State revenue collections missed the mark by nearly 5% in January, with the $3.834 billion that the Department of Revenue reeled in landing $192 million or 4.8% shy of the previous January’s collections and $185 million or 4.6% below the monthly benchmark.
It is the first time since June 2020 that DOR has announced that tax collections have failed to live up to the administration’s monthly expectation. The $21.643 billion that DOR has collected through seven months of fiscal 2023 is $229 million or 1% less than actual collections in the same period of fiscal 2022. Tax receipts are the primary source of funding for this year’s state budget, which grew by 10%.
“January collections decreased in withholding, non-withholding income tax, and ‘all other tax’ in comparison to January 2022,” Revenue Commissioner Geoffrey Snyder said. “These decreases were partially offset by increases in sales and use tax and corporate and business tax. The decrease in withholding was mostly driven by corporate restructuring events that positively impacted January 2022 withholding collections. Although withholding declined in January, year-to-date withholding is 3.3% higher than the same period of FY2022. The decrease in non-withholding income tax is most likely the result of pass-through entity members utilizing credits to reduce income tax payments and weakness in financial markets in calendar year 2022. The increase in sales and use tax reflects, in part, continued strength in retail sales and the increase in corporate and business tax is primarily due to an increase in estimated payments and a favorable decrease in refunds.”
Fiscal 2023 tax collections are still ahead of the year-to-date benchmark, but that gap is closing. Heading into January, tax collections were $1.087 billion or 6.5% more than what had been expected to that point. After January, state revenue is now $922 million or 4.4% ahead of year-to-date expectations.
And the monthly benchmark that was missed (as well as the year-to-date one) is now outdated since Administration and Finance Matthew Gorzkowicz last week upgraded the current year’s final revenue estimate by $151 million. DOR said new benchmarks will be ready by the time February revenues are reported in early March.
Before marking up fiscal 2023 revenues by just 0.4%, Gorzkowicz acknowledged that he was not confident the $1 billion over-benchmark dynamic would continue and said, “we need to be cautious as we look at the second half of the year where the largest amount of tax collections are, and understand how much of that might be timing that we’re seeing in the first half of collections.”
Snyder said recently that a big factor in the above-benchmark performance to that point was that the amount of credits claimed by pass-through entity members was lower than expected, “which we do expect to reverse in the second half of this fiscal year.”
He explained the pass-through entity, or PTE, excise issue and how it affects state revenue reporting during the consensus revenue hearing in late January. PTEs generally do not pay tax on their income, he said. Instead, their income is passed through to the members, who then pay taxes on their share of the entity’s income.
In response to the federal 2017 Tax Cuts and Jobs Act’s $10,000 cap on state and local taxes that can be deducted at the federal level, Massachusetts lawmakers in 2021 created a work-around.
The fiscal 2022 budget included a provision to allow DOR to implement an optional PTE excise — meaning taxes would apply at the entity level rather than after income was passed through — and a corresponding tax credit equal to 90% of the member’s portion of the excise.
But the time between when an entity pays the excise and when its members claim the credits has essentially inflated state revenue numbers on a temporary basis. DOR has been pointing out that “most of the increase in collections associated with the PTE excise is temporary” and adjusting for it in its monthly revenue reports for more than a year.
“Our experience to date with PTE excise indicates that a significant amount of the member credits generated from the excise collections received in the current fiscal year are not realized until the taxpayer files their return in the following fiscal year,” Snyder said. “Because the PTE excise was enacted during Fiscal Year 22, the result is an estimated one-time revenue increase of approximately $1.4 billion in FY22.”
That gain is thought to be a “one-time timing event,” the revenue commissioner said, because DOR expects that “a significant portion of PTE excise payments collected in the current fiscal year will be offset by member credits that were generated by the excise payments remitted in the prior fiscal year.”
“Looking forward, you will have payments and credits pretty much in balance on a going forward basis,” he said last month. “That’s why our estimated PTE effect in [FY]23 was a minus $13 million — de minimis, if you will — and [positive] $102 million for FY24, but relative to billions still small.”
When DOR released a study of the idea of a PTE excise and credit as a SALT deduction cap in March 2021, the department estimated that roughly 55,500 Massachusetts personal income tax filers would benefit and could save up to an average of $20,158 in federal taxes annually or a combined $1.12 billion. DOR said that the excise would be “revenue neutral for Massachusetts, or slightly revenue positive.”