RICHMOND — Gov. Ralph Northam doesn’t want Virginia to endorse a new tax benefit for business in federal emergency relief legislation that could cost the state a half-billion dollars or more while giving a “double tax benefit” to companies that received forgivable federal loans for maintaining their payrolls during the COVID-19 crisis.
Secretary of Finance Aubrey Layne told the House Appropriations Committee on Friday that the governor wants Virginia to “deconform” its tax code from the provision of the federal emergency relief bill adopted by Congress and signed into law by President Donald Trump in late December.
“Not only is it expensive, it’s bad tax policy and it’s bad public policy,” Layne, a certified public accountant, said in an interview this week.
The provision, contained in the Consolidated Appropriations Act, would cost Virginia $500 million over two years if the state conformed its tax code to the new law, Layne said in a Wednesday letter to the leaders of the General Assembly money committees.
That’s a conservative estimate, Layne told the chairs of the House Appropriations, House Finance, and Senate Finance and Appropriations committees.
“Based upon preliminary data from the Small Business Administration, the Department [of Taxation] estimates that full conformity ... could result in a significant negative general fund impact of up to $900 million,” he said.
Layne contends that the tax provision benefits large companies that got the loans more than small businesses that didn’t, but the National Federation of Independent Business said it strongly supports conforming Virginia tax law to the new federal law.
“This is just a way for the state to tax more money and find more money to spend and not provide tax relief to small businesses,” Nicole Riley, executive director of the NFIB in Virginia, said in an interview after Layne’s presentation to the House committee on Friday.
The budget that Northam proposed last month already would decline to conform state tax law to business provisions of the federal CARES Act, a $2.2 trillion relief package passed in late March at the beginning of the pandemic, that would cost Virginia $667 million in state income tax revenues by restoring tax breaks that the Tax Cuts and Jobs Act had eliminated in 2017.
The governor’s budget would conform state and federal tax codes on provisions of the CARES Act to help individual taxpayers. Those provisions would cost the state $41.7 million in income tax revenues in the two-year general fund budget, which is financed by state taxes to support core government services.
Northam proposes a similar approach to provisions of the Consolidated Appropriations Act, which included both a $900 billion emergency relief package and a $1.4 trillion bill to fund the federal government for another year.
Conforming to provisions of the new law for individual taxpayers would cost Virginia almost $80 million over two years. The governor supports doing so, including a provision opposed by some Democrats that would expand the deduction of corporate expenses for meals, which Layne said could help struggling restaurants.
However, Northam opposes conforming Virginia tax law to provisions of the law that would allow businesses that receive money under the Payroll Protection Program and Economic Injury Disaster Loan program to deduct expenses that already were paid by tax-exempt federal funds.
“You get a tax benefit on something you didn’t pay anything for,” Layne said in an interview.
He also objects to the tax provision as inequitable because it would give a double benefit to the companies, many of them large, that received forgivable loans under the program that small and minority-owned businesses were unable to get. He said about 40% of businesses in Virginia, or 113,00 out of 250,000, received PPP loans, which were granted on a first-come basis.
“These guys got free money, and they shouldn’t have gotten a tax deduction,” Layne said.
Riley, at NFIB, said many of the businesses she represents took the loans because the federal and state governments essentially shut down their businesses to prevent the spread of COVID-19 but wanted them to keep employees on their payrolls. She said they deserve some type of tax relief to compensate for their losses in a public health emergency.
“If they are allowing this at the federal level, why are we not allowing it at the state level?” she asked.
Northam also doesn’t want Virginia to conform to a provision of the new law that would continue to use a lower threshold for businesses to deduct medical expenses from income taxes.
The Tax Cuts and Jobs Act, signed by Trump in late 2017, lowered the threshold from 10% to 7.5% of adjusted gross income on tax returns, but Virginia did not conform to the provision in 2019.
The new federal law would extend that tax benefit permanently, which Layne estimates would cost Virginia $14.5 million in revenue in the second year of the budget and double that amount in future fiscal years.
House Finance Chair Vivian Watts, D-Fairfax, questioned the state’s position on lowering the medical expense threshold, but she agrees with the Northam administration that the state should not conform to the provision allowing businesses to deduct expenses already covered by nontaxable federal loans and grants.
“Absolutely, we have to go ahead and deconform” on the provision for deducting expenses for businesses that receive tax-exempt loans, Watts said in an interview Friday.