Estimates show surtax, capital gains declining amid volatility
By Katie Castellani, State House News Service
STATE HOUSE, BOSTON, DEC. 16, 2025…..State tax revenues are expected to continue seeing slow, but cautious growth as Beacon Hill faces myriad state and federal uncertainties closing out fiscal 2026 and entering the next budget year.
This is what House Ways and Means Chairman Aaron Michlewitz, Senate Ways and Means Chairman Michael Rodrigues and Administration and Finance Secretary Matthew Gorzkowicz heard from those who were invited to testify during an annual hearing on revenues. The hearing marks the beginning of the fiscal 2027 budget writing process and helps budget writers estimate the revenues that will serve as the foundation for spending.
Department of Revenue Commissioner Geoffrey Snyder told lawmakers that his agency expects tax revenue growth in fiscal 2027 of between 1.7% and 3.1%. For fiscal 2026, Snyder expects tax revenue to range from $43.46 billion and $44.18 billion. This $155 million below to $563 million above the current benchmark.
These estimates reflect the effects of the federal One Big Beautiful Bill Act, also known as OB3, surtax revenue and Massachusetts’ economy that is in “a period of slow growth, characterized by modest gains in real gross state product,” Snyder said.
Tax collections in fiscal 2026 and 2027 will depend on factors including the resiliency of the state economy; federal cuts to research and development grants; unemployment; unexpected changes to tariffs, including potential retaliation and their effects on inflation and interest rates; and the Federal Reserve’s decisions.
On top of these factors, OB3, signed in July is expected to result in a $664 million revenue loss for fiscal 2026, Snyder said. The federal policy is projected to trigger a $282 million loss for fiscal 2027. The difference in revenue losses is a result of the timing when some of the bill’s provisions go into effect.
Capital gains and income surtax volatility
Experts who testified noted unstable capital gains and income surtax revenues.
This year, revenues from the income surtax on wealthy households are expected to exceed the benchmark. However, DOR expects them to fall in fiscal 2027, declining between 10.6% and 1.6% compared to fiscal 2026 levels, Snyder said.
Based on estimated collections through Sept. 30 and year-to-date financial market performance, Snyder estimates fiscal 2026 capital gains revenues to be between $531 million and $676 million above benchmark. However, capital gains revenues are expected to fall by 16.4% and 10.7% in fiscal 2027 from the fiscal 2026 forecast.
The estimated drop in income surtax and capital gains revenues comes after a few years of strong collections in those areas. But Snyder said the recent benchmarks have been significantly lower than forecasts.
“We’re going to need everything to be firing the right way to see it again in 27,” Snyder said.
Similarly, Evan Horowitz, director of the Center for State Policy Analysis, raised concerns about volatility in the tax system. While the income surtax took effect during a “nearly unprecedented” three-year upward run in asset prices, it won’t last forever.
“At some point, returns will fall – at least temporarily – and the swing in tax collections will be substantial, but also difficult to track,” he said.
Surtax and capital gains were also significant factors in Horowitz’s revenue estimates for the remainder of fiscal 2026 and fiscal 2027.
Horowitz expects fiscal 2026 collections to end up around $45.1 billion, roughly $1.5 billion above the current benchmark. One reason for this is the strong, and surprising, performance of the stock market, which is set to support strong collections in April and receipts for capital gains and income surtax.
For fiscal 2027, Horowitz estimates tax revenues will total $47.1 billion, about 8% rise over the current benchmark and a 4.5% increase over the center’s updated fiscal 2026 revenues. This estimate includes adjustments for OB3 and the income surtax, which is expected to generate about $3 billion.
However, Horowitz said the net effect of the surtax is “significantly smaller” than $3 billion as a result of losses from avoidance in regular state income tax. The federal government shutdown has delayed the center’s plan for more analysis but it estimates offsetting losses of just under $1 billion.
Alan Clayton-Matthews, a professor from Northeastern University, projects fiscal 2026 tax revenues to be around $43.57 billion, 0.3% less than in fiscal year 2025. But fiscal 2026 capital gains tax revenues are projected to rise 17.3% and surtax revenues are estimated to fall 9.6% from fiscal 2025, under his analysis.
Clayton-Matthews also projects fiscal 2027 revenues to be $46.45 billion, a 6.6% increase over fiscal 2026. He estimates capital gains revenues will rise 12.5% in fiscal 2027 and expects surtax revenues to remain the same.
Clayton-Matthews said the large differences in estimates for fiscal 2026 and 2027 revenues “reflects the volatility of tax revenues.”
Ballot initiative effects
Proposed ballot initiatives are also expected to have a greater influence on tax collections than in previous years.
Horowitz said proposed 2026 ballot initiatives are “unusually consequential” for the state’s future budget and economy “with risks and changes that far exceed anything we’ve covered in recent cycles.”
A record 44 proposals were certified as ballot eligible by the attorney general this year and 12 cleared the latest signature gathering requirement needed to move forward on the path to the 2026 ballot.
Two of these petitions are expected to affect state tax revenue collections. One is a petition to reduce the state’s personal income tax from 5% to 4% over three years. Another would establish rent control throughout the state.
“Moving to a 4% income tax, for instance, would have a bigger effect on tax collections than even a prolonged recession,” Horowitz said. “And while the costs of rent control are less direct, a statewide rent control system could shake the real estate market and upend local tax systems.”
The proposal to drop income tax to 4% would cost the state about $4.2 billion to $4.8 billion in revenues, according to the DOR. That number is determined by dropping the state’s current collections of $24 billion in personal income tax by 20%.
Sluggish economy
Doug Howgate, president of the Massachusetts Taxpayers Foundation said risks and uncertainties in the broader economy – along with potential losses of federal funds – could make fiscal 2007 one of the most challenging budgets since the 2009 financial crisis.
He projects the 2026 non-surtax revenue to fall $73 million below the benchmark, ending the year at $41.14 billion. He also estimates fiscal 2027 non-surtax revenues to grow by 2.2% to $42.03 billion.
Howgate attributed the slower growth to a sluggish economy marked by flat employment and financial strains limiting growth in residents’ personal expenditures.
He estimates sales tax revenues to grow less than 1% in fiscal 2027, rising to $9.7 billion. When considering sales tax collections, he said it’s also important to consider residents’ personal consumption expenditures on taxable goods, which are expected to drop by 5.3% in 2023 to 0.33% in 2027.
Longer term, Howgate said he’s concerned about the state’s slow rate of employment growth.
“Of greater concern is the lack of employment growth, and here the Massachusetts economy looks increasingly vulnerable,” Howgate said in a written copy of testimony that was obtained by the News Service.
Employment grew 1.25% in fiscal 2023, showing “healthy growth that was fueled by a surge in international migration,” according to Howgate. Since then, employment growth falls to 0.11% in fiscal 2026 and 0.02% in fiscal 2027 meaning “virtually no growth in jobs over the next 18 months.”
In the near term, Howgate said immigration is set to affect the state’s employment.
“We saw a huge surge in the state’s labor force last year, almost entirely attributable to immigration,” Howgate said during the hearing.
“It’s hard to imagine over the next couple years that we’re going to be able to count on immigration growth as being an engine for our economy and it may be targeted costs in places like sciences, higher education, stuff that is a really critical part of our economy.”
Clayton-Matthews, projects the working age population to fall at an annual rate of 0.12% throughout the rest of fiscal 2026 and in fiscal 2027. He also expects the labor force participation rate to fall by 0.23% per year because of the state’s aging population.
On the other hand, Clayton-Matthews pointed to the state’s “substantial” estimated productivity growth rate of 2.08% per year.
In the written testimony, Howgate referred to Moody’s Analytics projections that estimate the state’s productive growth rate to fall from 2.9% in 2024 to 1.6% in fiscal 2027, the second lowest figure since fiscal 2022.
But overall, Howgate said that slow and sluggish economic growth is still growth.
“It could be worse,” he said. “…The fact that we’re talking about positive growth budgets building on each other is something that we shouldn’t take for granted.”
Katie Castellani is a reporter for State House News Service and State Affairs Pro Massachusetts. Reach her at kcastellani@stateaffairs.com.
Read the original article from the State House News Service, here.