When is a tax actually tax relief? McKee explains his proposal to tax a portion of forgiven PPP loans



When he first unveiled his budget plan in March, Gov. Dan McKee distanced himself from one of its more controversial proposals: making forgiven Paycheck Protection Program loans above $150,000 subject to state taxes.

Taxing those forgiven loans — which helped keep COVID-battered businesses afloat — would raise more than $60 million for the state. But McKee said depending on the federal dollars that came in from the Biden administration's American Rescue Plan, the proposed tax could be rescinded.

Now, the tune has changed. At an event Monday, McKee described the proposal not as a necessary budget maneuver, but as $70 million in "tax relief" for small businesses.

"The tax relief we put in our budget was about $70 million of tax relief for small businesses," McKee said at an event Monday unveiling a separate measure to provide grants to small businesses.

Small business owners, though, are not at all relieved by the proposal.

"Tax relief on a tax that shouldn't be there is not tax relief," said Karen Cardinal, who, with her husband Bill, owns Cardinal Restaurant Group. They received PPP loans in 2020. "I don't know how they can even consider it tax relief."

The Cardinals say McKee has a reputation as a governor who's strong on small business issues.

"I just wish him the best and hope that he listens to our voices and understands this tax is going to hurt," Bill Cardinal said.

Here's why McKee considers it tax relief: The state's projections show that if forgiven PPP loans weren't taxable and businesses were also able to deduct expenses they paid with that money, they'd miss out on about $133 million in revenue. By taxing amounts above $150,000, they'll recover more than $60 million of that — and consider the remaining $70 million or so to be the tax relief for small businesses.

The federal government, though, has said all along that forgiven PPP loans would not be taxed at the federal level. Congress also last year passed a law saying businesses could claim deductions on things they spent forgiven PPP money on. Rhode Island piggybacks off federal law, so without McKee's proposal, the forgiven loans wouldn't be taxable at all here, either.

The tax implications for each particular business isn't straightforward, since business losses can offset the taxable portion of the forgiven loan. Still, scores of businesses that have come out in opposition to it. They say it will affect small businesses, like restaurants, and not just larger companies. Some have said they wouldn't have taken the PPP money if they'd known they might eventually be taxed on it.

"The PPP loan program was never intended to be a revenue generator for the state of Rhode Island," said Christopher Carlozzi, the Rhode Island director of the National Federation of Independent Businesses. "It's a key concern for small businesses."

Carlozzi challenged the notion that taxing only a portion of the PPP loans was in some way "tax relief."

"It's relief from policy he's enacting, at a time when virtually every other state is saying we should not be taxing these loans," Carlozzi said.

The McKee budget, if passed, would also give his administration the authority to unilaterally reverse the proposed tax if the state got more federal money to replace lost revenues. Some have questioned the constitutionality of allowing the executive to make tax policy like that, and the budget is not a done deal.

According to the state's projections, fewer than 1 percent of for-profit businesses with forgiven PPP loans would be affected by the change in the 2020 tax year, and fewer than 15 percent of such for-profit businesses would be affected in the 2021 tax year.

Some businesses are set up as pass-through entities, which means their taxes are really their owners' own taxes. So if a business made $150,000 in revenue, that's what the owner may be living on, said Michael DiBiase, the president and CEO of the Rhode Island Public Expenditure Council. It's more than just businesses looking at slimmer profits, but people looking at smaller amounts of personal income.

The Rhode Island Public Expenditure Council — a nonprofit, nonpartisan public policy research organization — said Rhode Island should follow the federal government's lead and not tax forgiven PPP loans.

"The idea that this is tax relief is misleading, because it was not money the state was depending or relying upon until the windfall of the revenue connected with these PPP loans," DiBiase said.

State legislators have proposed exempting forgiven PPP loans from taxes, and about 100 businesses signed a letter in support of that legislation. At a hearing last week, businesses explained how and why the proposal would affect them.

But the Economic Progress Institute, a progressive think tank in Providence, has come out in support of McKee's proposal. In fact, Alan Krinsky, a senior policy analyst there, said it might not go far enough: Rhode Island should consider fully breaking with federal law on PPP loan taxes, because the federal rules are a departure from longstanding tax policy.

"Even though we're expecting considerable federal aid in general from the American Rescue Plan, these are important funds for the state," Krinsky said. "As we face possible budget deficits going forward, there's a lot of money the state can use for other purposes, including the kinds of projects, whether it's for community schools, infrastructure, or job training, that actually help small businesses in the state."