Colin A. Young
State House News Service

Administration officials defended Gov. Maura Healey's approach to mitigating state revenue impacts of recent federal tax code changes as one that strikes an appropriate balance, but that equilibrium came under attack from various sides at a Revenue Committee hearing Thursday.

A committee co-chair began Thursday's hearing by asking advocates to submit any testimony on the bill as soon as possible. Top lawmakers need to make a decision on Healey's bill soon since the resolution will have a bearing on both the current state budget and the one being prepared for the fiscal year that starts July 1.

The situation offers a unique opportunity for Democrats on Beacon Hill to weigh in on some of the federal tax law shifts that have riled the national political discourse recently, and potentially to postpone some tax law impacts until after this year's elections.

The One Big Beautiful Bill Act (OB3) that President Donald Trump signed July 4 made more than 100 changes to the federal tax code, about 30 of which trigger an impact to Massachusetts tax collections based on the way Massachusetts automatically conforms to some elements of the federal code.

Healey last month filed a bill (H 4975) to delay the implementation of the five tax code changes that would take the largest bite out of state tax collections. If the Legislature does not adopt her plan, her administration says Massachusetts would see a $442 million revenue shortfall during the current fiscal year and could forgo more than $250 million in each of the next two fiscal years.

But the federal changes Healey is seeking to delay are expected to benefit Massachusetts residents and businesses, who may not have to pay all of the taxes the state had been expecting. Administration and Finance Secretary Matthew Gorzkowicz pitched it to the Revenue Committee on Thursday as a plan that strives to balance the interests of state government and the state's taxpayers.

"The bill before you lays out a thoughtful, phased-in approach to implement a number of the key OB3 tax reforms at the state level that will ensure our current fiscal year '26 budget and critical services it provides remain intact. By doing it this way, we were also able to deliver a predictable, competitive tax environment in which our residents, economy and workers can thrive," he said. "We arrived at this recommendation after many conversations with employers and business groups who see value in tax breaks included in the OB3 and the positive impact they could have on our economy. We also want to ensure that we are not cutting critical programs and services to accommodate those tax breaks."

Healey's bill spreads out Massachusetts's implementation of five key OB3 provisions over two years.

It allows the section that lets businesses fully deduct domestic research and experimental expenditures in the year those expenses are incurred to take effect as of Jan. 1, 2026 (federal law made it applicable for taxable years beginning after Dec. 31, 2024), allowing companies to take advantage here for the just-started tax year and blunting the state-level impact until fiscal year 2027.

"This was consistently the provision of the OB3 we heard most about from Massachusetts businesses as being important to their future, and it's why we're phasing it in first," Gorzkowicz said. 

Massachusetts would conform with the other four tax provisions in the federal law that were expected to reduce state tax revenues starting with tax year 2027 (fiscal year 2028) under Healey's bill. 

Those sections increase the cap on the deductibility of the interest that a business pays on its debt (had been projected to result in $52 million less for the state this fiscal year and $25 million less in fiscal 2027); increase dollar limits on expensing certain depreciable business assets (projected $25 million impact to the state this year, $17 million impact in fiscal 2027); a special depreciation allowance that lets businesses deduct the full cost of certain production property in the year it is placed in service (projected $98 million less for the state in fiscal 2026, and $131 million less in fiscal 2027); and the permanent renewal and enhancement of federal "opportunity zones" tax credits (no state impact in fiscal 2026, but a loss of $18 million for fiscal 2027), according to a Department of Revenue memo from October.

A parade of advocates, many associated with the Raise Up Massachusetts organization, told the Revenue Committee that Healey's bill doesn't go far enough and asked that the Legislature instead permanently decouple Massachusetts' code from the new federal changes, blocking them from becoming effective here. Phineas Baxandall, director of research and policy analysis at the Massachusetts Budget and Policy Center, said the state "can and should do more."

"With the federal administration aggressively implementing its own fiscal priorities, states like Massachusetts have an opportunity to protect our own laws from being reshaped by ineffective and inequitable policies from the federal level. We propose that the state opt out entirely from these five most expensive federal corporate tax changes," Baxandall said. "By completely opting out of the five changes, rather than just delaying them, Massachusetts can preserve the entire $278 million that the Department of Revenue has said would be lost by them in fiscal year 2027, whereas the governor's bill would preserve less than half of that revenue."

Massachusetts Teachers Association President Max Page urged the same, and pointed out that he had spent time Thursday in a meeting of the Group Insurance Commission, which postponed a vote on controversial benefit changes tied to Healey's directive for the GIC to cut $120 million in spending in fiscal 2027.

"But now I'm coming here to testify against because the administration is suggesting that, in fact, we can afford hundreds of millions in tax cuts to big corporations in the future," he said.

Revenue Committee co-chair Sen. Jamie Eldridge asked Gorzkowicz why the administration sought a delayed implementation rather than decoupling as states like New York, Rhode Island and Maine have done.

"We were trying to strike a balance between ensuring that Massachusetts remains competitive with other states, particularly for sectors that are important here in Massachusetts. They may not be as important in Maine, they may not be as important in some other states as they are here," the secretary said. "And so we wanted to make sure that we preserved our competitive advantage, support those industries that are important to our economy, while also insulating and preserving programs and services that might otherwise be impacted from the implementation of these."

Others said delaying implementation would be bad for the economy. Rep. Francisco Paulino of Methuen took issue with the administration's proposed delay until fiscal 2028 of a special depreciation allowance that lets businesses deduct the full cost of certain production property. Gorzkowicz told him that provision would mean a $98 million hit to state revenues if implemented right away.

"When you come up with that number, you realize that when you build any property -- well, let's say in this case nonresidential -- the builder, the investor, pay sales tax for all materials. The employees pay income tax to Massachusetts. Basically, we get taxes anyway from the property," he said. "We're losing revenue by [not] implementing now. And we need to build. We need to build, to create jobs, to keep all those young workers working so we can fill the pipeline of apprentices that need to be trained."

Paulino added, "$98 million is a cost that we should afford."

After a hearing on Healey's fiscal 2027 budget plan (H 2) Wednesday, the two lawmakers most responsible for producing the budget said they were glad the Revenue Committee was taking the bill up this week.

"If we're going to do anything, we need to do it quickly," Senate Ways and Means Chairman Michael Rodrigues said Wednesday.

House Ways and Means Chairman Aaron Michlewitz agreed. He added, "Also it is important, if we're going to do it, to do it soon because we've got to build the budget up. And then also, just because people are filing their taxes pretty soon, so they've got to know what to do as well."