Maine lawmakers finished voting on the supplemental 2021 budget bill, L.D. 220, about 1:30 a.m. Friday, including in their final agreement full conformity with the federal tax treatment for Paycheck Protection Program loans and decoupling from the deduction for federal foreign derived intangible income, or FDII.
The bill was approved unanimously in the Maine Senate and won approval 139-1 in the House, with one Republican voting against it.
The agreement on the PPP loan treatment in particular represents a change from the original proposal by Democratic Gov. Janet Mills, who first pushed for decoupling from the tax treatment for the loans because of the costs to the state, which are estimated at more than $100 million. Mills then offered partial conformity as a compromise after pushback. Other states are also wrestling with the potential costs of PPP loan conformity.
The budget would also exempt the first $10,200 of unemployment benefits for 2020 from state income tax for certain individuals, which conforms with the American Rescue Plan of 2021. While the budget would decouple from the FDII deduction, which was passed in the federal Tax Cuts and Jobs Act
of 2017, it includes Republican demands to study the FDII tax consequences further. The FDII deduction provides a lower effective federal tax rate on excess returns earned by a U.S. corporation from foreign sales.The measure next goes to Mills' desk, where it's expected to be signed.
Democrats also resisted House Republican demands to further conform to federal business tax benefits, including those for increases to interest deductions, excess loss allowances and deductions for business meals and entertainment.
Mills on Thursday evening condemned House Republicans' initial rejection of the proposed budget, which needed approval by more than a two-thirds majority to pass. She also criticized their efforts to give what she called tax breaks to "large multistate, multinational corporations," a reference to efforts to allow for the FDII deductions via conformity.
But by Monday morning, with the budget passed, Mills thanked Democratic and Republican leadership for coming to an agreement.
"As a result of this compromise, 160,000 unemployed Maine people and 28,000 Maine businesses that received PPP funds will receive important tax relief," Mills said.
House Republicans, who had taken a stand on the PPP tax issue, said on Friday they considered their efforts a win, arguing that public opinion and unanimous GOP opposition first forced Mills to offer partial conformity, at a cost of $82 million, and then forced Democrats to back down even further to full conformity.
"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," said House Republican Leader Kathleen Dillingham, R-Oxford.
The conformity issues have arisen after several major federal laws passed last year to help provide relief from the novel coronavirus. Those included the Families First Coronavirus Response Act
, the Coronavirus Aid, Relief and Economic Stability Act or CARES Act, and December's Consolidated Appropriations Act .The left-leaning Maine Center for Economic Policy had urged state leaders not to allow what it called a "double-dip tax break," when it came to the PPP loan treatment. On Friday, Garrett Martin, executive director of the group, said the state tax code already had what he called "ineffective and costly tax breaks for profitable businesses."
"The last thing Maine needs as we look to build an inclusive, equitable COVID recovery are more tax cuts for businesses that profited during the pandemic," Martin said.
Martin noted that the group appreciated the majority not passing other corporate "tax breaks," pointing to the inclusion of Mills' proposal to allow for taxation of FDII deductions. He said the study would show that the foreign income deductions only "enrich a handful of corporations and at great cost to Mainers."
House Democrats on Friday said that to reach the agreement with House Republicans they agreed to add $8 million to the state's rainy-day fund and to create a study on FDII deductions, but successfully resisted their efforts to allow for state conformity to the FDII deductions.
House Democrats said the PPP loan deal works out to about $100 million in tax relief for about 28,000 Maine businesses, while the unemployment tax benefits add up to about $47 million for 160,000 Maine citizens. House Speaker Ryan Fecteau, D-Biddeford, called the deal a "huge step forward."
"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," Fecteau said.
Senate President Troy Jackson, D-Allagash, said Democrats were willing to compromise but didn't want to spend money on "frivolous tax breaks for companies," referencing the FDII tax treatment.
"My colleagues and I were also clear that we would never get behind lavish tax breaks that only benefit wealthy, multinational corporations," Jackson said. "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."
David Clough, director of the Maine chapter of the National Federation of Independent Business, told Law360 the group appreciated the agreement on the PPP loan issue.
"This action will help small-business owners focus on recovering and rebuilding from the pandemic economic shockwaves," Clough said. "We hope lawmakers will continue to be mindful that what works for small business works for Maine."
--Additional reporting by Abraham Gross and Asha Glover. Editing by Vincent Sherry.
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