Massachusetts State Budget Deficit: MassHealth, Federal Cuts, and the Surtax

The Massachusetts state budget deficit opened in late 2025 when a new federal tax law automatically cut state revenue by hundreds of millions of dollars, and it has since widened into a multi-year squeeze driven by federal funding losses and rising MassHealth costs. By October 2025, state budget officials were looking at a shortfall of more than $650 million in the fiscal 2026 budget, about 1.5 percent of expected annual collections.1NEPM. Mass Faces a $650M Budget Gap Governor Maura Healey’s fiscal 2027 proposal of $63 billion then had to absorb roughly $3.5 billion in annual federal healthcare funding losses while holding spending growth to 3.8 percent, a challenge the Massachusetts Taxpayers Foundation has called potentially the most difficult since the 2009 fiscal crisis.2WBUR. Healey 63 Billion Budget Massachusetts

What Triggered the Shortfall

The immediate cause was federal, not local. President Trump signed the “One Big Beautiful Bill Act” into law on July 4, 2025. The legislation changed several provisions of the Internal Revenue Code that Massachusetts tax law automatically incorporates by reference. Federal tax cuts flowed straight through to reduce state tax collections, with no vote by state lawmakers required. The Healey administration estimated these changes would strip $664 million from state revenue in fiscal 2026 and $282 million in fiscal 2027.2WBUR. Healey 63 Billion Budget Massachusetts

Secretary of Administration and Finance Matthew Gorzkowicz faced an October 15 deadline to formally certify the shortfall or revise the revenue forecast. The decision was complicated by the loss of reliable federal economic data during a concurrent government shutdown.1NEPM. Mass Faces a $650M Budget Gap

How Massachusetts Patched Fiscal 2026

Healey signed the fiscal 2026 General Appropriations Act on July 4, 2025, at $60.9 billion, more than $1 billion below her original January proposal. She vetoed $130.2 million in spending, including $19.9 million from charter school reimbursements.3Mass.gov. Governor Healey Signs $60.9 Billion Fiscal Year 2026 Budget4Massachusetts Taxpayers Foundation. FY 2026 Budget Veto Summary Even with the cuts, the budget was 5.4 percent larger than the prior year.

The administration added several cost-containment measures. An executive branch hiring freeze that began in May 2025 was extended through the end of the fiscal year. A planned pay raise for non-union managers was scrapped, saving $17 million. Payment on roughly $125 million in earmarked local projects was deferred. Coverage of GLP-1 weight-loss drugs through the state employee Group Insurance Commission was limited to medically necessary cases such as diabetes, saving $27.5 million. A supplemental bill provided $100 million in flexible resources and expanded the administration’s emergency “9c” budget-cutting authority along with authority to transfer funds between line items.3Mass.gov. Governor Healey Signs $60.9 Billion Fiscal Year 2026 Budget

The structural fix came the following summer. A supplemental budget signed into law on June 12, 2026 decoupled Massachusetts from several of the most costly federal provisions, delaying conformity on new deductions for business income, research expenses, bonus depreciation, and opportunity zone investments by one to two years. The law also set a standing rule: any future federal tax change estimated to cost the state more than $20 million will no longer take effect automatically but will require affirmative legislative action.5Mass.gov. TIR 26-4: Massachusetts Conformity to Certain Provisions in Public Law No. 119-216EY Tax News. Massachusetts Delays Conformity to Certain Federal Tax Changes Made by the OBBBA

Federal Funding Losses Go Well Beyond Taxes

The tax conformity hit was only part of the problem. The broader package of Trump administration and congressional actions is estimated to cut $3.7 billion from Massachusetts between fiscal years 2025 and 2028. Health and human services took the largest loss at $1.6 billion, followed by $1.3 billion in direct state budget reductions, $361 million from transportation, $187 million from energy and environment programs, and $142 million from education.7WWLP. Massachusetts to Lose $3.7 Billion as Trump, GOP Cut Funding

Massachusetts receives roughly $22.9 billion in federal funding each year: $16.1 billion in the operating budget, $5.3 billion in agency grants, and $1.5 billion for capital projects. By spring 2025 the administration had identified $350 million in direct cuts and launched a public dashboard to track impacts.8Massachusetts Municipal Association. Administration Launches Dashboard Displaying Direct Funding Cuts to Mass Specific losses have included FEMA hazard mitigation grants for coastal infrastructure, EPA environmental justice grants, Department of Homeland Security food and shelter programs, and broadband expansion funding.9Mass.gov. Impact of Trump Administration and Congressional Cuts on Massachusetts Municipal officials have said backfilling at this scale is not realistic. Cambridge receives about $23 million in federal funds annually and told state leaders it would be impossible for the city or the state to replace losses at that level.10WGBH. Massachusetts Cities and Towns Brace for Catastrophic Federal Budget Cuts

Why MassHealth Keeps Driving the Numbers Up

No single program pulls harder on the state budget than MassHealth. Healey’s fiscal 2027 proposal allocates $22.7 billion to MassHealth, more than a third of total spending. After federal reimbursements, the net state cost is $9.3 billion, 7.4 percent higher than the prior year.11Commonwealth Beacon. Growing Health Care Pressure Drives Up Spending in Healey’s Annual Budget

Several forces are stacking on top of each other. Enrollment peaked at 2.4 million during the pandemic, when federal rules barred states from removing anyone from the rolls, and even after redeterminations resumed it remains roughly 260,000 above pre-pandemic levels. The remaining population is sicker on average. Per-member pharmaceutical spending grew 16 percent in fiscal 2024, and use of long-term support services has climbed 11 percent since 2023.12Mass.gov. FY26 House 1 Budget Brief: MassHealth About 200,000 members have shifted from employer-sponsored insurance onto state-funded coverage, adding roughly $1 billion in annual gross costs. The expiration of enhanced federal Medicaid reimbursement rates from the public health emergency costs another $1 billion per year.13Massachusetts Taxpayers Foundation. Health Care Spending in FY 2026

The federal picture gets worse starting January 1, 2027, when the One Big Beautiful Bill Act imposes new Medicaid work requirements and semiannual eligibility checks. MassHealth estimates roughly 175,000 people will lose coverage through those provisions, with total coverage losses reaching as high as 300,000 residents when other eligibility changes are included.14Mass.gov. MassHealth Federal Updates and Impact The Massachusetts Taxpayers Foundation projects federal healthcare changes will reduce federal funding to the state by more than $24 billion over the next decade.11Commonwealth Beacon. Growing Health Care Pressure Drives Up Spending in Healey’s Annual Budget

To contain costs, the administration has proposed eliminating MassHealth coverage for GLP-1 drugs used solely for weight loss, capping adult dental benefits at $1,000 per year, and reducing funding for care management, moves expected to save $311 million in total spending.11Commonwealth Beacon. Growing Health Care Pressure Drives Up Spending in Healey’s Annual Budget

The Fair Share Surtax Is Holding the Budget Together

The voter-approved Fair Share Amendment, which took effect in 2023 and imposes a 4 percent surtax on annual income above $1 million, has become the state’s single most important new revenue source. Collections have consistently beaten projections. Budget planners originally assumed roughly $1 billion in fiscal 2024; actual collections came in at $2.2 billion. Fiscal 2025 collections reached $3 billion.15Streetsblog Mass. Fair Share Millionaire Tax Continues to Exceed Expectations

Under the constitutional amendment, that money has to go to education and transportation. The FY2026 budget allocated $2.4 billion in surtax revenue, an increase of more than $400 million over previous years. A $496 million expansion of Chapter 70 school funding, over 20 percent of total surtax spending, was deliberately shifted to Fair Share rather than general revenue; House Ways and Means Chair Aaron Michlewitz said the move was designed to “limit any potential exposure with general fund revenue.”16New Bedford Light. Massachusetts Millionaires Tax Spending Gets Complicated Fair Share also closed a $700 million operating deficit at the MBTA and is expected to cover another $523 million shortfall in fiscal 2027.17Streetsblog Mass. Healey Budget Bill Would Balance MBTA Budgets for One More Year

Critics say the revenue is being used to backfill existing budget gaps rather than fund genuinely new investments, straying from the ballot measure’s original intent.16New Bedford Light. Massachusetts Millionaires Tax Spending Gets Complicated The windfall collections of the surtax’s first years are unlikely to continue as forecasting catches up to reality, with revenue expected to stabilize closer to the $2.7 billion projected for fiscal 2027.18Massachusetts Taxpayers Foundation. FY 2026 / FY 2027 Tax Revenue Forecast

Revenue, Reserves, and Why the Rainy Day Fund Stays Full

Overall tax revenue is growing, but slowly. The fiscal 2027 Consensus Revenue Estimate, agreed by the governor and legislative leaders on January 14, 2026, pegged total tax revenue at $44.9 billion, reflecting 2.9 percent growth. Of that, $2.7 billion was attributed to the Fair Share surtax, leaving baseline tax revenue growth at just 2.4 percent.19Massachusetts Municipal Association. State Leaders Estimate 2.9% State Revenue Growth in FY27 The Massachusetts Taxpayers Foundation cited a slowing economy, flat employment, and constrained consumer spending as the main drags.18Massachusetts Taxpayers Foundation. FY 2026 / FY 2027 Tax Revenue Forecast Actual collections have run ahead of plan. Through April 2026, fiscal year-to-date revenue of $38 billion was $1.58 billion above benchmark, driven largely by income tax collections that beat expectations by nearly $1 billion through the first ten months, with capital gains and surtax payments accounting for much of the outperformance.20Mass.gov. April Revenue Collections Total $7.366 Billion

The rainy day fund stood at $8.165 billion as of June 2025, one of the largest stabilization reserves in the country relative to budget size.21Massachusetts Comptroller. Commonwealth Stabilization Fund Lawmakers have refused to draw on it. Senate Ways and Means Chairman Michael Rodrigues emphasized the need to preserve the fund for a potentially deeper downturn.22WGBH. Massachusetts Bracing for All-Hands Response to Federal Funds Threat Instead, the governor and the House Ways and Means Committee have proposed raising the capital gains threshold, the level above which “excess” capital gains collections are automatically deposited into reserves, from $1.78 billion to $2.25 billion. That one-time move would keep roughly $467 million in the General Fund rather than routing it to the stabilization fund and other reserves.23Massachusetts Taxpayers Foundation. FY 2027 HWM Budget Report

The FY2027 Package and the One-Time-Fix Problem

Healey’s fiscal 2027 budget, filed in January 2026, totals $63 billion and incorporates $15.8 billion in federal funding, down from $16.1 billion in fiscal 2026. Administration officials called the federal outlook “punitive.”2WBUR. Healey 63 Billion Budget Massachusetts To close the gap without touching the rainy day fund, the governor and legislature assembled a mix of revenue measures:

The House Ways and Means Committee released its own version in April 2026 at $63.33 billion, just $29 million below the governor’s number. The committee largely adopted the governor’s framework but treated the capital gains threshold increase as a one-time revenue solution rather than a permanent change, pushing the total amount of one-time budget fixes to $1.8 billion.23Massachusetts Taxpayers Foundation. FY 2027 HWM Budget Report That is the central concern for next year: the same patches cannot be used twice.

What the Outlook Looks Like

Credit markets have not flinched. On May 27, 2026, Fitch Ratings affirmed Massachusetts’ general obligation bonds at AA+ with a stable outlook and assigned the same rating to nearly $984 million in new bond issuances.25Fitch Ratings. Fitch Rates Massachusetts $984 Million GO Bonds AA+, Outlook Stable The $8.2 billion rainy day fund, projected to hold roughly that level through the end of fiscal 2027, gives credit agencies a substantial buffer to weigh.23Massachusetts Taxpayers Foundation. FY 2027 HWM Budget Report

The longer-term picture is harder. Surtax revenue is volatile. One-time fixes already total $1.8 billion. The MBTA’s operating deficit is projected to reach $837 million by fiscal 2028 as the windfall of unspent surtax reserves is depleted.17Streetsblog Mass. Healey Budget Bill Would Balance MBTA Budgets for One More Year MassHealth cost growth continues to outpace inflation, and the federal funding environment is uncertain for years to come. Each successive Massachusetts budget is likely to demand harder choices than the last, with fewer easy levers left to pull.