PROVIDENCE – Gov. Daniel J. McKee’s proposal to tax forgiven Paycheck Protection Program loans greater than $150,000 would generate an estimated $67.7 million in revenue for the state in fiscal years 2021 and 2022, according to the governor’s office.
Despite growing opposition from business groups, McKee spokesman Matt Sheaff on Wednesday said the governor remains committed to the proposal, which marks a shift in policy from what Paul L. Dion, chief of the R.I. Office of Revenue Analysis, told the Senate Committee on Finance in January.
Dion said then all forgiven PPP loans would not be taxed at the state level, mirroring federal tax policy created under the Coronavirus Aid, Relief and Economic Security Act. McKee, however, has included the tax in his 2021 supplemental budget proposal in House bill H6121, which was heard before the House Committee on Finance on Wednesday. No vote was taken on the bill.
During the meeting, Jim Thorsen, director of the R.I. Department of Revenue, said, “A month ago, when Gov. McKee introduced his fiscal year 2022 budget proposal, the federal government unveiled the American [Rescue] Plan Act. Still today, Rhode Island is without clear direction from the feds in deciphering the specific parameters of how to efficiently use this federal stimulus money. Add on the structural deficit that the state faces, we are in dire need of a revenue source of this magnitude.”
Thorsen noted that the governor’s proposal “will only affect a small percentage of companies who benefited from more than $150,000 in PPP loans. Based on data from current applicants, the Office of Revenue Analysis estimates that fewer than 1% of for-profit businesses with PPP loans forgiven would be impacted by this provision in 2020, and fewer than 15% in 2021.”
Rep. Deborah L. Ruggiero, D-Jamestown, said that it is not the right time to “whack 2,200 businesses in the state” with a taxation policy. “The federal government said that these loans were forgivable loans,” she added.
Ruggiero feels the state should explore using the $1.1 billion in federal aid it will be receiving from the American Rescue Plan Act. “The PPP loans were a lifeline,” she said. “We can’t hit businesses again.”
Rep. Carol Hagan McEntee, D-Narragansett, proposed House bill H6170 in opposition to the governor’s budget proposal bill following testimony of H6121. Her bill would exempt from taxation any loan forgiveness under the federal Paycheck Protection Program.
“I don’t understand when we say we gave them this money and now we are going to tax them,” said McEntee. “I don’t see anybody getting rich on this.”
McEntee said that McKee is a small-business advocate, but “the small-business community is not happy about this bill. Please do not tax these 2,200 businesses. I think we can find the revenue elsewhere.”
The House Committee on Finance heard the testimony of business owners and advocates via telephone noting their opposition to taxation of the state’s small businesses.
Prior to the meeting, Sheaff told Providence Business News the change in policy was made out of “fairness. There are businesses out there that maybe did not get a PPP loan, who have found a way to survive and they’re not getting any additional tax relief compared to the businesses that made a profit, and then are getting up to $150,000 in tax relief.”
Sheaff added that, “It is a very small percentage of businesses that will have to pay the tax above” the $150,000 threshold. “Exempting the first $150,000 is over $63 million of tax relief. And for those businesses that have been fortunate enough to make a profit and then get on top of that this additional – what amounts to income – we feel this is the right way to do it.”
McKee’s fiscal 2022 state budget plan projects revenue from the tax of $3.6 million in 2021 and $64.1 million in 2022.
Business groups, however, have come out strongly opposed to the proposal.
Sarah Bratko, senior vice president of advocacy and general counsel for the R.I. Hospitality Association, said, “It has caused absolute chaos in the small-business community.”
Liz Catucci, CEO and president of the Northern Rhode Island Chamber of Commerce, added that the proposed tax would create problems for businesses that received more than one PPP loan, making tax filing more complicated.
And the National Federation of Independent Business in Rhode Island on Wednesday urged the House panel to reject the governor’s proposal, claiming it would place an additional burden on the back of small-business owners who have not only used the PPP money to pay employees but also to keep their doors open during the pandemic.
But Alan Krinsky, senior policy analyst at The Economic Progress Institute, supports the governor’s proposal.
“The businesses benefited from the program as designed – they paid their workers and for other expenses and had the loans forgiven,” said Krinsky, noting that the proposed legislation would not be “the imposition of a tax on businesses, but rather an extra bonus for some businesses.”
Krinsky said the bonus means using the revenue received from the taxation policy “to help the small businesses that need it most.”
(This story has been updated to include comments from R.I. Department of Revenue Director Jim Thorsen, Rep. Deborah L. Ruggiero and Rep. Carol Hagan McEntee.)
Cassius Shuman is a PBN staff writer. Email him at Shuman@PBN.com.
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