Massachusetts lawmakers are racing to address a $442 million revenue shortfall triggered by federal tax code changes, with the state’s Revenue Committee weighing competing proposals that pit fiscal stability against business competitiveness. Gov. Maura Healey’s administration is pushing for a phased implementation of five key corporate tax breaks while advocacy groups demand the state permanently block the changes altogether.
The dispute stems from the One Big Beautiful Bill Act that President Trump signed last July, which made over 100 changes to federal tax law. About 30 of those changes automatically affect Massachusetts tax collections because the state’s code conforms to federal rules unless lawmakers specifically opt out. Without legislative action, the state faces revenue losses exceeding $250 million annually for at least two years beyond the current fiscal shortfall.
The Five Provisions at Stake
Healey’s bill targets the federal changes with the largest revenue impact. The biggest hit comes from a provision allowing businesses to fully deduct domestic research and experimental expenditures in the year those costs are incurred, rather than spreading deductions over multiple years. If Massachusetts conformed immediately, this single change would cost the state $288 million in fiscal 2026.
The other four provisions increase the cap on business interest deductibility, raise limits on expensing certain depreciable assets, create a special depreciation allowance for production property, and enhance opportunity zone tax credits. Together, these four would reduce state revenues by an additional $175 million in fiscal 2026 if implemented without delay.
Administration and Finance Secretary Matthew Gorzkowicz told the committee Thursday that Healey’s approach strikes a necessary balance. The bill allows the research expense deduction to take effect starting January 1, 2026, pushing its fiscal impact to the 2027 budget year. The other four provisions would conform with federal law starting in tax year 2027, affecting the fiscal 2028 budget.
“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. He noted the administration consulted extensively with employers and business groups who emphasized the competitive importance of these tax breaks, particularly the research expense deduction for the state’s biotech and technology sectors.
Push for Permanent Decoupling
The Massachusetts Budget and Policy Center is leading calls for a more aggressive response. The organization wants lawmakers to permanently decouple from all five federal changes, following the path taken by New York, Rhode Island, and Maine.
Phineas Baxandall, the center’s director of research and policy analysis, argued that Healey’s delayed implementation preserves less than half the revenue at risk. According to Department of Revenue projections, the five provisions would cost Massachusetts $278 million in fiscal 2027 if fully implemented. Under Healey’s plan, the state would still lose $87 million that year from the research expense provision alone, with total losses climbing above $260 million in fiscal 2028 when all five take effect.
“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,” Baxandall testified. He framed the issue as an opportunity for Massachusetts to insulate its tax policy from what he called “ineffective and inequitable policies from the federal level.”
Massachusetts Teachers Association President Max Page connected the debate to other budget pressures. He pointed out that he had just come from a Group Insurance Commission meeting where officials postponed a vote on controversial benefit changes tied to Healey’s directive for $120 million in spending cuts for 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,” Page said.
Business Impact and Economic Arguments
The hearing highlighted differing views on the economic and fiscal effects of the proposed tax conformity changes. Rep. Francisco Paulino of Methuen challenged the administration’s proposed delay of the special depreciation allowance for production property, which would cost the state $98 million if implemented immediately.
Paulino argued the state actually gains revenue from construction activity through sales taxes on materials and income taxes paid by workers. “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,” he said, adding that “$98 million is a cost that we should afford.”
Gorzkowicz defended the administration’s approach by emphasizing Massachusetts’ unique economic profile. When asked why the state didn’t simply decouple like Maine or Rhode Island, he said those states have different industrial priorities.
“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.”
The research expense deduction carries particular weight for Massachusetts companies in research-intensive industries. Under the federal change, businesses can immediately deduct the full cost of domestic research and development expenses rather than amortizing them over five years. For companies with substantial R&D budgets, this creates immediate cash flow benefits and reduces effective tax rates.
Broader Federal Impacts on State Programs
The tax conformity debate is unfolding alongside other federal changes that threaten Massachusetts revenues and programs. The One Big Beautiful Bill Act also imposes new Medicaid work requirements starting January 2027, mandating that beneficiaries work at least 80 hours per month or earn at least $580 monthly to maintain coverage.
These requirements could strip Massachusetts of $3.5 billion in annual federal Medicaid funding and potentially cause hundreds of thousands of residents to lose coverage. The state faces $31 million in immediate compliance costs, including $21 million for IT system upgrades and staffing to handle increased workload from twice-yearly eligibility checks.
MassHealth, the state’s Medicaid program, currently covers 2 million residents—roughly one in four Massachusetts residents. Elizabeth LaMontagne, MassHealth’s chief operating officer, told officials the federal changes mean “increased workload, volume, calls… sharp increase in [health care] cost… D.C. is making things worse.”
The tax conformity discussion is occurring alongside other federal changes that could affect state finances, as Healey’s administration weighs how to manage projected revenue impacts.
Legislative Timeline
Top budget writers emphasized the urgency of resolving the issue. Senate Ways and Means Chairman Michael Rodrigues said Wednesday that “if we’re going to do anything, we need to do it quickly.” House Ways and Means Chairman Aaron Michlewitz agreed, noting the decision affects both the current fiscal 2026 budget and the fiscal 2027 budget now being prepared.
“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,” Michlewitz said.
Revenue Committee co-chair Sen. Jamie Eldridge opened Thursday’s hearing by asking advocates to submit testimony as quickly as possible, underscoring the compressed timeline. The Legislature needs to act before the fiscal 2026 budget requires adjustments and before businesses and individuals begin filing 2025 tax returns under uncertain rules.
Under Healey’s proposal, the research expense provision would apply to Massachusetts tax returns starting with the 2026 tax year, meaning businesses would see the benefit when filing returns in early 2027. The other four provisions would take effect for the 2027 tax year, impacting returns filed in early 2028.
If lawmakers instead choose permanent decoupling, Massachusetts businesses would not receive any of the federal tax breaks at the state level, regardless of their federal tax treatment. This would maintain higher state tax revenues but potentially put Massachusetts companies at a competitive disadvantage compared to businesses in states that conform to the federal changes.
The Legislature is weighing whether to delay conformity, permanently decouple from the federal provisions, or adopt them on the same timeline as federal law. The decision will determine how the five tax provisions affect Massachusetts revenues and business tax treatment in upcoming fiscal years.
Source
State puts approach to federal tax law changes on fast track | WWLP.com