“The tax break we added to our budget was approximately $ 70 million for small businesses,” McKee said at an event Monday that unveiled a separate small business grant scheme.
Small business owners are not at all exonerated from the proposal.
“Tax breaks for a tax that shouldn’t be there isn’t a tax break,” said Karen Cardinal, who co-owns the Cardinal Restaurant Group with her husband Bill. They got PPP loans in 2020. “I don’t know how they can even consider it a tax break.”
The Cardinals say McKee has a reputation as a governor who is strong on small business issues.
“I wish him all the best and I hope he listens to our voices and understands that this tax is going to hurt,” said Bill Cardinal.
Here’s why McKee is considering a tax break: The state’s projections show that if PPP loans issued were not taxable and companies could also deduct expenses they paid with that money, they would be about $ 133 million would miss out on revenue. If they tax amounts over $ 150,000, they’ll get more than $ 60 million back – and consider the remaining roughly $ 70 million as a small business tax break.
However, the federal government has been saying all along that PPP loans issued would not be taxed at the federal level. Congress also passed a law last year that says companies can ask for deductions for things they’ve given PPP money for. Rhode Island piggybacked on federal law, so the loans made wouldn’t be taxable at all without McKee’s suggestion.
The tax implications for each individual business are not straightforward as business losses can offset the taxable portion of the loan given. Still, dozens of companies have spoken out against it. They say it will affect small businesses like restaurants and not just bigger businesses. Some have said they wouldn’t have taken the PPP money if they knew they might be taxed on it.
“The PPP loan program was never intended to be a source of income for the state of Rhode Island,” said Christopher Carlozzi, director of the National Federation of Independent Businesses in Rhode Island. “It’s a key concern for small businesses.”
Carlozzi disputed the notion that taxing only a portion of PPP loans was in some way “tax relief”.
“It’s a relief from the policy he is adopting at a time when virtually every other state is saying we shouldn’t tax these loans,” Carlozzi said.
The McKee budget, if passed, would also give its administration the power to unilaterally reverse the proposed tax if the state receives more federal money to replace lost revenue. Some have questioned the constitutionality of allowing the executive branch to operate such tax policies and the budget is not a closed deal.
According to projections by the state, less than 1 percent of for-profit companies with issued PPP loans would be affected by the change in tax year 2020, and less than 15 percent of those for-profit companies would be affected in tax year 2021.
Some businesses are set up as transit companies, which means that their taxes are actually the taxes of their owners. If a company has $ 150,000 in revenue, it could make a living on it for the owner, said Michael DiBiase, president and CEO of the Rhode Island Public Expenditure Council. It’s more than just companies looking for lower profits, it’s people looking for smaller amounts of personal income.
The Rhode Island Public Expenditure Council – a nonprofit, impartial public policy research organization – said Rhode Island should follow the lead of the federal government and not tax PPP loans.
“The idea that this is a tax break is misleading as it was not money that the state relied on or could rely on until the revenue from these PPP loans collapsed,” DiBiase said.
State lawmakers have proposed tax exemptions for issued PPP loans, and around 100 companies have signed letters in support of the legislation. At a hearing last week, the companies explained how and why the proposal would affect them.
However, the Economic Progress Institute, a progressive think tank in Providence, has voted in favor of McKee’s proposal. In fact, Alan Krinsky, a senior policy analyst there, said it may not go far enough: Rhode Island should consider breaking federal law on PPP loan taxes entirely as the federal rules are a departure from longstanding tax policy.
“Although we generally expect substantial government aid from the American rescue plan, these are important resources for the state,” said Krinsky. “Given potential budget deficits, the state can spend a lot of money on other purposes, including the type of projects, be it community schools, infrastructure, or vocational training, that actually help small businesses in the state. ”
Brian Amaral can be reached at firstname.lastname@example.org. Follow him on Twitter @ bamaral44.