Because COVID-19 hasn’t hit Virginia’s economy as hard as officials thought, Gov. Ralph Northam says policymakers will have a An additional $ 730 million to work with when finalizing the next state budget.
Instead of fitting that revenue into a spending plan that includes increases for public sector employees and increases in funding for pandemic-stricken school systems, some business groups want the state to use its new. flexibility to provide more tax breaks to businesses that have taken out federal loans from the Paycheck Protection Program. to get through the crisis.
“When small businesses see in the news that the state has this money, I think they’re going to make it very clear to their elected officials that this is something the state can do,” said Nicole Riley, director of Virginia State National Federation. of the independent business.
About $ 12.6 billion in PPP loans went to thousands of businesses in Virginia during the pandemic, with an average loan amount of around $ 107,000. The goal was to give employers an infusion of cash so they could continue paying workers, even as business withered amid closures and stay-at-home orders. As long as the money was spent on valid expenses like payroll, rent, and utilities, loans were canceled. This is where the tax issues come in.
Even though the loans have essentially turned into grants, Congress has ruled that aid money should not be considered taxable income and should be tax deductible. Because Virginia and other states must decide whether or not to conform their own tax policies to federal rules, state policymakers have had to make their own decisions about how to handle P3 loans.
Virginia, which cannot print money and has a constitutional obligation to balance its budget, does not consider P3 money to be fully tax exempt. This means that some businesses could receive a state tax bill for taking funds that they thought were supposed to be a lifeline to keep people working.
Forgiven PPP loans won’t be treated as taxable income, but Gov. Ralph Northam’s administration has argued that Virginia business expenses covered by federal money should not be deducted from business income. In other words, a business with $ 500,000 in profits that took out a PPP loan of $ 100,000 could not count the expenses covered by the PPP against its income to reduce its taxable net income to $ 400,000.
Making the P3 money deductible, according to Finance Secretary Aubrey Layne, creates a double benefit for loan recipients, allowing companies that have been able to get free federal money to use it to get tax relief that doesn’t. will not be available for companies that have missed. PPP funds.
“These guys got a lot of help,” Layne said in an interview. “Other people got nothing.”
Compliance of Virginia’s tax policy on PPP loans with federal rules, Layne said, could mean revenue of up to $ 500 million in the next two fiscal years.
Some have argued that improving the state’s fiscal outlook, while still $ 800 million below the pre-pandemic forecast, makes it easier.
The Virginia Restaurant, Lodging and Travel Association sent a letter to General Assembly budget officials on Wednesday asking them to consider doing more to deal with “the exceptionally difficult situation in the hospitality industry.”
“Without action, our members will face surprise tax bills at a time when they should be focusing on surviving the winter and the pandemic,” wrote VRLTA President Eric Terry.
Lawmakers in the State Senate and the House of Delegates have already worked on the issue, both seeking to offer targeted tax breaks to small businesses without going so far as to declare all P3 money tax deductible.
The House passed a law allowing deductions of up to $ 25,000 in P3s. The Senate passed a proposal allowing deductions of up to $ 100,000. Both chambers will likely have to work out the details at ad hoc conference committee meetings as the session draws to a close later this month.
The House proposal, which only covers personal income taxes, would cut state revenues by $ 36 million over the next two years, state tax analysts say. The Senate version, which covers personal and corporate taxes, is estimated to have an impact of $ 98 million.
In an email Wednesday, Del. Vivian Watts, D-Fairfax, the chair of the House finance committee, said the new budget forecast could be factored into the discussions.
“The income forecast may affect the amount of the deduction based on competing needs to fully fund other programs to deal with the adverse effects of COVID-10, such as the opening of schools, the replenishment of the unemployment, rent assistance, and small business reconstruction grants in Virginia, ”Watts mentioned. “But while we negotiate, the Chamber will continue to focus targeted relief on those businesses that need it most.”
Supporters of the Senate back-up plan said a deductible of up to $ 100,000 would cover about 75% of businesses in Virginia that have received P3 funds. Proponents say it will help small businesses avoid a tax coup without giving massive cuts to big business.
“It’s not the Amazons, or the Krogers, or any of those businesses that everyone loves to start that have been very successful through the pandemic,” Riley said.
Some Republicans have argued that the state shouldn’t be too strict about the money desperate businesses have taken to increase their chances of survival.
Senate Republicans on Wednesday tried unsuccessfully to amend one of the bills to make the full amount of P3 loans deductible. Senator Ryan McDougle, R-Hanover, described it as a matter of sticking to the deal business owners thought they were getting when they took the money to avoid cutting jobs.
“One of the reasons our economy is functioning well is that these employees continue to have jobs. They continue to have paychecks. They continue to have health insurance, ”McDougle said.
This effort failed with a 17-22 vote.
Speaking in the Senate, Senator Scott Surovell, D-Fairfax, said the P3 program was meant to be a ‘pass-through’ relief for workers, not a tax break for companies that got the money. fell from the sky”.
“What we are proposing, I think, is very focused and much more thoughtful than what the federal government has decided,” said Surovell.
Senator Janet Howell, D-Fairfax, chair of the Senate Finance and Credit Committee, said the state was not “full of money.”
“We have to make some very difficult decisions,” Howell said. “And if that were to be passed, they would be virtually impossible decisions.”
Layne said the Northam administration simply did not agree that tax policy is the right path for COVID relief because companies that have secured PPP loans do not represent “all of the people who have been affected by the pandemic ”.
“It had nothing to do with need,” he said. “He was the one who showed up the fastest and had connections with the banks.”