Maine Gov. Signs Budget, PPP Loan Tax Conformity Into Law

Maine's governor Thursday signed a supplemental budget that conforms Maine to the tax treatment of federal coronavirus relief business loans but decouples from the federal deduction for foreign derived intangible income.

Democratic Gov. Janet Mills signed into law the 2021 supplemental budget bill, L.D. 220. Under the law, Maine will fully conform with the federal tax treatment for Paycheck Protection Program loans and decouple from the deduction for federal foreign derived intangible income, or FDII.

Mills emphasized in a news release that the budget would bring tax relief to about 160,000 Maine residents who received unemployment benefits and 28,000 state businesses that received PPP funds.

Mills' signature comes after weeks of back and forth over the PPP loan tax treatment. The issue forced Maine lawmakers last week to work overnight to pass the measure until it could win approval from Republicans, who had opposed previous proposals by Democrats to only partially conform to the PPP loan treatment.

"This supplemental budget is the result of a long and, at times, arduous debate," Mills said. "But ultimately it was a sensible compromise on all sides that got it across the finish line."

Full conformity to the PPP loan treatment in particular represents a change from the original proposal by Mills, who first pushed for decoupling from the tax treatment for the loans because of the estimated $100 million cost to the state. Mills then offered partial conformity as a compromise after pushback. Other states are also wrestling with the potential costs of PPP loan conformity.

About $47 million is allocated in the budget to allow for unemployment benefits to be exempt from state income taxes, according to Mills' office. The law exempts 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.

The budget also decouples from the FDII deduction passed in the federal Tax Cuts and Jobs Act of 2017, a provision state House Republicans also attempted but failed to reverse. Instead, the law requires further study of FDII tax consequences. The FDII deduction provides a lower effective federal tax rate on excess returns earned by a U.S. corporation from foreign sales.

House Republicans said after the budget passed they considered their efforts a win, arguing public opinion and unanimous GOP opposition first forced Mills to offer partial PPP conformity, at a cost of $82 million, and then forced Democrats to back down even further to full conformity.

But House Democrats said they successfully resisted Republican efforts to allow for state conformity to the FDII deductions. They said they also resisted 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.

The law also also makes several other tax conformity changes, including decoupling from federal changes dealing with excess business loss limitation deferrals, changes to conformity for business expense limitations, and decoupling from charitable contribution limits for corporations. Maine will also conform to treatment of some net operating loss limitations, and beyond conformity will give a tax credit for taxes paid to other states.

State tax conformity issues have arisen after several major federal laws passed last year to help provide relief from the 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 .

State leaders' attention has already turned to the state's biennial budget process and several bills that could increase taxes on Maine high earners but have been opposed by the Mills administration. House Republicans have previously said they plan to try to expand the tax provision that provides a $10,200 income tax credit for unemployed workers to all state citizens.

A spokesperson for state House Republicans pointed to past comments from the caucus after the budget was passed. The offices of state Democratic majority leaders in the House and Senate, and the office of the Republican minority leader, didn't immediately respond to requests for comment.

--Additional reporting by Abraham Gross and Asha Glover. Editing by Vincent Sherry. 

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