Conformity debate highlights want for tax code of the longer term

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Who had money on “tax conformity” becoming a big political story? I would think those were long odds.

But, as Tom Brady has shown us once again, sometimes those crazy bets pay off. Like a 199th overall draft pick in the 2000 NFL draft.

Susan Collins made headlines nearly a year ago when she helped lead the charge to create the Paycheck Protection Program, or PPP. It wasn’t perfect, but it was a near-instant lifesaver for countless businesses facing the pandemic through no fault of their own.

That’s where the story begins.

When Congress first passed the CARES Act in March 2020, they made PPP a forgivable loan program. If businesses used the money on eligible expenses — most notably maintaining their payroll — then the debt would be forgiven.

One catch. Normally, when debt is forgiven, a taxpayer — in this case, a business — needs to report that forgiveness as income. And get taxed on it.

That created a challenge for employers. While they could take on the (likely forgivable) debt under PPP and pay out their employees, April and May 2020 saw government-mandated shutdowns nationwide. So they could keep paychecks processing, but without other revenue opportunities, it would only help them reach the scene of the crash.

That is where Congress’ efforts around PPP had some wisdom. They included a provision in the law that made the “forgiveness” portion of PPP not reportable as income. That bought businesses a measure of flexibility. They could pay their people without issue, while working to generate additional revenue to survive.

Then, a second catch. The IRS, under Donald Trump, interpreted another part of tax law to neuter Congress’ intent. They gave lip service to the CARES Act, but then claimed that expenses paid via PPP were no longer deductible. Which put employers back in the box by making PPP forgiveness effectively taxable.

If the forgiven loan is income and the expenses are deductible, the result is $0 of tax. But, if the forgiven loan isn’t income and the expenses aren’t deductible, you are still at $0.

Congress got mad. Everyone from Oregon Democratic Sen. Ron Wyden and Florida Republican Sen. Marco Rubio lambasted the IRS and, by extension, the Trump Administration.

In December, the most recent coronavirus response bill finally overrode executive branch intragencience.

Then the battle moved to the states.

Gov. Janet Mills ran headfirst into opposition by effectively following the Trump Administration’s approach. The IRS said the loan wasn’t income, but the expenses weren’t deductible. Mills’ instead said the loan would be income, but the expenses could be deducted. Two roads, same destination.

The PPP story continues to play out, but it highlights a much bigger issue with Maine’s tax code. Every year, the Maine Legislature has to determine whether — and to what extent — it will “conform” to federal income tax law. This has a big impact on the state budget.

But it also has a big impact on Mainers and businesses. When Jan. 1 rolls around, they are forced to guess what the tax law might be. And if they guess wrong and make the wrong estimated payments, they are subject to penalties. It is a waste of time, effort and resources that would be better spent building something new.

Mills’ inauguration speech cribbed Kurt Vonnegut, claiming that Maine should have a “Department of the Future.”

If that still holds true, Augusta should turn its sights to the tax code of tomorrow. Our state budget and Maine businesses should not be tied to the vagaries of Washington. It means relying less — or not at all — on income taxes, instead focusing on other revenue sources. Particularly ways where people who live here for six months less a day can still contribute.

Getting it done faces long odds. There will be plenty of naysayers and vested interests taking shots at the idea. Yet, with dedicated focus and some political courage, those obstacles can be overcome and we can write off “tax conformity” from being an issue in the future.

Sometimes those crazy bets pay off. Just ask the 199th overall draft pick playing quarterback for the Super Bowl champion Tampa Bay Buccaneers.

Michael Cianchette is a Navy reservist who served in Afghanistan. He is in-house counsel to a number of businesses in southern Maine and was a chief counsel to former Gov. Paul LePage.