By DJ Cence
Massachusetts’ Budget Outlook
In 2026, Governor Healey and the Massachusetts state legislature are faced with a daunting task: balancing the state budget with an expected $650 million shortfall caused by federal tax policy changes made by the One Big Beautiful Bill (OB3). The Governor will release her draft of the budget on January 28th, with the House and Senate versions to follow in the Spring. Together, these budget recommendations will provide the state with an important picture of how our elected officials plan to address this gap in revenue.
There are a few options that Governor Healey and the legislature have at their disposal to balance the budget. Programs and earmarks in the budget can be cut to reduce spending down to be in line with expected revenue. Alternatively, the legislature could create a new revenue source through legislation. Finally, the state could opt to decouple the current tax code from federal tax code and choose not to enact measures passed in OB3.
Here’s a look at how each option affects the state budget outcome.
Budget Cuts
As part of Massachusetts’ constitution, the legislature is required to establish a balanced budget year after year. This means the state cannot spend more than the revenue collected that year, unlike the federal government’s ability to spend on deficit. If the state does not choose to pass laws or decouple from federal tax code to address the expected revenue shortfall, cuts to specific programs may be required to ensure a balanced budget.
Many legislators have worked for years to get specific programs included and funded in the state budget. If the state does not increase revenue or decouple from federal tax policy, budget cuts may become a necessary consequence.
Revenue Generation
Rather than reducing spending to meet revenue, the state can increase revenue by implementing new programs both statewide and/or at the local level. The following proposals are currently under consideration to help combat expected shortfalls.
- Legalized iGaming: a proposal that would legalize online casino “skins” made by approved companies. If passed, legalized iGaming is expected to generate roughly $500 million in annual tax revenue.
- GILTI: a proposal to increase the GILTI (Global Intangible Low-Taxed Income) provision, which identifies U.S. profits shifted by multinational corporations to overseas tax havens, from the current 5 percent to 50 percent, in line with federal protocols. This would increase tax revenues by an estimated $585 million annually.
- Prop 2½: a proposal to allow cities and towns to increase their property tax revenue beyond the ceiling of 2.5 percent of total assessed value. This would allow cities and towns to increase their own tax revenue, helping to offset losses at the state level.
While these proposals are not a silver bullet to this issue, each would contribute to addressing federal tax policy changes.
Decoupling from Fed
Decoupling the state’s tax code from specific provisions in the federal tax code is a common practice, and an option available to Massachusetts leadership to mitigate the effects of OB3. The Department of Revenue estimates that decoupling from the provisions passed in OB3 would save the Commonwealth $436 million in Fiscal Year (FY) 26, and an additional $990 million from FY27 to FY31.
While this strategy seems to be an easy way to address the issues caused by OB3, it is possible that the move could be seen as politically unpopular, as some of the proposals in OB3 help small businesses and high-earning households in Massachusetts. Governor Healey’s budget proposal would be the first indication of appetite to decouple from the federal tax policy and would likely spark conversation about the desirability and likelihood of enactment.
Conclusion
An additional wrinkle to the state’s struggles against federal tax changes is a ballot measure filed for the 2026 election cycle. This measure seeks to decrease the statewide income tax from 5 percent to 4 percent annually and would lead to an additional $5 billion reduction in state revenue annually. In a turbulent economic environment, this measure would further exacerbate the issues facing Massachusetts leadership exponentially.
Despite the issues created by federal tax policy, the state has not remained passive in this process. Massachusetts leadership has indicated a desire to explore multiple options to address the budget shortfall before implementing drastic cuts. The Governor’s budget will be published this month, and we look forward to seeing how the state plans to solve this revenue issue and balance the budget.