What’s behind the legislative budget stalemate

Corporate tax provision -- incentive or unwarranted tax advantage?

STATE HOUSE NEWS SERVICE

LEGISLATIVE LEADERS have been mum about what is keeping them from agreeing on a bill to close the books on the fiscal year that ended almost six months ago, but Beacon Hill think tanks have weighed in on both sides of a tax provision thought to be at the center of the stalemate.

Though the branches differed on some spending and other matters when they each passed their own supplemental budgets finalizing fiscal year 2019, the most significant area of divergence was a measure decoupling Massachusetts from a new provision in the federal tax code in order to allow business to continue deducting interest on borrowing for capital investments. The House adopted the measure; the Senate did not.

Massachusetts automatically conforms to the federal Internal Revenue Code for corporate taxes, the Massachusetts Taxpayers Foundation said, but the House opted to decouple the state’s tax code from a specific section of the federal code, Section 163(j), to allow corporations to continue to deduct interest on money borrowed for capital investments. The House’s approach effectively made it so that a new part of the tax code, altered by the 2017 federal tax law, would not apply to Massachusetts companies.

The move to decouple from the federal code, which the Taxpayers Foundation estimates would result in the state not collecting about $37 million in tax revenue from corporations, was originally proposed by Gov. Charlie Baker. House lawmakers rejected an amendment that would have removed the decoupling language from their budget closeout bill by a 9-146 vote in October. Supporters see the decoupling as an incentive for business growth, while critics deride it as a corporate giveaway.

Rep. Mark Cusack, who chairs the House Revenue Committee, told the House that decoupling would aid a robust state economy and help employers of all sizes. He added that the provision cannot be a giveaway because the state has never collected the tax revenue that companies would be required to pay if the tax codes remain coupled and said the forgone revenue would be more than made up by the increase in corporate tax collections the state expects to receive.

When the Senate took up and passed its own version of the supplemental budget bill, the language to decouple from 163(j) was not included. It later sent the House a compromise proposal that would instruct the Department of Revenue to study the implications of decoupling from Section 163(j).

The Massachusetts Budget and Policy Center, a more left-leaning think tank, seemed to prefer the Senate’s approach. The center says Massachusetts businesses received an estimated $4 billion in tax relief from a federal tax cut and don’t need the additional savings that decoupling would provide.

“The Commonwealth should not be seeking additional ways to reduce state-level income taxes on profitable multi-state and multi-national corporations operating in Massachusetts. This approach provides an unwarranted tax advantage to a subset of businesses: those with multi-state and/or multi-national subsidiaries and sophisticated accounting departments,” the organization said in a position paper released Monday. “Providing such corporate tax cuts also deprives the Commonwealth of much-needed revenue for investments in education, transportation and more — all of which allow both businesses and communities throughout the state to thrive.”

Officials in the business community have declined to identify which companies would benefit from the tax provision.

Senate Ways and Means Chairman Sen. Michael Rodrigues said his committee removed the tax provision from the House bill because “we don’t believe in doing major tax policy in a supplemental budget.”

MTF, a business-backed organization that tends to be more conservative than MassBudget, agrees with the House that decoupling is necessary and rejected Rodrigues’ suggestion that the Senate’s revenue working group should consider the idea further.

“This approach would be misguided,” MTF said in a primer on Section 163(j) released in late October. “Failure to act would represent a significant change in tax policy that would be neither deliberate nor timely. While the Working Group determines if a change in the tax treatment of interest expense is warranted, lawmakers should preserve the historic deductibility of interest expense as an interim approach.”

The two think tanks framed action taken by other states differently in their descriptions of Section 163(j) legislation around the country. While MTF said “several other states have already taken action to address this issue,” MassBudget wrote that “decoupling from Section 163(j) is not especially common among the states.” But both organizations agreed that eight states — Alabama, Connecticut, Georgia, Indiana, Missouri, South Carolina, Tennessee and Wisconsin — have decoupled from Section 163(j).

“If Massachusetts decouples, it will be an outlier,” MassBudget said.

Over the summer, the Greater Boston Chamber of Commerce came out in support of decoupling the state code from Section 163(j) of the federal code.

“Massachusetts can avoid penalizing businesses for their investments by decoupling,” the Chamber wrote in a brief. “In order to remain regionally and internationally competitive Massachusetts should act quickly to encourage investment by removing unintended limitations on the deduction for interest.”

Senate President Karen Spilka has said that the holdup is “not about spending,” while House Speaker Robert DeLeo last week told reporters, “I don’t know if we can talk about what exactly the hang-up is.” House Ways and Means Chairman Rep. Aaron Michlewitz said late last month that the corporate tax benefit approved by the House, which some progressive Democrats have threatened to rally against if it’s in the final bill, was one of a number of “complexities” keeping the branches from a timely resolution.

[Several sources said the tax issue has soured negotiations between the two chambers, but they were puzzled why, if that’s the case, the Senate wouldn’t simply go along with a DeLeo proposal to pass a bare-bones budget bill and put the tax issue on the shelf, at least for now.].

The House and Senate face a deadline of 3 p.m. Wednesday to reach a deal on a supplemental budget bill or else Comptroller Andrew Maylor plans to unilaterally transfer the entirety of last year’s roughly $1 billion surplus into the state’s rainy day fund.

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The House supplemental budget totaled $723 million in spending and the Senate bill before the House-Senate conference committee calls for $853 million in spending. The funds for those appropriations, which would also plug accounts that ran out of money in fiscal 2019, could be swept away by Maylor on Wednesday.

It’s unclear whether the Legislature will be too late to act if the Senate relents and agrees to decouple. MTF said in October that the Section 163(j) issue “is urgent for many corporate taxpayers.”