Republicans should welcome governor’s compromise on tax conformity

By David Farmer

Republicans haven’t realized it yet, but Gov. Janet Mills may be their biggest ally when it comes to negotiating a new two-year state budget.

Fueled by a legitimate policy disagreement about the tax treatment for federal forgivable loans — which are essentially grants — given to Maine businesses through the Paycheck Protection Program, Republicans — backed by members of the business community — pounced on the governor.

They argued that the decision not to conform with federal tax policies would hurt Maine businesses by taxing part of the relief they received from the PPP.

The argument is dubious. Under the original Mills proposal, the portion of the grants that went to pay for allowed business expenses would have been exempt from state taxation. 

With conformity, businesses get twice the benefit from the program by being able to deduct the grants from both the income and expense side of their books, as the Bangor Daily News editorial page explained.

“A month ago, Congress changed the law regarding the taxation of funds associated with the Paycheck Protection Plan, the federal program passed early in the pandemic to give businesses funding to help maintain their payrolls when revenue dropped because of the coronavirus and accompanying public health restrictions,” the paper wrote. “Now, there is pressure on … Gov. Janet Mills … to change Maine tax policy to match the federal rules.”

Uncharacteristically for Mills, once objections were made to her plans, she reconsidered her original proposal, creating a $100 million hole in her proposed state budget. 

On Tuesday, Mills released her fix for the issue.

Under her new plan, 99 percent of Maine businesses who received PPP funds would be able to take advantage of the tax provision, exempting from taxes up to $1 million from the loan they don’t have to pay back, turning the money into a grant essentially. The cost: $81 million, a slight savings over the original $100 million price tag, with the sharper focus on small businesses.

The governor would close the budget gap by redirecting $61 million she initially planned to put in the state’s reserve accounts, through other savings and by using unspent state funds.

The conservative business organization, the National Federation of Independent Business, reacted positively to the move, saying it would be “substantial help” to small businesses, according to the Bangor Daily News.

Republicans, needless to say, were more skeptical — as were Democrats. During a hearing in the Legislature on Tuesday, Republican Sen. Matthew Pouliot said debate was basically useless, according to BDN reporter Caitlin Andrews. He was only going to support full conformity. Democrat Sen. Ben Chipman was similarly dug in and said that he would not support the “double benefit” and that aid to businesses should be more targeted.

The governor made a smart tactical play with her proposal. She used money for a priority she shares with Republicans — adding to the state’s emergency reserve accounts — as the biggest source of funding to solve a political issue that has some teeth. Savvy.

Frankly, my biggest objection to the governor’s original budget was setting aside $61 million for the rainy day accounts at a time when a global public health emergency is putting families on the ropes. I would have used that money to invest — in health care, broadband, schools. The needs are great.

Looking ahead, it seems that Democrats in Washington are prepared to advance President Joe Biden’s $1.9 trillion COVID-19 rescue package, with or without Republican support. If they do, Maine could receive additional federal funding that could solve the taxation problem for businesses and address other urgent needs the state faces to get the economy back on track.

Federal and state leaders must go big on their response to the coronavirus crisis and its economic fallout. The danger is doing too little, not too much.

Republicans should recognize that the governor has given them a deal with the double benefit that’s better than they could have hoped for given incredible demand for additional government support and their party’s resistance to additional federal aid for states.

Take it now and they might have a chance to even get a few dollars back for the reserves. Keep fighting and pointing fingers and Democrats will be in a better position to rally for investments that they support.

The governor offered Republicans an olive branch and a solution. They hand back a bunch of splinters at their own policy peril.

David Farmer is a public affairs, political and media consultant in Portland, where he lives with his wife and two children.