There should be no after-the-fact taxation of pandemic loans that helped Vermont businesses make payroll and survive, the Vermont Senate decided unanimously.

The proposal would have taxed loans that businesses received through the Paycheck Protection Program, a federal effort to help companies stay afloat.

Earlier this year, lawmakers sent a COVID-19 aid package to the governor’s desk that included a tax on PPP loans forgiven in 2021 — taxing the loans as if they were normal income.

This year’s miscellaneous tax bill, H.436, which contains a variety of changes in the state’s tax code, would jettison that provision.

While legislators passed language in April that would tax PPP loans, they said they hadn’t reached a final decision on the matter, and would debate it in the ensuing weeks.

Initially, some legislators had concerns about opening up an opportunity for businesses to “double dip” — not taxing the loans, and also giving companies the opportunity to deduct them as if they were normal expenses.

Gov. Phil Scott sharply criticized the proposal to tax the forgiven loans. And after hearing testimony from concerned businesses, lawmakers backed off the idea.

“We wanted to help out the small businesses who pointed out to us, ‘Look, we can’t pay taxes out of the PPP grant,’” Sen. Ann Cummings, D-Washington, chair of the Senate Finance Committee, said on the virtual Senate floor.

“‘So now we’re just getting on our feet, and you’re going to tell us we have to come up with X thousand dollars in taxes.’ For the really small struggling ones, that’s a pretty hard blow,” she said.

In addition, the tax bill links Vermont with other federal tax changes that were made when President Joe Biden signed the American Rescue Plan Act into law. The rescue plan temporarily boosts the child tax credit and earned income tax credit, which are available to residents with low and moderate incomes. The Senate tax legislation would temporarily expand the state’s child tax credit and earned income tax credit in line with the federal changes.

The tax bill would also exempt menstrual products from the state sales tax. That exemption passed the Senate in March in a separate piece of legislation, S.53.

Sen. Ruth Hardy, D-Addison, said the measure is a “great way to promote gender equity through our taxation system” and praised the bill overall.

“These are really important things to help families, and businesses and Vermonters with lower incomes, and also women and others who purchase menstrual products,” Hardy said.

Senators said this week that other major tax changes proposed by the House this year will be put on hold until 2022.

The House tacked a series of proposals onto S.53, including sweeping changes in Vermont’s corporate tax structure and a sales tax on cloud-based software and services.

But Cummings told the finance committee on Wednesday that there wouldn’t be enough time to take up the provisions before the Legislature adjourns this month.

“I don’t intend to get to the cloud tax — because it is highly technical — this year. I think if we can even start to lay the foundation for the corporate tax this year, we will be lucky,” Cummings said

The miscellaneous tax bill is expected to pass the Senate on a second vote next week. Then it will return to the House.

Read more at VTDigger.org (Senate approves legislation that would scrap tax on PPP loans).

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