Despite continued economic growth, state government fell into an even deeper financial hole in January when tax collections missed their target by $195 million leaving state finance officials staring at a $403 million gap more than half-way through the budget year.

Budget monitors had been hoping to see a rebound after a dismal December for state revenues, but income tax collections continued to lag the state's projections, which were only recently revised upward.

Tax collections for the year of $16.1 billion, which covers about 40 percent of state spending for the year, are currently 2.4 percent less than projected, and only 1.3 percent higher that the same seventh-month period last fiscal year.

January collections were down 6 percent from the same month in 2018.

"While most major categories of revenue continue to perform generally as expected, Massachusetts, like a number of other states, experienced below-benchmark performance in the category of non-withheld income in both December and January, particularly in individual estimated payments," Department of Revenue Commissioner Chris Harding said in a statement.

Harding said Massachusetts experienced a shift in estimated payments from December into January but they still trailed the monthly benchmark by $191 million, or 21.6 percent, and were 25.3 percent off last year's pace.

Harding attributed the worsening shortfall to "volatile capital gains," which are paid on investment earnings.

The state's two largest tax categories – withholding and sales – continue to show growth, according to DOR. Withholding collections are up 3.2 percent for the year and sales taxes are up 5.3 percent over fiscal 2018.

"These categories are associated with overall economic conditions in the state, which continue to show solid growth," Harding said.

Historically, January tax collections account for about 10 percent of overall revenues for the year. Revenues of $2.79 billion for the month were down $180 million from last year.

Despite back-to-back bad months, Gov. Charlie Baker did not seem ready to panic yet. Massachusetts is also not alone among states experiencing a downturn in the middle of the fiscal year that has been attributed to changing behavioral patterns as a result of the 2017 federal tax reform law.

"I think we're fine," Baker told the News Service prior to the release of the official figures, which the governor said he had not yet seen.

After the January figures were published, Baker's office issued a statement indicating its would "continue to closely monitor revenue collections over the next few months."

"The Baker-Polito Administration has increased the balance of the Rainy Day Fund to its highest point in a decade, closed a billion dollar budget deficit without raising taxes and while much of the recent shortfall appears to be related to a decline in revenue from capital gains, the Commonwealth has a statutory mechanism in place to buffer the state from such volatility," spokeswoman Sarah Finlaw said.

The state's policy on capital gains collections is to deposit anything in excess of roughly $1 billion into the state's "rainy day" account to both build up reserves and guard against over reliance on capital gains.

In late January when he released his $42.7 billion budget for fiscal 2020, Baker said he was still bullish on the economy.

"Our employment numbers still look really good and withholding and sales and estate taxes all still look really good," Baker said.

He continued, "The big question mark that was created in December was around estimated payment and there are a lot of states and a lot of experts that believe the estimated payments issue is a timing question."

Income tax collections in January missed their monthly benchmark by $230 million, and withholding collections were $27 million under benchmark, while sales tax collections beat their target by $3 million and corporate and business taxes were $28 million over estimates, a increase of 60 percent over last year.