Facing backlash from businesses over a proposal to tax forgivable coronavirus relief loans as income, Gov. Janet Mills said Wednesday that her administration will look for federal funding that would allow the state to make the loans tax-free while still covering a projected $100 million budget shortfall.

Mills’ budget calls for taxing the forgivable loans, which provided aid to businesses that struggled to continue operating as the pandemic spread around the country last year. Forgiven loans are normally taxed as income, but the federal government is exempting the Paycheck Protection Program loans, which were intended to help businesses keep workers on the payroll and help with some other expenses as the pandemic caused a sharp slowdown in the economy.

In presenting a proposed budget to lawmakers, Mills administration officials said not taxing the forgivable loans would lead to a $100 million shortfall in the state’s spending plan.

By law, state officials have to approve a balanced budget, so the administration said it had no choice but to present a budget that included tax revenue from the levies on forgivable loans, even though Congress has made the loans exempt from federal taxes. Federal lawmakers also decided businesses can deduct from their taxes additional expenses for which some businesses used a portion of their PPP loans.

Mills has said that the federal government, which recently approved another $284 million for the program, didn’t provide any compensation for states that would be losing revenue if they matched the federal government’s tax treatment of the loans.

Greg Dugal, director of government affairs for the industry group HospitalityMaine, is relieved that the governor will be looking for additional funds to avoid the tax hit but realizes any solution is likely to take some time to craft.

“We’re not going to be holding a party today,” Dugal said.

Maine restaurants, inns and hotels were essentially closed for three months in late spring last year, and the PPP aid was intended to help them through that period, but those businesses continued to struggle through 2020, he said.

“There’s no making it up … people are hanging by a thread,” Dugal said, and the idea of facing a tax bill over the federal aid “was heart-wrenching. They’re saying, ‘We don’t have that money.’ ”

Dugal is hoping that there is state and local government aid included in a COVID-19 relief bill that the Biden administration is proposing. Details of the $1.9 trillion package are still being worked out, but Dugal said any aid that helps get Maine businesses through to April – including aid that could allow Maine to avoid taxing the PPP loans – would help many survive. By late spring, he said, businesses will be reopening from winter shutdowns, and tourism is expected to recover as more people get COVID-19 vaccines.

The conservative Maine Policy Institute also said it welcomed Mills’ decision to look for a solution on the tax issue, but it said she should have come up with a leaner budget in the first place to avoid the shortfall that would be caused by not taxing PPP funds.

The institute also questioned why the administration didn’t pursue that option before releasing its budget.

But the liberal Maine Center for Economic Policy said the state should reject a “double-dip tax break scheme” for businesses.

The organization said making the loans tax-free while also allowing businesses to write off expenses partially paid for with PPP funds gives businesses two tax breaks for the same money – “one tax break for the grant coming in, and another for spending it.” The center also said the tax break would unfairly help larger businesses that received bigger PPP loans rather than small businesses that did not get as much aid.

The PPP loans pumped about $2.3 billion into the Maine economy during the pandemic.

Maine businesses took out more than 28,000 loans under the program, which was structured to turn the loans into grants that didn’t need to be paid back as long as the money was used for the purposes Congress intended, primarily for keeping workers on the payroll. Maine banks have been gearing up to process more loan applications using the additional money for the program approved this month.

Mills said she wants state departments to start looking for any newly available federal funds that would allow Maine to offer the tax break to businesses and also maintain a balanced budget.

The departments will begin their reviews immediately, she said.

Correction: This story was updated at 9:15 a.m. Thursday Jan. 28, 2021 to correct the Maine Policy Institute’s position on the proposed state budget.

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