BOSTON – Facing softening non-surtax revenue collections, spending demands inflated by pandemic-era initiatives and a mountain of uncertainty about the direction of key federal policies, state budget managers and economic analysts agreed Monday that the next budget year will be a challenge, but there was less agreement around just what to expect and how to prepare.

Budget writers from the Legislature joined Administration and Finance Secretary Matthew Gorzkowicz to hear from the Department of Revenue, the state Treasury, academics and economists as they begin to prepare for fiscal year 2026, which will begin July 1, 2025.

Even though unemployment is relatively low and state reserves are at an historic high, most Beacon Hill officials expect fiscal 2026 will be a challenging budget year, given that non-surtax collections have softened and spending pressures escalated.

“We’re really worried about FY ‘26,” Senate Ways and Means Chair Michael Rodrigues told reporters, before outlining his areas of concern.

“Worried that revenue trends are not trending in the right direction ... seems to have plateaued and flat,” he said. “We’ve seen spending demands in the 4, 5 and 6% range over the last few years, and revenues are going to be in a 2 to 3% revenue growth, federal money is done, the ARPA dollars and all the federal dollars are pretty much spent up. So it’s going to be a challenge for FY ‘26 and that’s going to be my focus over the next ensuing few months.”

Rodrigues said he does not think midyear spending cuts or a state hiring freeze are on the table for fiscal 2025, despite the suggestion from the Department of Revenue and others Monday that revenue collections might land short of expectations.

“It’s FY ‘26 that I’m most worried about right now,” he said.

Gorzkowicz, Rodrigues and House Ways and Means Chair Aaron Michlewitz will have to agree on a state tax revenue estimate for fiscal 2026 by Jan. 15. That estimate serves as a building block for budget proposals that Gov. Maura Healey will unveil by Jan. 22, followed by a House budget proposal in April and a Senate plan in May.

State government collected about $967 million more than expected in fiscal 2024, but all of the overage and then some came from the surtax on high-income households. Setting aside that money, which is supposed to only be used for transportation or education initiatives, the state ended fiscal 2024 with a budget shortfall of $463 million.

Fiscal 2025 revenue collections were $129 million or 1% below year-to-date benchmarks through the first four months of the budget year, ending with October. After adjusting for revenue from the state’s relatively new surtax on annual household income above $1 million, fiscal 2025 collections are trailing benchmarks by $372 million. However, year-to-date tax receipts are still ahead of actual collections during the same period in fiscal 2024 by $667 million or 5.6%. November revenues are due from DOR by Wednesday.

“Predicting future revenue figures, as me and my counterpart have seen over the last couple years, can be a very, very difficult process in normal times,” Michlewitz said. “But given how volatile our revenue has been over the last couple years, this will be especially challenging. It will be especially challenging because the commonwealth not only faces the challenges at home, but we face unprecedented factors on a federal and global stage.”

Fiscal 2026 predictions

Geoffrey Snyder, the state commissioner of revenue, laid out those challenges as he presented DOR’s estimate that fiscal 2026 revenues will end up in the range of $40.206 billion to $41.286 billion (1.9% to 3.1% growth over fiscal 2025’s forecast), plus another $2.186 to $2.561 billion from surtax collections.

“Tax collections will vary depending on many factors, including one, the potential impact of the president-elect’s full suite of policy proposals and their impact on inflation, interest rates and the economy in general; we have the possible elimination of and/or changes to the $10,000 federal limit on the deduction for state and local taxes, better known as the SALT cap,” Snyder said. “We have a worsening of geopolitical risks, including the Middle East and the Russia-Ukraine conflicts and their potential impact on energy prices and inflation; we have the Federal Reserve policy, will the Fed continue to ease monetary policy and at what pace? What’s the duration? What’s the destination? And we have other significant global, domestic and political factors.”

An August report from Moody’s Analytics, which DOR works with as it prepares its economic forecasts, projected that a Donald Trump victory and Republican control of both branches of Congress would “result in higher inflation and interest rates and weaker economic growth” and that “recession becomes a serious threat once again” if the president-elect’s campaign proposals are all enacted.

And if the SALT cap is not extended in its current form beyond its current Dec. 31, 2025, expiration date, Snyder said it would have “a materially negative impact on future income tax revenues” for Massachusetts to the tune of $1 billion, mostly in fiscal years 2026 and 2027.

Doug Howgate, president of the Mass. Taxpayers Foundation, and Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, presented their outlooks as a touch rosier.

Howgate’s organization projects non-surtax revenues of $40.9 billion in fiscal 2026, an increase of 3.1% over its revised fiscal 2025 estimate of $39.7 billion. MTF also projects $2.6 billion worth of surtax revenue in fiscal 2026.

“Keep in mind that in fiscal year ‘23 and ‘24 we effectively saw flat to actually slight declines in non-surtax revenues. So we expect in ‘25 and ‘26 to see moderate, positive revenue growth. And I do think that part of that is really a credit to how the U.S. economy has handled the post-pandemic transition,” Howgate said.

Horowitz estimated that fiscal 2026 state tax revenue collections will total $42.1 billion, plus another $2.4 billion in surtax revenue. That would be about 7% greater than this year’s benchmark and roughly 5% above the organization’s updated fiscal 2025 estimate.

“It’s vital to note that while our forecast is relatively sanguine, we expect significant volatility over the next 18 months, due to the shifting priorities of the incoming administration in Washington,” he said in his testimony Monday. “This seems like a reason to choose a conservative revenue benchmark, somewhat below the $44.5 billion projected level.”

Preparing for ‘26

With all the uncertainty on the horizon, Howgate said it will be important for the Legislature and administration to control the growth of spending in the fiscal 2026 budget. He said the fiscal 2025 budget lawmakers sent to Gov. Maura Healey’s desk this summer was a “really positive sign” in that it represented just 3.1% spending growth, compared to spending growth in the 6% range in prior years.

“I’m here to tell you, I think it’s equally important this year that we keep spending at 3% or less. Now, one of the reasons for that is I just got done telling you that we would estimate revenues to grow, tax revenues, to grow by 3.1%, right? And so it would make sense to kind of track those two numbers together,” Howgate said. “But there’s kind of a larger global reason for that, which is: as we think about the long-term structural stability of the budget, the spending decisions made now have such a huge impact in the budget next year, in the year following, in times when we have a lot of uncertainty.”

Gorzkowicz said the Healey administration is “clear-eyed about the scale of the challenges ahead and the potential for ongoing misalignment between spending and revenue” for the remainder of fiscal 2025 and into fiscal 2026.

“Programs such as MassHealth, the Student Opportunity Act, provider rate increases, [and] our pension obligation are just a few of the drivers of spending growth over which we have less discretion,” the secretary said.

Before they can put fiscal 2026 on the front burner, Beacon Hill’s budget managers must first get through fiscal 2025. Snyder, the state revenue commissioner, gave them some sour news on that front Monday, saying that DOR now projects fiscal 2025 revenue, excluding surtax funds, will be between $39.447 billion and $40.063 billion, which would be 2.1% to 0.6% below the fiscal 2025 benchmark for non-surtax revenues of $40.307 billion.

However, surtax revenues are estimated to come in between $2.349 billion and $2.491 billion, compared to $1.3 billion accounted for in the total revenue estimate of $41.607 billion.

Howgate said MTF is projecting total non-surtax revenues of $39.7 billion in fiscal 2025, but is not recommending that policymakers adjust the fiscal 2025 revenue expectation “at this stage of the game.”

“Four months into the fiscal year, we have revenue collections at growing at 5.6%, and while that may be somewhat surtax-driven, we think in the numbers we’ve actually seen to date, it wouldn’t warrant an adjustment,” he said.

Horowitz said his group is also not recommending a change to the fiscal 2025 revenue estimate, though he thinks it will ultimately land above benchmark with collections totaling “between $41.4 and $42.4 billion, with the bulk of likely outcomes above the $42 billion threshold.”

“Despite our relative optimism about final collections, we don’t think it’s necessary or appropriate to adjust the FY25 benchmark upward at this time. There is simply too much uncertainty to count these chickens,” Horowitz said in his testimony.