Say no to ‘double-dip’ PPP tax break

Proposal would be bad economic, fiscal, and social policy

STRUGGLING SMALL businesses are being used once again by anti-tax zealots to push legislators and the public alike into supporting a new and ill-advised state tax break. Advocates for this new tax break for sole proprietorships, pass-through businesses, and the like, are claiming that the COVID relief dollars that many big and small businesses received through the federal Paycheck Protection Program (PPP) will result in higher income tax bills. This is not true. Let’s be very clear from the outset about this essential point: under current Massachusetts tax laws, businesses will not pay state income taxes on the PPP dollars granted to them by the federal government. Period.

Unfortunately, the tax code can be very complicated – and the interactions between our state code and the federal code make it even harder for non-experts to understand – in this case, leading to a good deal of confusion. What the tax proposal actually would do is create a new “double dip” tax break: PPP recipients would both get their PPP grants – free of federal and state income tax – and would be able to deduct expenses paid for with those grants from any other income they might have – a second tax break stacked on top of the first.

Such “double-dipping” is widely recognized by tax professionals as a violation of what former Treasury Secretary Steven Mnuchin called “Tax 101” – you don’t get to deduct expenses that someone else paid for. (In this case, that “someone else” is the federal government.) More important than flouting the rules of Tax 101, however, this double-dip tax break also would be bad economic, fiscal, and social policy.

As economic policy, the new tax break makes little sense. It would help only those business owners generating a profit or who have income from other sources. It would do nothing to help business owners who are struggling the most during the pandemic: those whose businesses are failing to generate a profit and who are without other sources of income.

As a matter of fiscal policy, the new tax break would be very expensive. Using currently available data on the distribution of PPP, MassBudget estimates that the Commonwealth would lose at least $165 million in one-time income tax revenue were the double-dip proposal adopted. And that is a conservative estimate – the current data include only part of the first round of PPP and none of the second round that is now being distributed, all of which will drive up state revenue losses significantly.

Notably, a still more costly, identical state tax break for corporations is already on our books due to our state’s automatic linkage with the federal corporate tax code. If the Legislature does not act to decouple from the relevant federal provision, the Commonwealth will lose another $250 million in one-time, corporate income tax collections – and probably considerably more.

Finally, the proposed double-dip tax break would be bad social policy. Private business ownership in the US is heavily concentrated among white, high-income households. White households own almost 90 percent of private businesses, while black and Hispanic households each own less than 2 percent of the total. The top 20 percent of households in the US own 85 percent of all such businesses, with the top 1 percent alone owning almost 45 percent of the total.

We should expect the benefits of the new tax break to be similarly lopsided. Given that Massachusetts already has an upside down state and local tax system – one that collects a larger share of household income from low- and middle-income households than from high-income households – why would we adopt a new, lopsided tax break? Changes in tax policy should aim to correct the current imbalance, not make it worse.

Meet the Author

Peter Enrich

Professor emeritus, Northeastern University School of Law
Meet the Author

Kurt Wise

Senior policy analyst, Massachusetts Budget and Policy Center
The economic fallout from the COVID pandemic has hit Massachusetts’ Main Streets hard. There is good reason to be concerned for the well-being of many passthrough and related businesses – these are often (though not exclusively) small, local businesses. Providing targeted state relief to businesses that are struggling – for example, through programs like the governor’s small business COVID relief program – makes good sense. Giving away hundreds of millions in untargeted, double-dip tax breaks only makes these and other smart policies harder to pay for.

Peter Enrich is an emeritus professor of law at Northeastern University’s School of Law and a member of MassBudget’s board. Kurt Wise is a senior policy analyst at MassBudget.