Deal on state tax exemption implodes as Republicans balk at supplemental budget

Mar. 5—AUGUSTA — A partisan impasse over a budget bill could leave thousands of Maine businesses and unemployed workers paying state taxes on federal relief funds they received to help them weather the COVID-19 pandemic.

The supplemental budget bill passed the Legislature's Appropriations and Financial Affairs Committee on an 8-5 party-line vote Thursday night, with Democrats in the majority and Republicans opposed.

The bill would exempt all businesses from state taxes on forgivable federal Payroll Protection Program loans they received in 2020. It would also give an estimated 160,000 unemployed Mainers a break by exempting up to $10,001 of unemployment benefits from state income taxes.

The bill sweetens a proposal by Democratic Gov. Janet Mills, who would have imposed state income taxes on profitable businesses that received more than $1 million in PPP funds.

Leaders in the Legislature's Democratic majorities said Friday they met their Republican colleagues more than half way in negotiations on the measure, but Republicans refused to support the bill.

That means it may fail because a two-thirds margin of support is needed to pass the legislation before the April 15 federal tax filing deadline. The bill will be before the full Legislature for consideration next week, when it meets for the second time this year in a COVID-19 restricted session at the Augusta Civic Center.

Republicans are pressing for full federal tax conformity, including provisions allowing businesses to deduct 100 percent of business meal expenses and other deductions in federal tax law. Republicans also want a law change that would give them more say in how any additional federal COVID-19 relief funds would be spent, by requiring a two-thirds approval for such expenditures by the Legislature.

"We presented the notion that the federal government recognized the difficult situation for employers of all kinds and sizes during 2020 and made adjustments in order to help them keep their employees and stay afloat and not fall by the wayside when the customers went away," said Rep. Sawin Millett, R-Waterford, the lead House Republican on the Appropriations Committee.

But top Democrats disputed the Republican arguments.

"While Democrats want to use resources to support Maine families, Republicans would rather prioritize giving lavish tax breaks that pave the way for write-offs for three-martini lunches," Senate President Troy Jackson, D-Allagash, during an online press conference Friday morning.

Sen. Cathy Breen, D-Falmouth, the Senate chair of the committee, said Republicans appeared willing to risk tax relief benefits for thousands of workers and businesses to expand tax breaks to a relatively small fraction of businesses.

Democrats were listening when Maine's business community expressed its dismay over facing a tax on the forgivable federal loans that were being exempted from federal taxes, she said.

"We heard the outcry from businesses, we heard from the Maine (State) Chamber of Commerce that they needed this double tax benefit for the business community that had been hit so hard and is shouldering so much of the responsibility of this pandemic," Breen said.

The bill will cost the state about $100 million in tax revenue to provide the benefit to businesses and about $50 million to provide the tax break to the unemployed. Both Democrats and Republicans said their proposals depend on additional revenues flowing to the state from increased liquor sales.

The supplemental budget, as approved by Democrats, will also direct $10 million to be matched with $20 million in federal funds, to support caregivers for people with intellectual disabilities, autism, developmental disabilities, mental health and substance use disorders, Breen said.

"This is a great plan," Breen said. "What we did not do is spend another $32 million of state resources on arcane tax changes in the federal law that are not related to the pandemic and in fact go back into tax years 2019 and 2018 that have to do more with the Trump tax cuts from earlier than anything to do with the pandemic."

Breen said supplemental budgets are typically passed to put the state's budget in balance, a constitutional requirement, but state revenue forecasts for the remainder of the current fiscal year, which ends on June 30, suggest the current budget will finish in the black.

Maine State Chamber of Commerce President Dana Connors said business people appreciated the decision by legislative Democrats to provide full federal PPP conformity to businesses of all sizes.

"That was a high priority for us and that Democrats and Republicans were able to come together on that was extremely welcomed," Connors said. He added there are also other components to the supplemental budget, as proposed by Mills and approved by the committee, that could be a problem for some Maine businesses, including how the state will handle foreign-derived intangible income. Connors estimated those changes could impact an estimated 200 companies at a combined cost of $8 million.

Connors said he is optimistic lawmakers will still broker a deal that keeps full federal conformity as it pertains to PPP in place. He said he believes there may still be time to reach a compromise on some of the other issues that have prompted Republican resistance to the bill.

Without a compromise, a supplemental budget impasse will set hard political battle lines for the state's next two-year budget, which must be in place by the end of June and which will also require two-thirds support to become law. Mills has proposed a basically flat $8.4 billion spending package, which is also the subject of ongoing public hearings before the Legislature.