks and helped to shrink the gap,” said Matthew Gorzkowicz, the Administration and Finance Secretary.

Gorzkowicz further said that the state is on track to close the fiscal 2023 in balance without dipping into the emergency savings account.