Maine Dem Refused to Spare Small Businesses From Taxes on COVID Relief

Gideon's failure to reopen legislature could cost businesses $100 million

Senate candidate Sara Gideon (D., Maine) / Twitter screenshot
October 30, 2020

Democratic Senate candidate Sara Gideon's refusal to reopen the Maine state legislature has stalled efforts to amend the state's tax code to exempt federal COVID business loans from taxation. Without the amendments, small businesses might be forced to pay millions in taxes for participating in the Paycheck Protection Program.

Gideon, the speaker of the Maine House of Representatives, closed the legislature in March due to the pandemic. She has failed for months to work out a deal with the Republican minority to reopen the legislature to amend the tax code. As the law stands, Maine small business owners will have to pay income tax on the portion of their PPP loans that is forgiven, likely squeezing small businesses that are already struggling to stay afloat.

"Congress intended the forgiven loan to be tax-free," Bernstein Shur, a New England-based law firm, wrote in a legal analysis. "But, due to other provisions in federal and state law, a forgiven loan will not be tax-free unless Congress and state legislatures pass new laws."

Gideon did not respond to a request for comment.

The CARES Act, which created the small business relief program, stipulated that forgiven PPP loans will not be considered taxable income by the federal IRS. But since Maine law requires the state legislature to vote every time it wants to update the state's tax code to conform with federal policies, the state's tax code still considers forgiven PPP loans taxable income. California, which has a similar law, has already voted to conform its tax code and exempt PPP loans from taxation, but Maine has yet to take such action.

Republican legislator Amy Arata, who serves on the state's tax committee, said that she and her fellow lawmakers intended to pass bills to exempt forgiven PPP loans from taxation. Gideon has failed to reopen negotiations with the Republican leadership while she has been on the campaign trail, according to Arata. She called on the Democrat to take action to protect Maine businesses.

"The intent is to conform [the state tax code] and one of the conditions we have to go back in the legislature was that we would only address coronavirus-related items," she said. "Sara Gideon has not been communicating with [state house minority leader] Kathleen Dillingham. So I really don't know if she's willing to compromise and bring back the legislature just to address COVID-related items or not."

Gideon's inability to work out a deal to reopen the legislature has become a vulnerability for the Democratic candidate. Maine, a state reliant on its massive tourism industry, has seen businesses struggle to cope with the coronavirus crash. Sen. Susan Collins (R., Maine), Gideon's rival in the race, has leaned into her role in crafting the PPP legislation. Thousands of Maine businesses have applied for up to $2.2 billion in PPP loans so far.

The Maine Revenue Services warned in July that forgiven PPP loans will be considered taxable income unless the legislature approves measures to "conform" the Maine tax code with its federal counterpart. Since then, the state's governor has introduced a bill to exempt forgiven PPP loans from being considered taxable income, but the legislature's continued closure has precluded a floor vote on the bill.

Mike Santo, a board member of the Maine Society of Certified Public Accountants, said that he did not have an exact figure on how much the gridlock could cost Maine taxpayers. He estimated, however, that the total amount of PPP loans taken out by Maine taxpayers multiplied by the state's highest tax rate of 7.15 percent would be a "pretty decent ballpark figure" of the total tax burden. Since Maine small businesses received more than $2 billion in loans, the total tax burden could exceed $100 million under those assumptions.

While Democrats control both houses of the Maine legislature, Gideon and her allies must secure Republican support before reopening the legislature, according to the state's law. State Democrats and Republicans have failed to reach a deal to reopen the legislature, prompting Gideon's Democratic counterpart in the upper chamber to say it is "unlikely" that the legislature will be reopened in 2020.

The crux of the disagreement between Maine Democrats and Republicans is the proposed scope and duration of the reopened legislature. Republicans want to limit the session to pandemic-related bills, while Democrats want a broader mandate to consider non-pandemic-related legislation as well.

"Special sessions are typically reserved for a … limited agenda, allowing for urgent matters that simply cannot wait until the next regular session," said Senate Republican Leader Dana Dow in August. "The current emergency justifies a brief, direct session that allows us to dispense with the most urgent of issues and then safely adjourn and return to our homes. No more."