The state’s fiscal picture in January 2024 looks drastically different than it did in January 2023. There is a lot of speculation on both sides of the aisle as to why that is and/or who is to blame. I will add my opinion into the fray.
Last January, the state was flush with cash. Tax collections exceeded expectations, the federal government’s largesse funded a Transitional Escrow Account that had a balance of over $1 billion, and the Stabilization Fund was at an all-time high with a balance of over $8 billion.
Just two months earlier, in November 2022, the state had returned almost $3 billion in excess tax receipts to taxpayers per a little-known, voter-approved statutory requirement. The Pew Charitable Trusts summed up the situation this way: “Higher-than-forecasted tax revenue growth, historic federal aid, and record financial reserves have buttressed states’ fiscal positions over the past two budget years.”
In recognition that the economic outlook was changing due to high inflation and interest rates, geopolitical threats, uncertain monetary policy, and an end to federal assistance, experts projected that state revenues would grow by a modest 1.6 percent in FY 2024. This would provide state coffers with $40.4 billion in tax revenue collections, or $642 million more than last year for the operating budget that began on July 1, 2023.
Maura Healey was sworn in as governor in January 2023. She increased projected revenue collections by $150 million for FY2023 and vowed to fulfill her campaign promise of providing tax relief. She filed a bill to provide $1 billion in tax cuts. A version of that bill was enacted in October of 2023 that is estimated to reduce tax collections by $580 million in FY2024.
Since the start of FY2024 on July 1, 2023, the state has experienced six straight months of revenues falling short of expectations. The Healey administration indicated earlier this month that Massachusetts is looking at a $1 billion deficit for FY2024 and proceeded to make unilateral budget cuts totaling about $385 million.
Opponents of the tax cuts are quick to cite them as the cause of the revenue shortfall, even though not a single income tax return for the 2023 tax year has come due yet. Opponents of the millionaire’s tax point to the uptick in out-migration of high-income Massachusetts residents as a result of the income surtax as the reason the state is not meeting its revenue projections.
That is also a faulty argument, because even if that turns out to be true in the future, only estimated payments of tax liability for those affected taxpayers have been made so far, making it impossible for now to calculate final tax collection amounts resulting from the surtax.
The reasons for the sudden reversal of fortunes are likely far more complicated than those proposed by folks on either side of the tax divide. They include:
- First and foremost, tax collections have declined not only for income tax, but sales, corporate, business, and all other miscellaneous taxes as well.
- Capital gains revenue collections dropped 16 percent year-over-year, reflecting a return to more historic norms after the large run-up in capital gains over the past few years.
- A lower labor participation rate and an aging population means fewer individuals earning income and subject to withholding.
- Unforeseen expenses, most notably the current $932 million price tag for emergency assistance that has grown by more than $600 million over the course of the year.
The single biggest factor, however, is the unprecedented growth of the state budget since FY2021. The $15 billion increase in state spending contextualizes the seemingly modest projected revenue growth of 1.6 percent for FY2024 by highlighting that the base is very inflated. Budget writers also assumed that 1.6 percent growth rate rather than the median rate of 1.3 percent proffered at the consensus revenue hearing, further inflating tax collection estimates. The sizable growth in state spending makes clear that the spending adjustments required to get the budget in balance will not be “cutting to the bone.”
To address the current shortfall, Gov. Healey chose to make unilateral cuts rather than tapping into state reserves to address the immediate shortfall, a wise move given the credit rating agencies’ preference for this option over using the Rainy Day fund when it isn’t raining.
Rather than speculating on the causes of the revenue shortfall, which are numerous, a more constructive exercise for lawmakers would be to think carefully about how to right-size the state budget after the unsustainable spending spree of the past two years.
A comprehensive review of state agencies and programs with recommendations for how to make state government function more efficiently would be a great place to start.