This Feb. 13, 2019, file photo shows multiple forms printed from the Internal Revenue Service web page that are used for 2018 U.S. federal tax returns in Zelienople, Pa. Credit: Keith Srakocic / BDN

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A month ago, Congress changed the law regarding the taxation of funds associated with the Paycheck Protection Plan, the federal program passed early in the pandemic to give businesses funding to help maintain their payrolls when revenue dropped because of the coronavirus and accompanying public health restrictions.

Now, there is pressure on state officials — namely Gov. Janet Mills — to change Maine tax policy to match the federal rules, which is called tax conformity. The federal government now exempts forgivable PPP funds from federal income taxes and allows businesses to deduct expenses covered by the PPP funds. This allows businesses to subtract their PPP loan amount from both the income side of the ledger and the expense side of the ledger.

Mills has called this a “double tax benefit.”

Earlier this week, Mills proposed a partial tax conformity plan to include the forgivable business loans as taxable income but allow businesses to deduct PPP-related expenses from their state income taxes. After pressure from business advocates and Republicans for full conformity with federal tax law, Mills quickly changed course and directed state department heads to look for federal funds to cover the estimated $100 million in foregone tax revenue for full conformity.

This narrow focus is unfortunate, as this issue requires a fuller conversation about state funding priorities, tax fairness and the most effective ways to help small businesses.

Since the state must have a balanced budget, unlike the federal government, if the state conforms with federal tax policy on PPP funds, it must make up for the lost revenue by either cutting spending or raising revenue elsewhere — or by putting less money into the state’s reserve account. Is forgoing an estimated $100 million state income tax revenue the state’s highest budgetary priority? Should state spending be lowered to extend this tax break? Should less money be put into the state’s rainy day fund in the midst of a pandemic, and instead be used to achieve fuller tax conformity?

Will exempting PPP funds from state taxation and allowing related tax deductions help the businesses that have been harmed the most by the pandemic? Is it contradictory to tax individuals who received federal help, in the form of unemployment benefits, but not businesses that got financial assistance? Unemployment benefits, which directly help workers who lost their jobs during the pandemic, are taxed, at both the federal and state level. The checks that were sent to qualified individuals and families as part of two relief bills last year are not taxable.

The PPP, which was championed by Sen. Susan Collins, was quickly enacted, as part of the Coronavirus Aid, Relief, and Economic Security Act, in March to help businesses that were facing significant revenue losses because of the coronavirus pandemic and the restrictions put in place to slow the spread of COVID-19. The funds were meant to help replace lost income so businesses could remain open and meet their payroll, thereby putting money into the pockets of workers, who would then spend the money, thereby preventing a worse economic downturn. If the federal loan money was used mostly for payroll, the entire loan amount could be forgiven, essentially turning the money into a grant.

Under the CARES Act, PPP funds that were approved for forgiveness were not subject to federal income taxes. However, expenses related to keeping employees working, such as rent and utilities, could not be deducted from federal taxes.

The Trump administration, even into late last year, supported the policy of disallowing such deductions. In November, the IRS and Treasury Department said: “Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible.”

However, a provision in the $908 billion relief bill passed in late December changed federal tax law to allow the deduction of these expenses when calculating federal taxes. This means that businesses could get tax refunds from the federal government, on top of the PPP funds they received.

Advocates for both exempting the PPP funds from taxation and for allowing the deduction say it will help struggling small businesses. It is not clear that this is the case.

In Maine, more than 28,000 PPP loans totalling more than $2.3 billion were given out to businesses, including the Bangor Daily News. The average loan was about $80,000. The largest loan recipients, which received between $5 million and $10 million a piece, included law firms, accounting firms, medical facilities and car dealerships. Most had more than 300 employees. With full tax conformity, these large PPP recipients would see the biggest tax breaks.

Tax conformity is a complex issue that invokes questions of financial priorities, fairness and consistency. Those questions deserve a fuller review before the state determines how to proceed with the tax treatment of PPP funds.

The BDN Editorial Board

The Bangor Daily News editorial board members are Publisher Richard J. Warren, Editorial Page Editor Susan Young, Assistant Editorial Page Editor Matt Junker and BDN President Todd Benoit. Young has worked...