In this April 28, 2020, file photo Maine Gov. Janet Mills speaks at a news conference in Augusta. Credit: Robert F. Bukaty / AP

AUGUSTA, Maine — Gov. Janet Mills’ administration cited cost as the main reason for a proposal to mirror only a small portion of a federal tax-cut package for businesses related to a stimulus package last year, prompting criticism from Republicans and the business lobby.

The Democratic governor’s tax conformity proposal, presented to the Legislature as part of a budget fix on Monday, is a side effect of the $2.2 trillion CARES Act. It funneled $8.9 billion into Maine, with most going to forgivable Paycheck Protection Program loans and other aid programs for businesses as well as enhanced unemployment benefits and direct payments.

At the federal level, forgivable loans and other grants to businesses will not be taxed. Changes passed by Congress in late December also allow businesses to deduct expenses made to keep employees working, such as rent or utilities retroactive to March, meaning businesses could claim those deductions on their federal taxes, regardless of whether loans were forgiven.

It was effectively a smaller stimulus on top of earlier stimulus. Unlike the federal government, states have to balance budgets. While they largely adhere to major federal tax changes for state tax purposes, they do so to varying degrees as full adoption could lead to massive increases or decreases in tax revenue. State conformity after a major federal tax change is always an open question, but businesses argued any tax on aid would be ill-timed during the pandemic.

For state taxes, Mills is proposing to include the business loans as income but allow businesses to deduct the expenses. The full package would cost the state $11 million into mid-2023. Kirsten Figueroa, the state’s budget commissioner, told lawmakers Monday that Mills would prefer to fully conform but the state cannot absorb the $100 million cost without congressional aid.

“The federal government is using the tax code to provide additional federal fiscal stimulus to PPP loan recipients,” Figueroa said. “But without additional funding to the states to pay for this effort, this is a conformity provision that is challenging state governments across the nation.”

Business groups said the proposal would hamper members as consumer spending is back on the decline. In Maine, it has decreased by 1.4 percent compared to a year ago, according to Opportunity Insights’ economic tracker, seeing a sharp decrease in December, a month usually punctuated by holiday spending.

“Anything the state can do to maintain and ensure the state’s economic vitality is important given that many businesses across the state have been impacted by [the pandemic] and continue to do so,” said Linda Caprara, a Maine State Chamber of Commerce lobbyist.

The plan figures to generate debate as the Maine Legislature considers Mills’ two-year budget proposal of $8.4 billion. While that plan largely holds state spending flat and takes advantage of projections that have outperformed dire estimates from earlier in the pandemic, minority Republicans in the Maine Legislature want to buffer that budget with spending cuts.

On Monday, Republican leaders slammed the proposal, saying it would take money away from businesses still struggling to survive the pandemic, especially in the winter months. Assistant Senate Minority Leader Matt Pouliot, R-Augusta, suggested the state cut expenses by $100 million and fully conform.

“I don’t think we should be taking resources away from Maine businesses trying to keep people employed,” he said.

But Sen. Ben Chipman, D-Portland, who co-chairs the tax panel, said the provision made sense by avoiding a “double benefit” to businesses and given the estimated $460 million revenue shortfall Maine is facing over the next three years. The liberal Maine Center for Economic Policy also opposed full conformity, saying it makes sense to treat loans as income or allow deducted expenses but not both.

Mills’ budget plan indirectly relies on federal stimulus money that helped bail out state budgets in 2020. The federal stimulus money greased consumption early in the pandemic while the $1.4 billion in enhanced unemployment benefits was taxable. The state collected about $55 million in taxes from businesses to pay for the unemployment fund, said Michael Allen, Maine’s associate commissioner for tax policy. In a normal year, it collects up to $3.5 million.

Another key provision in Mills’ conformity plan would be to create an allowance for Maine residents who moved to the state during the pandemic to avoid them having to pay income taxes in two states. The state is also looking to allow teachers to deduct personal protective equipment and cleaning supplies from their expenses.

The tax committee will meet this week to begin discussing the provisions. It will report back to the budget panel on any recommendations by early February. Lawmakers face a time crunch to pass a proposal quickly with state and federal taxes due on April 15.