A woman wearing a mask walks by an empty storefront in Portland on Wednesday Feb. 10, 2021. Credit: Troy R. Bennett / BDN

The BDN Editorial Board operates independently from the newsroom, and does not set policies or contribute to reporting or editing articles elsewhere in the newspaper or on bangordailynews.com.

Here’s how the Small Business Administration describes the Paycheck Protection Program, a federal loan fund created to help companies — and their employees — get through the coronavirus pandemic: “The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on payroll.” If employee retention goals are met, the loans are forgivable.

The forgivable loan program is run by the SBA and was created through amendments to the Small Business Act.

So, it is clear that the loan program, which was part of the Coronavirus Aid, Relief, and Economic Security Act passed by Congress in March, is meant to help small businesses.

Therefore, targeting PPP state tax breaks to Maine’s smallest businesses, as Gov. Janet Mills now proposes to do, is a reasonable way to direct benefits to Maine’s small employers.

The PPP program has been back in the news in Maine as state lawmakers debate how to tax the loan funds and whether to allow PPP-related tax write-offs.

Under federal law, PPP funds are not taxable and, after Congress changed the law in December, expenses covered by PPP funds can be deducted from potential tax liability. According to the SBA, PPP funds “can be used to help fund payroll costs, including benefits, and may also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.”

For federal taxes, this allows businesses to subtract their PPP loan amount from both the income side of the ledger and the expense side of the ledger. Mills has called this a “double tax benefit.”

States can determine whether to follow the federal tax policy — called conformity — or not.

Last month, Mills proposed a partial tax conformity plan to include the forgivable business loans as taxable income but allow businesses to deduct PPP-related expenses from their state income taxes.

Businesses are only liable for state income tax if they earned a profit after writing off eligible expenses and taking other deductions. Many businesses will get a tax refund based on how the PPP funds are treated under state and federal tax codes.

Meanwhile, unemployment benefits, which go directly to out-of-work Americans, are subject to state and federal income taxes.

After an outcry from some businesses and Republicans in response to her initial plan, Mills asked state department heads to look for funds to cover the estimated $100 million cost of full conformity.

On Tuesday, she offered another option. The state would not assess income taxes on the first $1 million in PPP funds that a business received, but loan funds above that amount would be subject to taxes.

According to an analysis by Maine’s Department of Economic and Community Development, there are 26,683 Maine businesses that received $1 million or less, which is 99 percent of all the Maine businesses that received PPP funds, the governor’s office said in a press release on Tuesday. These businesses employ 81 percent of the total number of employees at Maine businesses that received PPP funds.

In Maine, 251 businesses, including the Bangor Daily News, received more than $1 million in PPP funds. Those businesses represent less than 1 percent of the state’s PPP loan recipients. The average Maine PPP loan was about $80,000.

Targeting the tax breaks to Maine’s smallest businesses would reduce the cost of conformity to about $82 million, the governor’s office said. Mills’ plan, which is now being considered by lawmakers, would cover this cost by forgoing her initial biennial budget plan of putting $61 million into the state’s budget stabilization fund and by using unspent state funds.

“Her revised Paycheck Protection Program tax conformity proposal would be a tremendous relief to the thousands of small businesses that utilized this vital federal lifeline to keep their doors open, employees working and customers able to get their needs met locally,” David Clough, Maine State Director for the National Federation of Independent Business, said in the governor’s press release.

Legislative Republicans are still pushing for full conformity and calling for budget cuts to pay for it. In a press release on Tuesday, they wrongly said the governor was proposing to withdraw funds from the state’s rainy day fund (She’s now proposing to not add more money into the fund, which is not the same as taking money out of it) and incorrectly suggested that businesses won’t benefit at all from the PPP loans without the tax benefits. They also misstated when the CARES Act was passed.

The governor’s plan isn’t perfect but it offers a reasonable way to extend tax breaks, which resembles federal tax policy, to Maine’s small businesses. And, it pays for it with minimal impact on state programs and services.

The BDN Editorial Board

The Bangor Daily News editorial board members are Publisher Richard J. Warren, Editorial Page Editor Susan Young, Assistant Editorial Page Editor Matt Junker and BDN President Todd Benoit. Young has worked...