The first significant controversy of Maine’s new legislative session is over, and the surprising winners are the minority Republicans.
They were playing on their home turf, admittedly. The issue was a seemingly obscure point of “tax conformity” concerning PPP loans offered to businesses, including non-profits, as part of the $2.2 trillion CARES Act that was by far the most important Congressional response to the pandemic.
Gov. Janet Mills initially opted for “non-conformity” with the brand-new federal policy in her supplemental budget proposal, saying that otherwise there’d be a $100 million hole in the $8.4 billion biennial plan she presented Jan. 8.
Republicans pounced, calling it a “$100 million tax increase,” and trumpeting, on the party website, “Mills to destroy struggling Maine small businesses by taxing federal relief funds.”
Mills knew this was a largely false narrative, but didn’t contest it. Thus she quickly became “the Democrat who tried to tax small business,” perhaps unintentionally playing a game that’s been going on since Ronald Reagan’s mammoth tax cuts in 1981.
It goes like this: When in power, Republicans cut taxes, especially for business and the wealthy, as Paul LePage did throughout eight years as Mills’s predecessor.
When they resume control, Democrats accept almost all the cuts, or at most nibble around the edges, as Barack Obama did after the George W. Bush round of federal cuts.
Here, for the record, is what actually happened with the PPP loans.
When legislation as large as the CARES Act showers benefits on private companies, there are always questions about how the tax code adapts. In this instance, the PPP loans could immediately be deducted as a payroll business expense, but their status as business income was left unclear.
The IRS, with Donald Trump still in charge, ruled that PPP loans couldn’t also be deducted as income because that would create a “double benefit” Congress presumably hadn’t intended.
Business lobbyists went to work. In the year-end legislative mishmash that included more checks and loans enacted on Dec. 27, Congress quietly restored the double benefit the IRS had disallowed.
Congress showed no such solicitude for unemployed workers, who also benefited from CARES and the year-end supplement. Their benefits, both state and federal, remain fully taxable as income, but then they don’t have squads of lobbyists.
The last-minute change is of no real concern to Congress; the Federal Reserve steadily adds to the money supply to cover whatever expenses Congress runs up, but states are not so lucky.
Each federal tax benefit, at least for states like Maine with income taxes, 43 in all, goes directly to the bottom line of a budget that must be balanced every June 30, the fiscal year’s end.
Kristen Figueroa, Mills’s finance commissioner, clearly explained the situation to the Appropriations Committee, but Mills decided not get involved.
Mills could, for instance, have challenged Republicans to help find the $100 million if they were truly concerned, rather than sticking to their usual “cut spending – somewhere” mantra for a budget prepared months earlier.
Instead, she quickly retreated, calling on her commissioners to find $100 million in unused federal funding. For Maine, $100 million is not exactly pocket change, and the commissioners predictably failed.
So last Tuesday, Mills threw in the towel, saying she’d re-designate a $61 million increase for the rainy day fund to business tax relief, while limiting the deduction to those businesses reporting less than $1 million in income. There might have been better uses for that money.
The $1 million limit reduces total benefits to $81 million, rather than $100 million. The rest will be produced by some of that loose change.
Democratic legislative leadership instantly endorsed the plan; Republicans objected to the limitation.
The tradition of muddling through on taxes remains intact. It would be too much to ask Maine citizens to carefully consider the balance between supporting business – as Mills earlier did through a state $250 million loan fund, on top of PPP – and buying vitally needed services, such as public health and education.
All eyes now turn to Washington, where Congress is considering President Biden’s $1.9 trillion relief package that includes $350 billion in general purpose aid to states and local governments. If it comes through, Maine’s budget problems, for this year, will be over.
But the long-term policy questions remain. Will Maine continue to ratchet down state spending levels, as it has for the last 20 years? Are more business tax cuts truly the top priority? Or will Maine finally assess what public investments are needed to make the economy grow?
Those questions, it appears, will remain for another Legislature to answer.
Douglas Rooks, a Maine editor, reporter, opinion writer and author for 36 years, has published books about George Mitchell, and the Maine Democratic Party. He welcomes comment at drooks@tds.net
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