State small business loan tax relief put on hold over new stimulus law

SACRAMENTO — California has paused its plan to provide additional tax relief to small businesses slammed by the coronavirus pandemic because of a lastminute provision in the newly passed federal stimulus package.

The bill signed last week by President Biden, which included $26 billion in direct aid for California, prohibited states from using the money to subsidize tax cuts for the next three years.

State officials worry that the restriction could prevent them from pursuing a measure that was already in the works, which would allow businesses that received Paycheck Protection Program loans from the federal government to keep their workers employed during the pandemic to deduct up to $150,000 of that money from their state taxes.

In a letter Friday to Treasury Secretary Janet Yellen, California sought assurances that it would not be penalized for adopting a policy that is already law in some states that automatically conform to the federal tax code. The federal government is not charging taxes on the small business loans.

Keely Bosler, the state finance director, wrote that a strict interpretation of the tax cut prohibition would “limit a state’s ability to adopt policies that support federal goals and could thus constrain the economic benefits that were intended by the authorization of these funds.”

The tax deduction for the small business loans, which the state estimates would cost at least $2 billion over the next few years, was originally part of a state economic aid measure that Gov. Gavin Newsom and the Legislature negotiated last month.

While that package, which also set aside $2 billion for a small business grant program, quickly passed, the tax deduction was pulled out of it to make adjustments. It is now on hold while the state waits to find out whether the federal government would treat it as a tax cut. Finance officials fear that if it does, California could lose a portion of its stimulus aid equal to the tax relief for small businesses.

“We’re trying to provide additional relief to businesses that took it in the teeth during the recession,” said H.D. Palmer, spokesperson for Newsom’s Department of Finance. “We don’t want to go down that road until we’ve got further clarification from Washington.”

Senate Democrats pushed to add the language restricting the use of stimulus funds to subsidize tax cuts because they said the money was needed to combat the virus and maintain public services.

But it has become a flash point, particularly in Republicancontrolled states that argue it is an infringement on their right to control their own fiscal policies. The attorney general of Ohio sued last week to block the provision, and nearly two dozen other states are considering joining the case.