Higher SALT cap carries $222 million benefit on state tax filings, memo says
STATE HOUSE, BOSTON, OCT. 6, 2025…..The $650 million state revenue shortfall that could result from the federal law that Republicans championed this summer is based mostly on two tax code changes that would have less significant effects after the first year, according to a Department of Revenue memo.
The memo sheds light on possible tax policy decisions lawmakers could make in the coming months as they determine whether to cut some ties between the federal and state tax codes.
The One Big Beautiful Bill Act that President Donald Trump signed July 4 makes more than 100 changes to the federal tax code, about 30 of which trigger an impact to Massachusetts tax collections, DOR said. The federal changes trickle down to the state based on the way that Massachusetts conforms to the federal code — for individuals, taxable income is based on the federal code as in effect as of a specific date (currently Jan. 1, 2024), but trade or business deductions for an individual and the state’s corporate excise tax conform to the federal code as currently in effect and therefore automatically conform to changes Congress makes.
Revenue Commissioner Geoffrey Snyder told budget managers last week that the federal law is expected to reduce state tax collections by more than $650 million in fiscal year 2026, which began July 1. He said about a half dozen federal tax code changes form the bulk of the impact on the state and the DOR memo shows that some business filers could stand to benefit by not paying taxes the state had counted on.
The DOR memo on the federal law’s tax policy provisions, requested by the News Service following Snyder’s testimony, shows that five tax code changes are projected to decrease state revenues in fiscal 2026 by $685 million and that the rest of the law’s tax provisions “are projected to result in a total net increase in Massachusetts tax revenues of $21 million,” for a net decrease of $664 million.
The greatest single hit is expected to come from the return to pre-2022 rules around the ability of businesses to fully deduct domestic research and experimental expenditures, DOR said. Massachusetts conforms with that part of the federal code for both corporate excise and personal income tax purposes, DOR said, and the federal change is projected to mean a state revenue loss of $288 million.
The next-largest expected impact is based on the increase in the federal deduction for state and local taxes, the so-called SALT cap. The 2017 Tax Cuts and Jobs Act capped the SALT deduction at $10,000 and the new federal law increases that cap to $40,000. The expansion of the federal deduction, DOR said, is anticipated to reduce expected state tax collections by $222 million. The Urban-Brookings Tax Policy Center concluded late in 2024 that a higher SALT cap “would mostly benefit high-income earners.”
“[F]ewer Massachusetts filers will pay the Massachusetts pass-through entity, or ‘PTE,’ excise, which was enacted as a workaround to the cap on the federal SALT deduction and has been a revenue generator for the Commonwealth,” the DOR memo said.
The SALT deduction and domestic research expenditure changes are projected to combine for a $510 million negative impact on state revenues in fiscal year 2026, which runs through June 30, but their impact decreases greatly after the first year.
DOR said the net state revenue reduction from the new federal law in fiscal year 2027, which will start next July, is projected to be $282 million, then dropping to $251 million in fiscal 2028 and eventually down to a $13 million reduction in fiscal 2034. DOR said the fiscal 2026 impact is largest because some of the new federal law’s tax provisions are retroactive.
The four other tax provisions in the new law that are expected to reduce state tax revenues are the increase to the cap on the deductibility of the interest that a business pays on its debt (projected to result in $52 million less for the state this fiscal year); increased dollar limits on expensing certain depreciable business assets ($25 million impact to the state); a special depreciation allowance that lets businesses deduct the full cost of certain production property in the year it is placed in service ($98 million less for the state); and the permanent renewal and enhancement of federal “opportunity zones” tax credits (no state impact in fiscal 2026, but a projected loss of $18 million for fiscal 2027), according to DOR.
DOR’s memo is not entirely sour on the new federal law, though. It notes that the tax code changes to which Massachusetts conforms “are wide-ranging, and many of them will benefit Massachusetts residents and businesses.”
“For example, Massachusetts conforms to the sections of the OBBBA benefiting disabled individuals in Massachusetts by increasing their contribution limits to tax-free investment accounts, and to the sections enabling disabled individuals to roll over their 529 education plans to those investment accounts. Massachusetts also conforms to the sections of the OBBBA helping Massachusetts families finance education expenses by expanding the types of expenses that are allowable for 529 education plans,” the agency said. “Home builders in Massachusetts will benefit from Massachusetts conformity to the OBBBA’s change to accounting rules for residential contracts. And the OBBBA helps small businesses in Massachusetts by raising the threshold for 1099-MISC reporting from $600 to $2,000.”
At a midyear economic roundtable last week, lawmakers and budget chief Matthew Gorzkowicz mulled the possibility of decoupling the state and federal tax codes — either entirely or by addressing some or all of the six provisions highlighted in the DOR memo and in Snyder’s testimony.
“So those are the ones we’ll really have to take a look at and have some conversations about what, if anything, there is that we can do to help the commonwealth with the impacts of those,” Senate Ways and Means Chairman Michael Rodrigues said while discussing the six most impactful provisions with Snyder.
The revenue commissioner said last week that the state revenue impact of the new federal law was not taken into account during the fiscal 2026 revenue benchmark and budget-building process because it was signed into law on July 4, the same day that Healey signed the state budget.
The Healey administration and legislative Democrats agreed in January to build the fiscal 2026 budget on a $43.614 billion consensus revenue estimate. They stuck with that estimate through the five-month budget process, which coincided with the advancement of the One Big Beautiful Bill Act through Congress.
Gorzkowicz faces an Oct. 15 deadline to certify that estimate as still sound or revise it. The $650 million amount that DOR says is at risk would represent about 1.5% of all the tax revenue the state is expecting to collect this year.
