Sen. Brad Farrin, R-Norridgewock, watches a vote tally in the Maine State House in Augusta in this 2018 file photo. Credit: Troy R. Bennett / BDN

AUGUSTA, Maine — A potential compromise emerged Wednesday on a short-term budget plan to enshrine spending cuts and forgive taxes on federal business aid when Democrats won over two Republicans after adding money for veterans services.

The Maine Legislature looked to be deadlocked early in the day after the proposal failed to win the two-thirds votes needed for passage in the House of Representatives on Wednesday in their first round of chamber votes in 2021 at the Augusta Civic Center. There was urgency for a deal with taxes due in five days for certain businesses and the April 15 tax deadline looming.

By the evening, Democrats agreed to add $113,000 in staff positions and funding in the Maine Bureau of Veterans’ Services, a change championed by Sen. Brad Farrin, R-Norridgewock. Only he and Sen. Rick Bennett, R-Oxford, broke ranks to support the budget, giving it more than two-thirds of the votes in the Democratic-led Senate.

Farrin, a Maine Air National Guard veteran of the Iraq war, said he was determined to make the issue his “line in the sand” after a homeless services coordinator was slated to be cut. The budget still needs a two-thirds vote in the House to ultimately pass.

“It will be pretty hard for policymakers to ignore [the issue] now,” he said.

A relatively tiny pool of money paved the way for the agreement. Minority Republicans withheld support last week for a short-term budget proposal as they remained $32 million apart from Democrats on a deal, pushing for further tax cuts conforming to federal law while pushing a measure subjecting Gov. Janet Mills’ power to expend federal coronavirus aid to legislative votes.

The parties effectively have to make a deal by Thursday, the second of two scheduled days of votes. Not doing so would risk the entire package, including a bipartisan agreement to fully forgive state taxes on federal Paycheck Protection Program loans after business interests pushed back on a Mills plan to subject proceeds from the virus aid program to state taxes. The parties also agreed to forgive state taxes on enhanced unemployment benefits up to $10,200.

Republicans were most focused on winning a federal tax break on foreign-derived income that Maine Revenue Services said affects perhaps 10 businesses here at a cost of $8.4 million.

Democrats seemed taken aback by that impasse. Sen. Bill Diamond, D-Windham, said the tax break was obscure and not worth holding the package up over. Bennett, the other Republican defector, was unconvinced they would benefit a substantial amount of Mainers.

“The moment is now to pass the supplemental and deliver aid to all the businesses and families across the state,” Rep. Teresa Pierce, D-Falmouth, the co-chair of the Legislature’s budget committee, said in a floor speech early Wednesday.

The majority of Republicans insisted full tax conformity had always been their goal and was crucial to helping businesses recover from the coronavirus pandemic. They were not assuaged after Farrin announced his agreement, though Republican leaders backed that money.

“It’s important that we take care of all of the businesses in the state of Maine,” said Senate Minority Leader Jeff Timberlake, R-Turner, “and $8.4 million may not seem like much of a tax hike for a lot of you, but it’s a big, fat tax hike to me.”

The argument over tax conformity has been at the front of the supplemental budget discussions since Mills introduced it in January, with the Paycheck Protection Program issue drawing ire from Republicans and businesses. Her original proposed shied from full conformity, citing its $100 million cost. She later offered a proposal forgiving taxes on the first $1 million of loans.

The supplemental budget would reduce spending this year by $258 million in an effort to reduce a projected $650 million revenue shortfall over three years. The situation is fluid after Congress’ passage of a $1.9 trillion relief package that will send $1.6 billion in state and local aid to Maine.

The Democratic governor indicated Wednesday she would submit a change package to her $8.4 billion, two-year budget proposal after the vote. Lawmakers must resolve that by late spring and their problems with the short-term budget could portend tough negotiations ahead.