Gov. Janet Mills addresses members of the Legislature electronically at the Augusta Civic Center in this December file photo. Credit: Linda Coan O'Kresik / BDN

AUGUSTA, Maine — Gov. Janet Mills directed her administration to find $100 million in federal money to forgive state taxes on coronavirus relief funds to businesses in a Wednesday reversal of a budget plan that prompted an outcry from Republicans and business groups.

It came two days after the Democratic governor put forward a tax conformity proposal that would require Maine small businesses to claim loans received through the federal Paycheck Protection program as income for state tax purposes but would allow them to deduct essential expenses. The federal government moved last month to exempt the loans from taxes.

Kirsten Figueroa, the state’s budget commissioner, said granting the same benefit to businesses would cost $100 million this year, a sum that Maine could not easily afford absent direct congressional aid to the states. The package proposed by the administration would instead pass through only a sliver of the federal tax breaks, costing $11 million through mid-2023.

The plan quickly earned backlash from the business community. Republicans accused Mills of unfairly penalizing businesses, while lobbying groups urged lawmakers to revise the proposal. Both factions responded positively to Mills’ planned reversal soon after it came Wednesday while some noted that it was far from a sure thing that the federal money would be found.

“I want to work with the Legislature and others to do all we can to pursue solutions that will help small businesses through this time of extraordinary hardship,” Mills said in a statement.

Maine Senate Minority Leader Jeff Timberlake, R-Turner, said in a text message he was “glad she is listening to us and the business community.” David Clough, the Maine director for the National Federation of Independent Business, said he spoke to Mills on Tuesday about the topic and she was receptive and interested in the concerns he passed along from members.

“I think the governor is aware that it’s a very big issue for the small business community,” he said.

The episode gave minority Republicans in the Maine Legislature a victory in their first real fight with the governor on taxes. She won election in 2018 behind a promise to not raise them, though her first two-year budget proposal the next year led to a sharp increase in state spending that Republicans criticized but eventually acceded to with few other viable options.

Those were good economic times, but the coronavirus pandemic has led to an estimated $650 million revenue shortfall through mid-2023. Earlier this month, Mills proposed addressing that within the contours of a two-year budget of $8.4 billion, which largely keeps spending flat but comes in at roughly $400 million more than the last budget.

Administration officials have expressed confidence they will be able to cover the gap through cost cutting, better projections and federal funds, while Republicans have argued for cuts to buffer the budget. That conversation is expected to frame debate in Augusta this year.

The session will be also imbued with electoral politics. Mills is entering the final two years of her first term and planning to run for reelection in a potential matchup with former Gov. Paul LePage, a Republican to which the current governor played foil to as attorney general. He said her Wednesday reversal amounted to “looking to the federal government for a bailout.”

BDN writer Michael Shepherd contributed to this report.