AUGUSTA — Democratic and Republican lawmakers reached a late-night deal Thursday that provides income tax breaks to more than 28,000 businesses and 160,000 workers who were unemployed during the COVID-19 pandemic.

Disagreement over a proposed supplemental state budget bill on Thursday had left a $100 million state tax exemption for federal Paycheck Protection Program loans in limbo. With tax filing deadlines looming and tensions high during just the second full meeting of the new Legislature, House Republicans yielded on their demands to conform Maine’s tax law completely with the federal tax code late Thursday.

Despite the daylong turmoil that drew a rebuke of House Republicans by Gov. Janet Mills, the supplemental budget bill passed the House on a vote of 139-1 early Friday morning. The bill then received unanimous approval in the Senate.

All sides praised the final result on the interim budget bill, which covers state government spending through the end of the current fiscal year on June 30.

“Today’s vote is a huge step forward for Mainers,” House Speaker Ryan Fecteau, D-Biddeford, said in a statement. “After a year of uncertainty, the Legislature is now delivering some certainty for Maine people. We’ve passed a bipartisan supplemental budget with a great deal of tax relief for 28,000 businesses, the 250,000 Mainers they employ and over 160,000 Mainers who were out of work in 2020.”

House Republicans focused on the fact that the agreement provides full tax “conformity” between state and federal taxes for businesses that received forgivable loans through the Paycheck Protection Program, or PPP.

“Maine employers and their employees rallied to our call and convinced the governor and Democrats in the Legislature to see the wisdom of supporting the people who will lead our economic recovery,” House Republican Leader Kathleen Dillingham, R-Oxford, said in a statement. “In the end we commend our Democratic colleagues, the leadership of Speaker Fecteau, and his willingness to listen to achieve a bipartisan result.”

The supplemental budget bill is meant to close a projected revenue shortfall of about $125 million in the state’s current budget year but it also included the tax relief provisions for businesses and the unemployed. Legislative negotiations will now turn to the two-year, roughly $8 billion budget that begins July 1. Maine’s Constitution requires state government to maintain a balanced budget.

It was not clear a deal would happen Thursday as Democrats and House Republicans tussled over the scope of tax conformity.

Democrats had already agreed more than a week earlier to Republican demands that allow businesses that received PPP money to avoid paying state income taxes on the loans, mirroring the federal policy. That tax break is worth about $100 million to Maine businesses that participated in the PPP to protect jobs at the height of the COVID-19 pandemic.

But even after the agreement on PPP loans, Republicans in both the House and the Senate insisted they wanted “full conformity” between Maine and federal taxes, with some changes dating back several years. Democrats and Mills accused Republicans of “moving the goalpost” after the agreement by pushing to extend a range of obscure federal tax benefits worth $32 million to state law.

Ultimately, Republicans seemed unwilling to risk the broader tax relief package, including a provision in the bill that will exempt the first $10,200 of unemployment benefits from state income taxes.

A concession from Democrats to sock away another $8 million in the state’s rainy day fund brought enough Republicans on board to break the logjam and send the bill to Mills’ desk. As part of the deal, the Department of Administration and Financial Services will study the impact of one of the obscure tax conformity issues that Republicans had been seeking: federal tax benefits on foreign derived intangible income, which come from exporting products that are tied to intangible assets, such as patents, trademarks and copyrights, held in the United States.

Republicans said failing to do so would cost some Maine-based companies and those doing business in Maine a combined $8.3 million in new taxes. But Democrats accused Republicans of holding up tax benefits for tens of thousands of businesses and hundreds of thousands of Mainers to benefit a handful of multinational companies.

“Democrats were clear from the beginning, we were willing to work with Republicans to pass a compromise supplemental budget that works for Maine people and businesses,” Senate President Troy Jackson said in a statement. “My colleagues and I were also clear that we would never get behind lavish tax breaks that only benefit wealthy, multinational corporations. And we held firm. Three-martini lunches and offshore tax havens do nothing for the hardworking people who lost their job due to no fault of their own or the struggling small businesses on Main Street.”

But Dillingham said Republicans and Democrats were not fully hearing each other about what was meant by “full conformity.” She said lawmakers broke through on a deal by simply sticking to negotiating and that the study would show whether the conformity piece Republicans wanted would be beneficial or not.

“Is it beneficial to the businesses, how many businesses in Maine are using it?” Dillingham said. “Or do we want to continue to decouple from the federal tax code.”

Another conformity piece Republicans have asked for was matching federal law on allowing businesses to deduct 100 percent of the costs of business-related meal expenses.

Republicans said many Maine businesses incurred increased business meal costs as they fed employees during the pandemic to keep them on the job. But Jackson and other leading Democrats derided the idea as a write-off for “three-martini lunches.”

Following the agreement, Mills commended both Democratic and Republican leaders for working “to reach a sensible, bipartisan agreement.” On Thursday evening, however, Mills had jabbed at minority Republicans in the House, saying they were taking an “all-or-nothing” approach and encouraging them to “abandon their last-minute attempt to provide state tax breaks to large multistate, multinational corporations.”

To date, Maine businesses have received more than 38,000 PPP loans totaling $2.96 billion to help weather the COVID-19 pandemic, according to figures from the office of U.S. Sen. Susan Collins, a Republican who co-authored the program. So businesses were concerned about how a potential stalemate in Augusta over more obscure tax laws could affect corporate income taxes due on Monday and state income taxes due on April 15.

Earlier Thursday night, Dana Connors, president of the Maine State Chamber of Commerce, the state’s largest business organization, said the choice between full PPP conformity and no relief at all was not an option for his members.

“The fallback should have always been to protect the full PPP conformity, just as it had already been agreed to in a bipartisan manner,” Connors said.

The full Legislature met in person for only the second time since swearing in ceremonies in December. They were meeting at the Augusta Civic Center – a bigger venue that allows social distancing for lawmakers – at a cost of $21,000 a day.

But the venue and the pandemic also put additional pressure on lawmakers as the city-owned Civic Center was slated to again be set up as a mass-vaccination site for MaineGeneral Health on Friday.

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