When Congress established the Paycheck Protection Program last year, the aim was to provide tax-free, forgivable loans to businesses to help them make payroll and stay afloat during the coronavirus pandemic.
But now, the Vermont Legislature is looking to tax some of those emergency payouts.
The state House and Senate came to an agreement late last week on a relief package designed to pump federal aid into Vermont’s education system, as well as workforce and economic development initiatives. The legislation — formally known as H.315 but generally referred to as the “mini-Covid bill” — arrived on Gov. Phil Scott’s desk Monday.
Tucked inside the measure is a little-noticed provision allowing the state to tax PPP loans forgiven by the federal government in 2021 as if it was ordinary income. (Loans forgiven in 2020 would not be subject to the state tax.)
Lawmakers claim the provision is a placeholder that is subject to change as they debate in the coming weeks whether to actually tax the loans. But businesses are still slamming the proposal.
Leo O’Reilly, an accountant who works with many Vermont restaurants, said his clients have made key budgeting decisions assuming that PPP rules had been finalized.
“And we’re in a situation where that money will be necessary to maintain operations,” said O’Reilly, a member of the Vermont Independent Restaurant Coalition, which advocates for the food service industry. “So it’s not like these businesses are going to come out of the pandemic flush with anything.”
O’Reilly said the federal government had made clear that PPP loans weren’t taxable “because the purpose of the program was to help businesses get through the pandemic, not collect additional tax revenues.”
In December 2020, the federal government revived the PPP program with the Consolidated Appropriations Act, which specified that expenses from the loans could be deducted from tax liabilities. Since then, 14 states have opted to tax forgiven PPP loans or are considering doing so, according to the Tax Foundation, a center-right, pro-business think tank.
Sen. Ann Cummings, D-Washington, who chairs the Senate Committee on Finance, said lawmakers have yet to make a final decision on whether to tax PPP loans and need more time to deliberate. She said some of her colleagues are concerned that exempting the loans could result in a “loss of revenue to the state” and want to keep businesses from “double dipping.”
Normally, businesses pay taxes on their income and then deduct expenses from their tax liability. But unless the state made policy changes, businesses that received PPP loans would not pay taxes on those funds — and could still deduct expenses the loan covered.
Lawmakers say the PPP language in H.315 is just temporary — even though they already sent the bill to the governor — and they plan to return to the issue later this session.
“We may well do this. There’s arguments to be made on both sides, but I think we just needed time,” Cummings said, calling H.315 a “very fast-track bill.” She said she hadn’t heard enough testimony on taxing PPP loans to be “leaning either way” on the issue.
“We need to hear from the business community and what this means to them. We need to hear from the CPAs, and we need to hear from the tax department and the Joint Fiscal [Committee],” Cummings said.
The governor’s position on the matter is clear.
“We would not be supportive of that and would hope that it would be subsequently considered and removed, and that it would be nontaxable just like tax year [2020],” Scott spokesperson Jason Maulucci said.
He would not, however, say whether the provision would prompt the governor to veto the bill.
Taxing PPP loans forgiven in 2021 could generate a substantial amount of money for the state.
In the first four months of 2021, Vermont businesses have received 7,862 such loans totaling more than $517 million, according to Christopher D’Elia, president of the Vermont Bankers Association. Since April 2020, Vermont companies have benefited from 20,264 loans worth $1.7 billion, he estimated.
Since the Paycheck Protection Program was renewed at the end of 2020, D’Elia said, it has largely benefited small businesses and those that may have missed out on the funds last spring — particularly ones owned by women and Black, Indigenous and people of color.
Nationally, about 90% of PPP loans issued in 2021 have been for amounts of $150,000 or less.
“You’re really hitting a small dollar amount, small business category,” D’Elia said.
Sen. Michael Sirotkin, D-Chittenden, a member of the finance committee and chair of the Senate Committee on Economic Development, Housing and General Affairs, said that “no decision” on PPP has been made, despite the fact that both legislative chambers passed the bill as written.
“I think the Legislature, at least in the Senate, was just saying, ‘Let’s take a pause here and understand this better,’” Sirotkin said. “We need to do it before the end of the session, but we didn’t need to do it last week, until we fully understood the implications, including the implications on state revenues.”
Sirotkin said he was leaning against taxing the loans and said the state “shouldn’t be treating when the actual loan forgiveness is made by the banks as the triggering factor in terms of taxability.”
Austin Davis, a lobbyist for the Lake Champlain Chamber of Commerce, called it “outrageous” that lawmakers were considering taxing the federal loans. He said the program had helped keep workers employed, preventing additional stress on Vermont’s unemployment system.
“I think folks have really easily forgotten how strained the [unemployment insurance] system was at the height of the pandemic,” Davis said. “If it weren’t for these loans, it’d be even worse.”
Businesses plan to speak out against the PPP taxation proposal this week.
Davis plans to send a letter to lawmakers Tuesday outlining the business community’s concerns about the bill. The Vermont Chamber of Commerce, Main Street Alliance, Vermont Retail & Grocers Association, and other organizations are expected to sign on.
Vermont’s congressional delegation generally avoids weighing in on state policy. But David Carle, a spokesperson for U.S. Sen. Patrick Leahy, D-Vt., said the point of the PPP was to offer businesses tax-free money to help them survive the economic repercussions of Covid-19.
“Congress wanted businesses and individuals to both receive the full benefit of federal support during the pandemic by not taxing PPP loans,” Carle said.
