BOSTON — As some other states scramble to find workarounds to mitigate impacts of the new federal tax law, Massachusetts lawmakers got a yellow light Tuesday from experts they invited to weigh on paths they might take.
"I feel confident saying that Massachusetts has not been put in an emergency situation by federal tax reform," Michael Heffernan, state secretary of administration and finance, told the Legislature's Revenue Committee. "There is time for a thoughtful approach."
Heffernan and others who testified before the committee recommended that the Legislature proceed with caution, noting guidance from the Internal Revenue Service and technical corrections are still likely to emerge after President Donald Trump signed a tax overhaul into law last month.
After hours of invite-only testimony from economists and experts in tax law, Rep. Jay Kaufman, the committee's House chair, recessed the hearing instead of adjourning it. He had suggested earlier in the afternoon that the committee may need to reconvene in three to four months and ask the same questions when more data is available.
"We'll be back, that's my commitment to you," the Lexington Democrat said.
After testimony from Heffernan and Revenue Commissioner Christopher Harding, Max Behlke from the National Conference of State Legislatures, Noah Berger of the Massachusetts Budget and Policy Center, and Eileen McAnneny of the Massachusetts Taxpayers Foundation, Kaufman said he was struck that all four presentations called for the committee to "act slow and take no action."
"That's rather unusual in this room and in this building," he said.
Heffernan said Massachusetts, with its 5.1 percent income tax, is in a different position than states like New York, New Jersey and California where the new $10,000 cap on state and local tax deductions "may be a critical issue."
"The capping of SALT deductibility hits the upper income population, and it hits hardest in those states with high income tax rates for high earners, and high property taxes," Heffernan said. He said Massachusetts homeowners pay property taxes that are "not low by national standards" but compare favorably with those in New York, New Jersey and California.
Kaufman said he took "some comfort" in Heffernan's suggestion that the state does not need to be "in panic mode."
Two lawmakers who are certified public accountants — Marblehead Democrat Rep. Lori Ehrlich and Sandwich Republican Rep. Randy Hunt — joined the committee for its hearing.
Ehrlich said some other states are exploring "dramatic changes" in response to the federal tax law, including proposals to replace state income taxes paid by employees with an employer-paid tax and to give residents the option to contribute to newly created state charitable funds instead of paying taxes.
"These things just honestly blow my mind," she said. "They are very dramatic, they are extreme, but they're also interesting."
Some concrete proposals did emerge for steps the committee could pursue.
Luz Arevalo of the low-income tax clinic at Greater Boston Legal Services said the state should decouple its earned income tax credit from the federal version to make it accessible to people without Social Security numbers and to single workers without children.
To combat likely federal grant cuts, Andrew Reschovsky of the Lincoln Institute for Land Policy suggested building up the state's rainy day fund, potentially through delaying or repealing any scheduled reductions in the state income tax rate. Additionally, Reschovsky said, since the federal law provides large tax cuts to corporations, the state could consider "revenue-enhancing changes to state corporate income taxes."
McAnneny said she would strongly advise against a "knee-jerk policy reaction," but that federal tax changes are the latest in a series of developments that indicate the state should take a more comprehensive look at its own tax code.
Speakers at the hearing raised a suite of issues, touching on potential local impacts of the child tax credit, a reduced corporate tax rate, possible federal spending cuts and more.
* A "large majority" of Massachusetts taxpayers — as many as nine out of 10 — will end up paying less federal income taxes at least until the end of 2025, when individual cuts expire, according to the Lincoln Institute's Reschovsky.
* An increase in the standardized deduction is likely to disincentivize taxpayers from itemizing deductions on their returns, according to Associated Grant Makers, which said a "significant number of donors" plan contributions around the year's end to receive tax benefits. Citing an Indiana University Study that projected giving to charities would drop by 4.6 percent, the group estimated a loss of $253 million in charitable donations in Massachusetts.
* Hundreds of thousands of Massachusetts tax filers may be affected by the cap on SALT deductions, Northeastern University economist Alan Clayton-Matthews said. Among that group is about 13,000 single filers with gross adjusted incomes of $38,700 to $82,500 who have average state and local tax payments of more than $15,000. Clayton-Matthews said that if people in that demographic have other itemized deductions like mortgage interest or medical expenses and consequently do not take the standard deduction, they could lose more than $1,000 in after-tax disposable income. "It's interesting that when you do an analysis, it looks like there'll be many households even who aren't considered upper middle income or wealthy who may be affected by this," he said.
* Clayton-Matthews said there could also be positive impacts to the law's corporate tax rate reduction, including instances where companies could make more investments, increase worker pay, or even lower prices -- though he suggested the third option was unlikely, comparing it to chances of the New England Patriots losing the upcoming Super Bowl in Minnesota.
* The Massachusetts Municipal Association raised concerns about the SALT deduction limit, saying it has the potential to affect both property taxes that support local operating budgets and communities' ability to afford debt-financed capital spending for projects like roads and sewer systems.
* Taxpayers whose children do not have Social Security numbers will no longer be eligible for the child tax credit, said Keith Fogg, director of the federal tax clinic at Harvard Law School's Legal Services Center. Fogg said the law expanded the child tax credit to make up for the loss of dependency exemptions, but some filers who were eligible for the exemption will not be able to receive the credit. He gave the example of a married couple with dependent children aged 17 and 19. "If you play out the math in terms of how their tax return is going to map out, they're going to be losers, because they've lost the value of the dependent exemption and they're not getting any child tax credit to come in and give them the benefit," Fogg said. "If their children are 14 and 16, they might be net winners, because the child tax credit would be more valuable than the loss of the dependency exemption."
* The Massachusetts Taxpayers Foundation is "concerned long-term about potential impacts on federal revenue as our debt increases and federal spending could be reduced," McAnneny said. She said the law contains $6 trillion in cuts offset by $4.5 billion in hikes, for a net reduction in taxes of $1.5 trillion. What that revenue loss means for states is not yet clear, McAnneny said. Changes to Medicare reimbursement rates would have a "huge impact" on Massachusetts and its major health care sector, and it remains unseen if the federal government will partner with states on an infrastructure plan.
* One of the issues the Massachusetts Society of Certified Public Accountants flagged in written testimony was the estate tax, noting the new law increases the estate tax threshold to $10 million per person while Massachusetts' threshold remains at $1 million. "We believe that such a drastic difference in the tax thresholds could have negative consequences for the state; our members acknowledge that even prior to the changes at the federal level, they advised their older, high-net-worth clients to change their domicile to states with little or no estate tax," wrote society CEO Amy Pitter and Chairman-elect Mark Nichols.