There are plenty of income streams we could tax in theory but don’t, usually for good reason. We don’t tax welfare benefits, for instance, even though they are technically income, because it would be pointless to give support to the poor with one hand and take it away with the other.
Stimulus relief falls into this category. Last August, Utah’s legislature wisely decided not to tax federal stimulus checks given to individuals. It would have been a bit circular after all to tax relief that originates from the government, sort of like charging your child rent if she comes home on the weekends — when you’re the one paying for her room and board at school in the first place. It’s just inefficient.
Which raises the question of taxing federal relief funds given to small businesses.
One of the most popular and innovative programs coming out of the COVID-19 relief bills has been the Paycheck Protection Program. Referred to as the PPP, this is the program that provides loans to small businesses suffering from the pandemic and then forgives the loans, but only to the extent the money is used to keep people employed and for certain other expenses.
It’s a program that tries to kill two birds with one stone and has been credited with saving scores of jobs and businesses. Quite possibly, your favorite local restaurant, if still operating, owes its survival to this program.
After a lengthy debate last year, Congress ultimately clarified that PPP relief would not be taxed at the federal level. This made sense because to tax these benefits would simply reduce the amount of aid Congress was intending to provide.
Exactly like the individual stimulus checks, the PPP is a relief program funded by the U.S. Treasury with tax dollars (or, gulp, future tax dollars), and taxing it would create a circularity.
Most states that have addressed the issue followed the federal government’s lead on this question. But not Utah.
Why not? I’m actually not sure what is motivating it, other than the anticipation of additional tax revenues. Last week, the state came out with an explanation for its position, but not a very good one.
They make the (sorry, but baffling) argument that because some businesses received PPP loans and others did not, it wouldn’t be fair if they don’t tax PPP benefits. Questions of fairness are often complex, but I’m not sure how tax policy solves anything here. If I am upset because my brother got ice cream and I didn’t, it doesn’t really help me if my mom eats part of my brother’s ice cream.
They also obliquely refer to the need to avoid double-dipping. This is a flawed bit of rhetoric to make it sound like small businesses would get two deductions if not taxed on the PPP loan forgiveness. They wouldn’t.
Boiled down to its essence, if the state of Utah goes forward with taxing PPP benefits, it will have the net effect of reducing the amount of stimulus support Congress was trying to give to small businesses and instead would transfer a portion of it to the state. That feels unfair.
Troy Keller is a partner at the international law firm Dorsey & Whitney in its Salt Lake City office.