Thimmesch: States, The PPP, And Planning For Fiscal Shocks

Adam Thimmesch (Nebraska), States, the PPP, and Planning for Fiscal Shocks, 98 Tax Notes State 1029 (Dec. 7, 2020):

This article is one in a series evaluating potential state responses to the COVID-19 pandemic. Prior articles in this series have focused on changes that the author and others recommend states make to both their personal and corporate income taxes, with a focus on provisions of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) that make little sense for states to adopt in the midst of a global pandemic. This article focuses on the Paycheck Protection Program and the federal and state tax treatment of funds received by taxpayers under that program. The article is a part of Project SAFE (State Action in Fiscal Emergencies), an academic effort to help states weather the fiscal crisis by providing policy recommendations backed by research.

Planning for a Future Fiscal Shock
Based on this analysis, and the apparent bipartisan support for a change in law in this area, states should be very aware of potential changes to the deductibility of PPP-funded expenses. The PPP provided American businesses with significant assistance as the country dealt with the initial wave of COVID-19 infections and related business shutdowns, but taxpayers and states continue to feel the effects of the pandemic and the failure of Congress to respond fully to the needs of the country. If Congress were to finally respond by allowing PPP-funded expenses to be deducted, the effects on states’ budgets could be dire. States need to be aware of this issue and need to plan ahead. Congress has shown little sensitivity to the effects of its tax changes on the states in recent years, and while states may hope for a better partnership with the federal government, it would be best for states to not plan on that improvement in the short-term.

A future article in this series will provide my thoughts on why states would be well-advised to decouple from any future PPP deductibility for tax and economic policy reasons, but regardless, states must be prepared for this significant change and how they would respond. That might mean pressing Congress to provide states with more direct relief or it might mean preemptively decoupling from future changes. But states need to take control of their fiscal affairs as much as possible in these uncertain and trying times. Being aware of, and preparing for, the impact of the PPP on their budgets is one necessary step in that process.