Gov. Janet Mills is considering targeted tax increases to deal with a projected $450 million budget shortfall in the next two-year budget cycle, according to a memo from her budget office.

Budget Commissioner Kirsten Figueroa sent the memo to lawmakers, who will come back into session on Wednesday, to tell them the governor is preparing a lean budget that will likely include program changes, spending cuts and targeted tax increases.

But the memo is clear that Mills is not considering increases to broad based taxes like the income tax and that she does not want lawmakers to use the state’s rainy-day fund to balance the budget.

“The Budget Stabilization Fund, which exists for the purpose of covering budget shortfalls in times of economic distress, should not be considered as a source of revenue to balance the budget,” Figueroa wrote.

For several months the administration has warned that revenues are leveling off following years of post-COVID federal funding that kept states afloat during and after the pandemic.

Figueroa said recent budget projections show that the state needs $11.67 billion to fund state government for fiscal years 2026 and 2027, which is $450 million higher than projected revenues.

And more immediately, the state faces a $118 million shortfall in the state’s Medicaid program that the administration attributes to an increase in enrollment, an increase in the “overall cost of health care services” and an increased demand for services following the pandemic.

Mills plans to present lawmakers with a supplemental budget to fill that gap using state revenues recently identified by the Revenue Forecasting Commission.

But when it comes to the two-year budget, Mills is considering a range of options from cuts to “targeted revenues” to help fill the gap. The memo does not describe what those revenue streams could be, but at least two bills coming before lawmakers propose increases in the cigarette tax and others have floated the idea of increased taxes on cannabis and casinos.

The memo indicates Mills wants to preserve what she considers core commitments, including continuing to expand health care coverage, funding 55% of local education, free community college and 5% revenue sharing for cities and towns.

Unlike the federal government, states are required to pass balanced budgets.

"While, on balance, the State of Maine has enjoyed significant new revenues over the past several years that have allowed investments in important new programs that have benefitted Maine people, difficult decisions should be expected and difficult changes must be adopted this year to balance the budget and ensure the fiscal stability of the state budget moving forward,” Figueroa wrote.