Nothing like a battle over fine print in the tax code to kick off a legislative session.
The first shot was fired by Gov. Mills, who released a proposed budget that would make money received by small businesses from a federal COVID relief program taxable, after allowable business expenses such as wages and rent are deducted.
Business groups fired back, saying that federal law not only allows them to deduct expenses but also considers the grants from the Paycheck Protection Program to be tax-free income, providing an extra benefit that the state would take away.
The Mills administration explained that Maine would lose about $100 million in revenue if it mirrored the federal tax code and, unlike the federal government, the state has to balance its budget. Republicans responded that the money should still go to the state’s small businesses and Mills could find spending cuts elsewhere to make up for the lost revenue.
By midweek, Mills said she would look for assistance from the federal government to cover both kinds of small-business tax relief. But she said she would not divert money meant to fill other needs in a tight budget.
Fortunately, this is the beginning of the legislative session, and not the end. There is a compromise that can be made if lawmakers are willing to try.
Everyone agrees that many small businesses and their employees are struggling as a result of the coronavirus pandemic and they need all the help they can get to make it through the winter. But exempting all PPP income is the wrong way to do that because it would send too much help to companies that don’t need it and not enough to the ones that do.
The COVID recession is not affecting all industries the same way, and it would be better to target relief where it’s needed most.
As part of the federal CARES Act passed last March, the PPP loaned money to businesses and nonprofits with the understanding that the loans would be forgiven if the money were used to keep workers on the payroll. Approximately $2.2 billion went out to 28,000 Maine companies supporting 250,000 jobs, a quarter of the state’s private-sector workforce. MaineToday Media, the parent company of the Portland Press Herald/Maine Sunday Telegram received $3.8 million to protect its workers from layoff.
To be eligible, businesses had to have 500 or fewer employees, which is not necessarily small by Maine standards. The size of the loan offered was based on the number of people on a company’s payroll. The bigger the company, the more they could borrow, up to a maximum of $10 million. Ninety percent of the loans in Maine were for $150,000 or less, but almost one third of the money distributed here through PPP went to a little more than 1 percent of the companies that applied.
That’s fine when you are trying to save jobs – saving a job at a big company is just as important as saving a job in a small one. But giving a disproportionate share of the tax relief to such a small number of companies doesn’t make sense.
These big recipients include large law firms, accounting firms, car dealerships and fast food chains, which are well equipped to ride out the recession without a tax break. But the businesses that are really struggling – locally owned restaurants, motels and retail stores – received less from PPP to begin with and so have less to gain from a budget-busting plan that is supposed to be helping them.
A good compromise would be to focus the aid on the small businesses that were hit hardest by the recession. The state could make the PPP money tax exempt for them, but cap the amount big recipients can shave off their income.
Then lawmakers should look for ways to directly help the businesses and their employees that have been most directly affected
We are still months away from the time when a majority of people will be vaccinated against COVID, and when restaurants, bars, theaters and other gathering places can open safely at full capacity. Until then, lawmakers should work together to make sure that their limited resources are going to the right places.
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