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For weeks, Maine Republicans have been calling for full conformity with a new federal tax law to fully exempt all forgivable Paycheck Protection Program loans from state income taxes.
On Thursday, Democrats on the Legislature’s Appropriations Committee agreed to a supplemental budget that includes this tax change — along with tax breaks for Mainers who received pandemic unemployment benefits and for some direct care workers. Republicans on the committee voted against it.
Republicans in the State House now want further state tax reductions for businesses, many of which are not tied to the pandemic and which the state had previously decided not to adopt after Republicans in Congress passed tax cut legislation in 2017.
Rather than take credit for a victory — they successfully moved many Democrats and Gov. Janet Mills from minimal tax conformity to full conformity on PPP funds — Republicans now threaten to doom a supplemental budget that is slated for a vote in the Legislature next week. The budget, which needs to be passed soon so that Maine businesses and individuals can complete their tax filings with clarity, requires support from two-thirds of lawmakers to become effective immediately.
Republicans also want more of a say in how the state spends federal funds it has and will likely receive as part of federal pandemic relief packages. That may be reasonable in theory. But being inflexible on the supplemental budget likely doesn’t give Democrats, who control both chambers of the Legislature, much confidence that Republicans would be collaborative partners in those decisions. Not when Republicans apparently believe that compromise means fully agreeing with their positions.
To show they are reasonable negotiating partners heading into more difficult conversations about the larger biennial budget, Republicans should accept their win on PPP tax conformity in the supplemental budget. If they can do that, Democrats should be more willing to weigh a move to two-thirds approval for expending federal pandemic funds.
In January, Mills proposed treating PPP loans as taxable income but allowing businesses to fully deduct expenses related to these loans. She said the state could not afford the estimated $100 million needed to fully comply with federal tax law, which was changed in December to exempt PPP loan funds from federal income taxes.
A month later, the governor proposed exempting the first $1 million in PPP loan funds from state income taxes. This would extend a tax break to 99 percent of businesses, according to her administration, and focus the tax relief on the state’s smallest businesses. Only 251 Maine businesses, including the Bangor Daily News, had loans in excess of $1 million. The average PPP loan in Maine was about $80,000.
After briefly supporting this plan, the Maine State Chamber of Commerce continued to oppose the governor’s plan and pushed for full conformity, a call that was long echoed by the Maine Republican Party and the party’s caucuses in the Legislature.
Earlier this week, Democrats agreed to support fully exempting all PPP loans from state income taxation but added provisions to exempt a significant portion of pandemic-related unemployment benefits from state income taxes. Under the revised supplemental budget, this tax break will go to 160,000 Mainers who were out of work at some time during the pandemic. The $47 million cost of this provision will be paid for out of higher-than-expected revenue from liquor sales in the state. The PPP income tax breaks will be covered by funds the governor had initially proposed to put in the rainy day fund, unexpended state revenues and forthcoming revenues that are projected to be higher than expected.
The pairing of tax breaks for both Maine businesses and Maine people who were out of work is a late change to the budget, but it is reasonable. The PPP was created to help businesses cover their expenses during the pandemic economic shutdown. If they kept employees on the payroll, the loans would be forgiven. In addition, businesses can deduct PPP-related expenses — which are broadly defined and include rent, utilities and worker protection costs related to COVID-19 — when calculating their taxes.
Despite this government help, some businesses closed, putting their employees out of work. Others laid off or furloughed employees. Many of these workers received unemployment benefits, which are typically subject to state income taxes.
It makes sense to treat financial assistance to individuals and businesses the same way in this situation.
The full Legislature is scheduled to convene on Wednesday to vote on the revised supplemental budget plan, which covers state expenditures and revenue for the rest of the fiscal year, which ends on June 30.
With many individuals and businesses already preparing their tax filings for the April 15 deadline, a timely vote on the budget — and its tax provisions — is essential. Republicans secured the primary businesses breaks they have been seeking for weeks. Democrats added breaks for Mainers who lost work, and income, during the pandemic. That is a compromise worth supporting.