Minnesota received some very good financial news Friday with the new budget forecast. However, over the past several weeks, the news hasn’t been so good for some of the state’s business owners.
Minnesota was expecting to see a significant hit to its revenues due to the COVID-19 pandemic’s severe impact on the state’s businesses. But when the new budget forecast was released Friday, rather than the $1.3 billion deficit that some projected for the next two years, a surplus of $1.6 billion was forecast.
The increase in revenues is due to better than expected tax revenues and lower state costs of operations in some areas during the pandemic. Also, Minnesota avoided the post-holiday surge in COVID-19 cases allowing the gradual reopening of businesses giving the economy a boost.
This positive outlook gives state legislators and the governor breathing room to plan government spending over the next two years.
While the state has something to celebrate, thousands of Minnesota businesses that have struggled to make ends meet during the COVID-19 pandemic are getting potentially bad news from the state.
So far, Minnesota’s Legislature and Gov. Tim Walz have been slow to agree that the state should follow the federal government in allowing the Paycheck Protection Program (PPP) funding they received in 2020 to be free from state income taxes.
Under the PPP, businesses that used the funds for maintaining their payrolls were eligible to get the loans forgiven. The loans were meant to help businesses that experienced a severe loss of income during the pandemic to survive until it passed and the economy recovered. Many businesses have gone through the process of submitting the required documentation to the federal Small Business Administration and have been notified their loans will not have to be paid back.
Congress acted in late December making it clear no federal tax was to be charged on forgiven loans. All our neighboring states are in agreement with the federal government and are not taxing the forgiven loans.
These funds were by no means a “gift.” Many lost far more in revenue than they received in funds. Still, they kept their staff employed and off the state unemployment rolls.
Businesses, such as community newspapers, were duty-bound to stay open to serve essential information needs of their residents. If it weren’t for the federal PPP assistance, many would have had to significantly reduce their staff and their coverage of their communities. Some would have had to close.
Though COVID-19 case numbers are falling and the pace of vaccinations picking up, we are still a long way from recovering from the pandemic’s devastating impact. It’s not over yet. There are predictions of a second pandemic wave in the early spring as new, more infectious and deadly variants of the virus spread.
For many small businesses in rural America, the recovery is going to be painfully slow.
It is estimated that tax forgiveness of the PPP loans will cost the state $440 million. Making businesses pay the taxes at such a vulnerable time could cost it far more than that in the coming years.
“Experience from the Great Recession indicates that economic recovery for most rural areas will take much longer than for the rest of the country, possibly resulting in loss of businesses, unemployment, and shrinking public resources for basic services. This will further push population decline in parts of rural America,” a report by the Community Strategies Group at the Aspen Institute called “Thrive Rural,” says.
“The longer the time it takes to recover, the greater will be the damage to the economy in terms of business survival, employment and entrepreneurship,” it said. Funding and investment in rural America will be essential to prevent this forecast from becoming reality. Imposing the state tax on the PPP funds for vulnerable rural businesses would set back their recovery.
ln an uncommon occurrence these days, many Republicans and Democrats are on the same page regarding what businesses need.
Republican Senate Majority Leader Paul Gazelka, East Gull Lake, told Minnesota Public Radio that his party is “working on a tax break for businesses that took out forgivable loans from the federal government during the pandemic.
“All those small businesses that really struggled and were getting Paycheck Protection Program benefits from the federal government, we need to make sure that we do not tax them in the state of Minnesota,” he said.
DFLer Paul Marquart, of Dilworth, chair House Taxes Committee Chair, agrees that tax forgiveness should be considered but adds a caveat. He would like to see the tax forgiveness targeted to those businesses hardest hit by the pandemic. Some Democrats would like there to be a distinction between what is a small business and large corporate interests when it comes to tax forgiveness.
“The largest corporations continue to get the breaks that they really don’t need,” Rep. Kaohly Her, DFL-St. Paul, told MPR. “And we do know that during this pandemic a lot of corporations, a lot of big companies did very well during this time period.”
Though the impact of tax forgiveness wasn’t part of Walz’s proposed budget, he said last week he is not ruling it out. “It’s certainly not intended to punish those very businesses it helped,” he said of the state’s current tax requirement for the PPP loans.
Minnesota business owners are already working on their taxes, so quick action (a concept not generally associated with the Legislature) will be needed. “Without this change, many small and mid-sized businesses – already struggling due to revenue losses – will face further tax burdens,” the Minnesota Chamber of Commerce said. “It is critical to conform to federal tax law as soon as possible in the 2021 session as the final tax payment is due March 15.”
Walz has said, “my budget focuses on leveling the playing field to support working families and small businesses.” Those small businesses can’t afford to be paying taxes on funds meant to help them survive the pandemic.