BRUNSWICK, ME – Today, U.S. Senator Angus King (I-Maine) applauded an announcement by the Treasury Department allowing states to use their allotments through the American Rescue Plan to cover the cost of tax relief that aligns with federal efforts to eliminate taxes on Paycheck Protection Program (PPP) loans and up to $10,200 of unemployment benefits. The decision allows states that adopt federally-approved tax treatment of PPP loans and some unemployment benefits to use federal funds to cover lost revenues. In Maine, Governor Janet Mills recently signed into law a bipartisan supplemental budget that provides state income tax relief to all Maine businesses that received a loan through the Paycheck Protection Program and exempts up to $10,200 of unemployment benefits from state income taxes for 160,000 Mainers, the cost of which is estimated to be about $147 million to the State.

The change comes one day after Senator King led a letter with Senators Kyrsten Sinema (D-Ariz.), Dianne Feinstein (D-Calif.), Alex Padilla (D-Calif.) and Chris Murphy (D-Conn.), urging Treasury Secretary Janet Yellen to allow states to use their American Rescue Plan funds for this purpose.

“Our states have forgone substantial amounts of revenue by mirroring federal tax aid to unemployed citizens and hard-hit small businesses that Congress has enacted in relief legislation over the past few months,” wrote the Senators. “By sending direct funding to states through the American Rescue Plan (“ARP”), Congress intended to help states offset the cost of pandemic-related aid. As the Department of the Treasury develops rules for the ARP State Fiscal Recovery Fund, we request that you explicitly permit states to use the funds for pandemic-related tax conformity.

“While we fully support the ARP’s guardrail against states using relief funds to make generalized tax cuts, we also think that states should not be penalized for providing versions of the very same tax relief that Congress enacted to help struggling citizens and small businesses,” the Senators conclude. “We request that as you draft the ARP State Fiscal Recovery Fund rules, you identify pandemic-related state tax conformity as a permissible use of state relief dollars. Thank you for your work on thoughtfully implementing the American Rescue Plan.”

Today’s announcement was welcomed by Maine Governor Janet Mills:

“The Paycheck Protection Program and unemployment benefits sustained Maine businesses, Maine people, and Maine’s economy during the pandemic. When the Federal government provided tax relief on these benefits, it was a welcome step forward, but it also inadvertently put state governments, like ours, in a tough position. We always wanted to match the Federal government’s benefits, but we had to do so within the confines of a balanced budget and with limited resources,” said Governor Janet Mills. “As we negotiated on the State level how to make that happen in Maine, I took our concerns to Senator King, and he’s delivered again. The flexibility in the use of these new Federal funds will be helpful as my Administration prepares proposals for the Legislature’s consideration and as we look to revitalize our economy and provide critical services to Maine people.”

Senator King voted for the American Rescue Plan’s passage on March 6th, citing the impact these funds would have to bolster the efforts of Maine's healthcare heroes and support Americans who are struggling with the economic effects of the pandemic. In his op-ed in the Portland Press Herald following the bill's passage, Senator King highlighted these needed funds as an essential part of bringing the virus under control.

Senator King has continued to seek opportunities to strengthen federal support for struggling small businesses throughout this crisis. In May, Senators King and Steve Daines (R-Mont.) sponsored the Paycheck Protection Flexibility Act, which passed the U.S. Senate unanimously and was signed into law. The bill made vital changes to the PPP to better support small businesses, including extending new loans over a longer period of time and allowing for added flexibility in how businesses can spend their PPP funds. In November, King and Daines introduced legislation to modify the CARES Act to ensure that all Economic Injury Disaster Loan advances would be excluded when determining loan forgiveness. That legislation became law in December 2020.

The letter can be downloaded HERE or read in full below.

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Secretary Janet Yellen

Department of the Treasury

1500 Pennsylvania Avenue, NW, Room 3134

Washington, DC 20220

Dear Secretary Yellen:

Our states have forgone substantial amounts of revenue by mirroring federal tax aid to unemployed citizens and hard-hit small businesses that Congress has enacted in relief legislation over the past few months.  By sending direct funding to states through the American Rescue Plan (“ARP”), Congress intended to help states offset the cost of pandemic-related aid.  As the Department of the Treasury develops rules for the ARP State Fiscal Recovery Fund, we request that you explicitly permit states to use the funds for pandemic-related tax conformity.

Conforming state tax codes to two federal pandemic relief measures has created a particularly significant strain on state finances.  First, conformity to the federal tax treatment of Paycheck Protection Program (“PPP”) loans has been tremendously expensive for many states.  According to the Tax Foundation, 32 states have fully conformed, and a number of other states have partially conformed to the federal tax treatment of PPP loans.  Bloomberg Tax reports that PPP-related conformity has cost states billions of dollars in revenue.

Second, states have begun to conform their tax codes to the federal income tax exclusion of the first $10,200 that a taxpayer receives in unemployment insurance benefits.  The 35 states that tax unemployment insurance benefits expected to derive $12 billion in revenue from that taxation prior to passage of the ARP.  If those states choose to conform to the ARP’s $10,200 income tax exclusion of unemployment insurance benefits, they will lose a sizable portion of that revenue.

While we fully support the ARP’s guardrail against states using relief funds to make generalized tax cuts, we also think that states should not be penalized for providing versions of the very same tax relief that Congress enacted to help struggling citizens and small businesses.  We request that as you draft the ARP State Fiscal Recovery Fund rules, you identify pandemic-related state tax conformity as a permissible use of state relief dollars.  Thank you for your work on thoughtfully implementing the American Rescue Plan.