Wednesday, March 10, 2021
Adam B. Thimmesch (Nebraska), States and the PPP: The Tax Policy Case for State Nondeductibility, 99 Tax Notes State 129 (Jan. 11, 2021):
This article is the second in a series evaluating the state tax aspects of the federal Paycheck Protection Program. The first article introduced the program and explained the potential effect on states if Congress were to change the law to allow taxpayers to deduct their PPP-funded expenses. This article continues that analysis and explores the tax policy reasons why states should prepare to deviate from federal law now that Congress has provided for PPP deductibility in its year-end COVID relief bill.
The PPP was an important part of Congress’s response to the pandemic and provided much needed assistance to businesses across the country. Now that Congress has decided to allow taxpayers the double tax benefit of excluding forgiven PPP loans from their income and deducting the expenses that those loans funded, states need to be aware of the impact of that federal change on their budgets and on their residents. This article has shown why states would be on firm footing rejecting that double tax benefit from a tax policy perspective. Not only would an exclusion/deduction framework fail to reflect actual income, but that framework would also most benefit the companies that did not use PPP funds to increase their spending and it would introduce an additional source of horizontal inequity into states’ taxing systems. The case for the double tax benefit at the state level is thus weak and would come at great expense for states. State legislatures should be prepared to reject that approach to protect their budgets during this time of great fiscal distress and to craft relief that is better targeted toward state needs.