BOSTON >> Republican Gov. Charlie Baker and the Democratic-controlled Legislature are considering ways to deal with an unexpected and untimely shortfall in Massachusetts tax revenues.

The problem that came to the forefront this past week threatens to slow final negotiations on the state's nearly $40 billion budget for the fiscal year starting July 1. It could also overshadow work on other major bills pending on Beacon Hill in the final weeks of the 2015-2016 legislative session.

Baker's administration now estimates that state tax collections in the new fiscal year will fall as much as $750 million below original projections.

State officials earlier said that the current year is likely to end with a more than $300 million revenue shortfall.

What to know about the Massachusetts budget:

The problem

The state uses a "consensus revenue estimate," agreed upon by the governor and legislative leaders after consulting with economists, to set benchmarks for projected tax collections, which in turn are used to base spending decisions in the annual budget. With the state's current fiscal year drawing to a close and a new one beginning July 1, shortfalls have developed for both years.

In a June 14 notice to the state's bondholders, the Baker administration said it now estimates tax collections in the current fiscal year will come in $320 million to $370 million below benchmark. It also revised downward the revenue estimate for the new fiscal year by anywhere from $450 million to $750 million. As a result, significant holes will need to be filled in both the current budget and the next one.


What's causing it

The administration points to lower-than-expected income and corporate tax payments that likely stem from stock market volatility and reduced investment returns. The Massachusetts Society of Certified Public Accountants surveyed dozens of CPAs and found that healthy capital gains in 2014 produced higher estimated tax payments in 2015, which in turn meant larger refunds in 2016. But when capital gains faltered in 2015, it also resulted in lower estimated payments to the state in 2016. The CPAs also concluded that this pattern of lower payments and higher refunds could continue into 2017.

Baker and most experts stress Massachusetts' overall economy remains strong, with low unemployment (4.2 percent in May) and about 30,000 jobs created since January. Many U.S. states, they note, are experiencing similar budgetary issues.

What's being done

With respect to the shortfall in the current fiscal year, which ends June 30, the Baker administration will only say that it's managing the problem "with existing tools," and has no immediate plans for state employee layoffs, emergency spending cuts or pulling cash from the state's "rainy day" reserve fund. It's also unclear how the administration will address the projected shortfall for next year.

A six member, House-Senate conference committee is currently negotiating a final version of the nearly $40 billion budget. But as the panel voted to meet behind closed doors, little is known about their deliberations. Reduced appropriations for some state agencies or programs are a possibility, though not a certainty.

If a budget agreement isn't reached by July 1, the Legislature could pass a temporary spending plan to keep the state running while talks continue.

Will taxes be hiked?

Taxes will probably not be raised, at least in the near future. Both Baker and Democratic House Speaker Robert DeLeo have ruled out new taxes to solve the budget gap. Some Democrats, including Senate President Stan Rosenberg, have strongly suggested that taxes must be on the table if the state is to maintain current programs, while addressing long-term priorities such as education and transportation infrastructure.

Lawmakers recently advanced a constitutional amendment calling for a 4 percent surtax on millionaires, but the earliest it could be ratified is November 2018.