Gov. Janet Mills addresses members of the Legislature electronically at the Augusta Civic Center on Dec. 2, 2020. Credit: Bangor Daily News / BDN

AUGUSTA, Maine — Gov. Janet Mills faces a tight deadline to reach consensus with Republicans on business tax conformity, an issue that has become her first major sticking point with the minority party and could affect an early budget bill.

Lawmakers are set to convene for the first time since December at the Augusta Civic Center on March 10 and 11. The full agenda is not certain, but lawmakers are expected to take up Mills’ supplemental budget, which would implement cost-saving measures and appropriate money to stem part of the projected $650 million shortfall the state is facing over three years.

Tax conformity is the major issue in the proposal, raising questions about the state’s plan to tackle the economic fallout of the coronavirus pandemic. Mills shifted money she was going to put in a reserve fund to pay for an $82 million plan to fully forgive state taxes on Paycheck Protection Program loans to businesses that got less than $1 million from the program.

It was a reversal of Mills’ initial plan to tax proceeds from the federal loans, which prompted outcry from business interests and Republicans. Many are now pushing for full conformity, arguing that the Democratic governor’s stance picks winners and losers when the economic recovery is uncertain. The required two-thirds majorities in both chambers to enact changes before Tax Day on April 15 leaves little time to agree.

Republicans have indicated the issue is a top priority, with Assistant Senate Minority Leader Matt Pouliot of Augusta saying that anything less than full conformity will tank his party’s support for the supplemental budget.

“To say that first $81 million was not a good first step would not be true,” said Rep. Micky Carmichael, R-Greenbush, who sits on the Legislature’s taxation committee. “But we need to take it the rest of the way.”

Under Mills’ plan, loan proceeds beyond $1 million would be taxable income in Maine, though it would be subject to some deductions. That would provide 99 percent of businesses with full forgiveness, leaving 251 larger businesses employing 43,000 people collectively to claim some portion of their federal loans as income. (They include the Bangor Daily News’ parent company, which got a $1.6 million loan in 2020.)

It means the sides are roughly $18 million apart. Mills’ initial proposal came after Congress made a late change in December to clarify that forgiven loans did not constitute income for federal tax purposes. Loans were awarded to businesses based on their payrolls.

While the proposed compromise is not “ideal,” it is the best way to balance the budget crunch with helping smaller businesses that have struggled most during the pandemic, said Heather Johnson, commissioner of Maine’s Department of Economic and Community Development. The proposal has been praised by Democratic legislative leaders as a good compromise, while some progressives have argued against giving businesses any extra benefit.

Lindsay Crete, a Mills spokesperson, shot back at Republican criticism to say the governor has negotiated on the topic. She called both full-conformity and no-conformity stances as “all-or-nothing” approaches.

“Rather than delay that or important progress on timely budget matters, [Mills] hopes Republicans will recognize she has offered a fair compromise,” Crete said in an email. “Whether they do so is up to them.”

Mills has said she would like to support full conformity, but says the state could not afford the full $100 million price tag accompanying it. Republicans say the governor’s proposal unfairly penalizes bigger businesses.

“The price tag compared to the benefit is low,” Pouliot said.

Dana Connors, the president of the Maine State Chamber of Commerce, said he was supportive of the governor’s compromise initially, but began pushing for full conformity once he saw the scope of businesses affected. He said the $18 million more needed to cover all businesses should be “manageable” for the state.

But Johnson, the economic development commissioner, said not every industry would recover in the same way. Some businesses might need the monetary boost from full conformity, but others would benefit from the economy recovering faster — something she said could be achieved through bond proposals that Mills proposed in her budget address.

Two politically connected businesspeople diverged on the plans on Wednesday. Shawn Moody, Mills’ Republican opponent in 2018 and the founder of Moody’s Collision Centers, said he appreciated not having to claim the first $1 million of $3 million in loans. But the possibility of having to pay taxes on the rest would burden 240 employees who co-own the company.

“It’s almost like encouraging businesses not to grow,” he said.

But Adam Lee, the chairman of Lee Auto Malls, said the $5.5 million loan his business received helped him bring employees back after initially furloughing dozens, yet business has continued. Lee said Maine needed the revenue.

“Maine’s never been a wealthy place,” said Lee, a prominent Democrat who considered running in a primary field against Mills three years ago. “I’m sure she [Mills] is doing her best to not cut programs.”