Revved-up tax growth comes to an end

AFTER TWO YEARS of revved-up tax revenue growth that helped fund a massive tax cut, a new report indicates the state’s ledger shifted into neutral during the fiscal year that came to an end on June 30.

Fiscal 2023 tax revenues came in just short of downsized projections, leaving the state with what appears to be a small, manageable deficit. While state officials say they should be able to close the deficit fairly easily, the bigger question is what the recent slowdown in revenue says about the current fiscal year and the budget Gov. Maura Healey signed into law this week, which assumes tax revenues will grow about $1.2 billion, or 3 percent, and sets aside $580 million for a yet-to-be-negotiated tax cut package.

Doug Howgate, president of the business-backed Massachusetts Taxpayers Foundation, sees the fiscal 2023 revenue shortfall as a small bump in the road and expects the fiscal 2024 budget and the tax revenues to support it are in good shape.

“We’re in a very strong financial condition,” he said.

Evan Horowitz, the executive director of the Center for State Policy Analysis at Tufts University, is generally in agreement, but he is a bit more cautious in his outlook. He said he’s been researching the revenue growth being projected by other states and finds Massachusetts to be an outlier – projecting much stronger revenue growth than the other states.

He said reducing revenue expectations would probably be a good idea. “I don’t think the end of good times has sunk in,” he said.

Horowitz said the state can probably afford a tax cut package in fiscal 2024, but he urges caution about its size. Some of the tax cut ideas envision phasing them in over time, with the bottom line growing to $1 billion or more in the next few years. He said lawmakers may want to proceed cautiously.

“As you inch upward, you increase the fiscal challenges,” Horowitz said.

The Department of Revenue reported on Friday that revenues in fiscal 2023 totaled $39.16 billion — $605 million, or 1.5 percent, below a forecast that was downsized earlier this year. State officials blamed the downturn on a decrease in capital gains tax revenue.

Since any increase in capital gains beyond a certain threshold is siphoned off into the state’s rainy day fund, the downturn in capital gains revenue doesn’t affect the state’s budget deficit but does reduce how much money will go into the rainy day fund. Officials said $750 million will go into the fund, about half as much had been forecasted.

The actual size of the deficit is unclear. The Healey administration pegged the shortfall at $39 million, but said that number “does not account for non-capital gains surtax revenue set aside for the Education and Transportation Fund.” The reference is to money collected by the state’s new 4 percent tax on income over $1 million in fiscal 2023.

Matthew Gorzkowicz, Healey’s secretary of administration and finance, said tax revenues in May and June rebounded and helped offset a sharp downturn in tax collections in April. He indicated the Healey administration could close the relatively small budget gap in fiscal 2023 by tapping unused funds in various accounts or by using money set aside from past budget surpluses or federal aid packages.

“We are on track to close fiscal year 2023 in balance without using the stabilization fund,” he said.