Tariffs, Market Turmoil, and Tax Uncertainty Threaten Massachusetts Budget

By Chris Lisinski, Michael P. Norton

Economic uncertainty deepened Monday as stock markets continued their multi-day, tariff-fueled decline, and the House budget chief declined to rule out tax increases as his team prepares to roll out a new annual state spending plan in an increasingly volatile environment.

A week before releasing a redraft of Gov. Maura Healey’s $62 billion fiscal 2026 budget, House Ways and Means Chairman Aaron Michlewitz initially dodged the tax question but then said taxes remain on the table.

“You’ll hear more about that in the coming days,” Michlewitz said about tax code changes in the budget, noting that lawmakers are still finishing their review of Healey’s proposal.

When a reporter pressed on whether tax options are still in the mix, Michlewitz replied, “Certainly everything is still on the table for conversation.”

“We’re trying to build a budget that is fiscally sound and also allows us to be able to pivot if necessary based off a lot of these challenges that we’re seeing from the federal government, from a financial standpoint a lot of uncertainty,” he said. “And then certainly with this tariff situation, top down with the affordability crisis that we’re facing, we certainly are taking that all into consideration.”

While House Democrats are keeping their budget plans mostly under wraps ahead of the proposal’s rollout next week, one economic expert is already sounding the alarm and calling for a major pivot from Beacon Hill.

Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said Monday that state budget-writers should immediately mark down their fiscal 2026 tax revenue estimate by $1 billion.

“It’s not just the turmoil in the markets, although that’s obviously a concern. It’s what that turmoil reflects, which is a growing risk of recession,” Horowitz said in an interview, noting that Goldman Sachs on Monday raised its projected odds of a recession.

Horowitz called the recession risks “almost entirely self-inflicted from the tariffs.” Any such downturn would make the state budgeting process trickier, he said, because lower wages and sales contribute less tax revenue.

And with President Donald Trump’s tariffs fueling a stock market decline, Horowitz cautioned that one of the better-performing levies in Massachusetts — the surtax on wealthy households — could begin to slow, too.

“Something like a third of the income of people who earn over a million dollars comes from capital gains. So with the market down this much, there’s every chance that capital gains collections for FY26 will be decimated, and that has a direct path through the ability of the state to generate sufficient revenue for its programs,” he said.

Beacon Hill took a conservative approach to surtax collections, leaving a surplus of about $1.3 billion officials are now moving to spend on one-time education and transportation investments.

Michlewitz said Monday it’s “hard to predict” if fiscal 2026, which begins July 1, would produce another surtax surplus.

“Obviously the unpredictability and kind of the fluidness that’s going on right now within the federal government is going to cause a lot of concern, and if that changes anything we’ll have to react to it,” he said.

Michlewitz said estimated tax returns and non-withholding tax data in recent months suggest another income surtax surplus tied to fiscal 2025 is in the works.

“We will probably have a good amount of surplus next year based off how the numbers are coming in so far,” he said. “We won’t know those finalized until summertime, or some point.”

Other economists relied upon by Beacon Hill argued that legislative budget-writers should not yet break the emergency glass and adjust any revenue forecasts.

Massachusetts Taxpayers Foundation President Doug Howgate said he thinks the best approach would be for the House and Senate each to follow their usual budget timeline, then for legislative leaders and Healey deputies to “take a breath” and assess the landscape before finalizing the spending plan.

“Allowing the next two months to play out as we gather more information is the smartest way to do that,” Howgate said.

He said a major drop in the stock market will have sizable impacts on the state budget, but stressed that other variables are also unknown. The governor’s budget bill relies on roughly $2 billion in combined capital gains tax revenues, Howgate said, while also assuming about $14 billion in Medicaid reimbursements that congressional Republicans might look to trim.

“You want to account for the best information we have, certainly on the economy, the stock market… but don’t forget the active decisions that will be played out over the next two months on Capitol Hill will have just as big, and in some cases a bigger, impact on revenue and spending decisions,” Howgate said.

Fears about economic damage have cascaded across Massachusetts, reaching well outside the halls of Beacon Hill.

Confidence among Bay State employers plummeted for the second straight month in March, falling to the lowest level in nearly five years.

The Associated Industries of Massachusetts reported Monday that its monthly business confidence index dropped 4.4 points to 46, well below the 50-point line that separates optimistic territory from pessimistic territory. It was the lowest one-month measurement since July 2020.

Over the past two months, the 100-point index has dropped 9.6 points. That appears to be the third-largest drop over any two-month span since 2006, trailing only the opening stretch of the COVID-19 pandemic, according to data tracked by the business group.

“It’s not at all surprising that confidence plunged in the past two months, especially among manufacturers, even before President Trump’s announcement of much more severe tariffs in early April,” Michael Tyler, a former chief investment officer at Eastern Bank and vice chair of AIM’s Board of Economic Advisors, said. “Lower confidence can itself lead to lower spending and eventually a recession, making this month’s Business Confidence survey results particularly concerning.”

Healey’s budget was up for a public hearing in Attleboro Monday and its final hearing is planned for Tuesday. Michlewitz said he wanted to wait for the hearings to wrap up before making final determinations on taxes.

House Speaker Ronald Mariano in late March said House Democrats would not adopt Healey’s plan to add new taxes on prescription drugs, appearing to take off the table more than $200 million in proposed levies. He also indicated the House would likely not pursue Healey’s idea to apply the sales tax to candy.

Raise Up Massachusetts, the coalition behind the income surtax on wealthy households that voters approved in 2022, is lobbying this year for a “corporate fair share” tax package that would target businesses that use “offshore tax havens” to steer profits overseas. Taxing these corporations the same way that other states do could yield hundreds of millions of dollars in new funding for Massachusetts, according to the coalition. A Raise Up official told the News Service that the coalition has had “good conversations” with legislators.