Estimating the Shortfall in Massachusetts Tax Revenue

In mere weeks, Covid-19 has battered the stock market, disrupted businesses of all sizes, and transformed daily life across Massachusetts. Lawmakers should prepare for an equally dramatic collapse in state tax revenues.

Given the uncertain path of the pandemic, and the evolving policy response, precise estimates are difficult. However, using economic projections from a variety of sources, we find that:

• Over the next 15 months, Massachusetts could face a tax revenue shortfall of $1.8 billion to $3 billion.
• The decline in tax revenue will be immediate, beginning in March and resulting in a $500 million to $750 million shortfall before the end of the fiscal year on June 30.
• Even as revenues decline, emergency spending on urgent health needs and essential economic support is likely to increase, further straining the state budget
• Federal infusions should help address this fiscal challenge. That includes heightened support for MassHealth along with several billion dollars in other Covid-related aid
• Massachusetts could also draw on the state’s rainy day fund, provided such withdrawals are calibrated to ensure adequate reserves across multiple years, including in scenarios where the economic decline proves especially severe

This policy brief highlights the unprecedented pace of economic decline from Covid-19, estimates the impact on near-term tax revenues, and discusses some of the options lawmakers have for filling the widening budget hole.