When money rains down on Beacon Hill, you might think lawmakers would race to spend their windfall.
Maybe not when an arcane corporate tax change is at stake.
Business groups haven’t given up hope that this gift can arrive in time for Christmas. Associated Industries of Massachusetts, for example, sent a letter on Wednesday to legislative leaders, asking again for the tax fix. But the odds of that happening anytime soon get slimmer with each passing day.
This tax change is just one reason that the supplemental budget for fiscal year 2019 — yes, the one that ended on June 30 — is overdue. Legislators are clashing over the best ways to distribute more than $1 billion in surplus funds. The House’s version of the “supp” included the business-friendly tax adjustment, but the Senate’s did not. A conference committee is trying to hammer out the differences. Neither side will say if the tax benefit is still in the mix. It’s almost like “Fight Club”: What happens in conference, stays in conference.
State Comptroller Andrew Maylor seems to be losing patience as he strives to meet a Jan. 8 deadline set by state law to file audited financials for the last fiscal year. He told Beacon Hill leaders on Wednesday that he will sweep the surplus funds into the state’s rainy-day account if they can’t reach a deal by Dec. 11. If Maylor pulls that trigger, it means the debate over the tax change will likely get punted into 2020.
AIM and other business groups don’t want that to happen. Companies would then face a new cap on the amount of interest that they can deduct from their state taxes, potentially discouraging them from taking out loans for equipment purchases and plant expansions.
Here’s why. The tax reforms Congress passed in late 2017 included a number of business-friendly provisions, most notably a huge reduction in the federal corporate tax rate. But those reforms also included a cap on the amount of debt-related interest expenses that companies can deduct from their federal taxes. Because Massachusetts tax law largely follows federal law, this cap took effect here, too. (AIM, in its letter, estimates that various changes in the 2017 federal law could actually increase state corporate taxes by 12 percent.)
How much will the new deduction limit cost employers? No one really knows. The state Department of Revenue estimates the annual fiscal impact could total between $28 million and $46 million, almost all from new business tax collections. (A small amount would come via personal income taxes.) Even with that wide range, DOR warns that the numbers should be used with caution.
Still, that’s pocket change compared to the $43 billion state budget. Supporters say this measure simply avoids a tax increase by restoring things to the way they were before the new federal law mucked things up. Critics see a potential giveaway to the business community, a corporate tax break. Governor Charlie Baker and the House leadership back the tax fix, while Senate leaders want to study the implications first.
To break the broader budget impasse, House Speaker Bob DeLeo proposed putting off new spending and policy decisions and instead simply paying any outstanding bills left from the last fiscal year. But even reaching an agreement about which accounts are deficient has proven tough.
AIM returned to the fray on Wednesday with its letter to legislative leaders that pleads for the so-called 163(j) decoupling language. (The measure would “decouple” state law from federal law, with regard to the relevant IRS code.) Legislative inaction on decoupling, the group argued, could discourage companies that might be planning to invest in jobs or capital expansions here.
Business leaders who once considered this a simple procedural move have watched with dismay as the tax change they want gets swept up in Beacon Hill politics. Mark Gallagher, vice president at the Massachusetts High Technology Council, says his members still see this tax benefit as critically important, and he worries about the message it would send if the Legislature lets this one go. Greater Boston Chamber of Commerce chief Jim Rooney is also pushing for the change, acknowledging lawmakers might be reluctant to give up this new revenue source once it takes full effect.
But Rooney also sees the merit to DeLeo’s latest idea, to just settle the deficient accounts and put the tougher decisions off for another day. After all, some kind of plan is a better outcome than no accord at all.