821 Bakery Cafe announces to customers that they are still open in Richmond, Virginia on March 18, 2020 (Parker Michels-Boyce / For the Virginia Mercury)

Because COVID-19 hasn’t hit Virginia’s economy as hard as officials thought, Gov. Ralph Northam says policymakers will have a An additional $ 730 million to work with as they finalize the next state budget.

Instead of working that income into a spending plan that includes increases for public employees and increases in funding for school systems hit by the pandemic, some business groups want the state to use its new flexibility to deliver. more tax breaks for businesses that have taken out loans from the Federal Paycheck Protection Program. to get through the crisis.

“When small businesses see in the news that the state has this money, I think they’re going to make it very clear to their elected officials that this is something the state can do,” said Nicole Riley, Virginia State Director of the National Federation of Independent Businesses.

About $ 12.6 billion in PPP loans went to thousands of businesses in Virginia during the pandemic, with an average loan amount of around $ 107,000. The goal was to give employers an injection of cash so they can continue paying workers even if business withers amid closures and stay-at-home orders. As long as the money was spent on valid expenses like payroll, rent, and utilities, the loans were canceled. This is where the tax issues come in.

Even though the loans have essentially turned into grants, Congress has ruled that the relief money should not be considered taxable income and should be tax deductible. Because Virginia and other states must decide whether or not to conform their own tax policies to federal rules, state policymakers have had to make their own decisions about how to handle P3 loans.

Virginia, which cannot print money and has a constitutional obligation to balance its budget, does not consider P3 money to be fully tax exempt. This means that some businesses could get a state tax bill for taking funds that they thought were supposed to be a lifeline to keep people working.

Forgiven PPP loans won’t be treated as taxable income, but Gov. Ralph Northam’s administration argued that Virginia business expenses covered by federal money should not be deducted from business income. In other words, a company with $ 500,000 in profits that took out a PPP loan of $ 100,000 would not be able to recognize the expenses covered by the PPP in its income to lower its taxable net profit to $ 400,000. .

According to Finance Secretary Aubrey Layne, making the P3 money deductible creates a double benefit for loan recipients, allowing businesses that have been able to get free federal money to use it to get tax relief that will not be paid. not available for companies that missed PPP funds.

“These guys got a lot of help,” Layne said in an interview. “The others got nothing.”

The compliance of Virginia’s tax policy on PPP loans with federal rules, Layne said, could mean an increase in revenue of up to $ 500 million over the next two fiscal years.

Some have argued that improving the state’s fiscal outlook, while still $ 800 million below pre-pandemic forecasts, is making it easier.

The Virginia Restaurant, Lodging and Travel Association sent a letter to General Assembly budget officials on Wednesday asking them to consider doing more to address “the exceptionally difficult situation in the hotel industry.”

“Without action, our members will face surprise tax bills at a time when they should be. focusing on winter and pandemic survival, ”wrote VRLTA President Eric Terry.

Lawmakers in the State Senate and the House of Delegates have worked on the issue before, both seeking to offer targeted tax breaks to small businesses without going so far as to declare all PPP money tax deductible.

The House passed a law allowing deductions of up to $ 25,000 from P3 money. The Senate voted on a proposal allowing deductions of up to $ 100,000. Both chambers will likely have to work out the details at meetings of the ad hoc conference committee as the session draws to a close later this month.

The House’s proposal, which only covers personal income taxes, would cut state revenues by $ 36 million over the next two years, state tax analysts say. The Senate version, which covers personal and corporate taxes, is expected to have an impact of $ 98 million.

In an email Wednesday, Del. Vivian Watts, D-Fairfax, chair of the House finance committee, said the new budget forecast could be factored into the discussions.

“The income forecast may affect the amount of the deduction based on competing needs to fully fund other programs to deal with the hard impact of COVID-10 such as opening schools, replenishing the unemployment fund, Rent Aid and Rebuild Virginia Small Business Grants, ”Watts mentioned. “But while we negotiate, the Chamber will continue to focus targeted relief on those businesses that need it most.”

Supporters of the Senate back-up plan said a deductible of up to $ 100,000 would cover about 75% of businesses in Virginia that have received P3 funds. Proponents say it will help small businesses avoid a tax hit without giving massive relief to big business.

“It’s not the Amazons or the Krogers or any of those businesses that everyone loves to start that have been very successful through the pandemic,” Riley said.

Some Republicans have argued that the state shouldn’t be too strict on the money desperate businesses have taken to increase their chances of survival.

Senate Republicans on Wednesday tried unsuccessfully to amend one of the bills to make the full amount of P3 loans deductible. Senator Ryan McDougle, R-Hanover, called it a matter of sticking to the deal business owners thought they were getting when they took the money to avoid cutting jobs.

“Part of the reason our economy works well is that these employees continue to have jobs. They continue to have paychecks. They continue to have health insurance, ”McDougle said.

That effort failed with a 17-22 vote.

Speaking in the Senate, Senator Scott Surovell, D-Fairfax, said the P3 program was meant to be “transferable” relief for workers, not tax relief for companies whose money was “falling from the sky” .

“What we are proposing, I think, is very focused and much more thoughtful than what the federal government has decided,” said Surovell.

Senator Janet Howell, D-Fairfax, chair of the Senate Finance and Credit Committee, said the state was not “flush with the money”.

“We have to make some very tough decisions,” Howell said. “And if that were to pass, they would be virtually impossible decisions.”

Layne said the Northam administration simply disagrees that tax policy is the right path for COVID relief because companies that have secured PPP loans do not represent “all people. who have been affected by the pandemic “.

“It had nothing to do with need,” he said. “He was the one who showed up the fastest and had connections with the banks.”