PROVIDENCE — State lawmakers are about to pass a budget without giving Rhode Islanders a tax break on the unemployment benefits they got last year. That will make the state an outlier nationally.
“Some of those people, that tax is really going to hurt them financially,” said state Representative Charlene Lima, a Democrat of Cranston. “They didn’t expect it. That’s money they could have used for rent or food.”
Lima and other lawmakers had proposed a tax break for people who received unemployment last year. Lima said she’ll continue to push for it, but said she was disappointed it was not included in the budget that the House passed last week and that the Senate will take up this week. The budget is expected to pass the Senate and will then head to the governor without the unemployment tax break. That’s despite a wave of early support for the bill.
“People are enthusiastic about this, but then they’re enthusiastic about that, and the horse trading goes on,” Lima said.
Rhode Island usually taxes people’s unemployment benefits. The federal government usually does, too. But under the American Rescue Plan Act, passed in March, Congress gave people a break on their federal taxes for 2020: The first $10,200 would be excluded from their income if their modified adjusted gross income was less than $150,000.
Many states followed suit. Others have never taxed unemployment benefits in the first place. Some, like Massachusetts, found a compromise: Massachusetts taxpayers with a household income under 200 percent of the federal poverty level can deduct up to $10,200 of unemployment benefits from their taxable income in 2020 and 2021.
Rhode Island, though, is not lowering taxes for people who were unemployed last year.
“The Assembly felt it was a matter of fairness,” Larry Berman and Greg Pare, spokesmen for House and Senate leadership respectively, said in an e-mailed statement. “Thousands of Rhode Islanders worked on the front line and in other jobs throughout the pandemic and paid taxes on their earnings. They felt it was fair that those who were not working continue to pay their fair share.”
A different tax debate got a lot more attention. The Paycheck Protection Program was a federal loan originally passed in the early days of the pandemic to help shore up businesses’ payrolls. If businesses spent the money in the right way, the low-interest loans would convert to grants. And the federal government would not tax them even if they turned into grants.
Rhode Island, though, decided to tax them. Governor Dan McKee originally proposed taxing forgiven loan amounts over $150,000. The business community rallied against it. There were news conferences. There were lobbyists. There was a compromise: The deal that’s making its way through the General Assembly now would tax PPP amounts over $250,000.
The unemployment tax break, though, went down without much of a fight, even though in the House of Representatives, a supermajority of legislators signed on to the idea of exempting the first $10,200 for people who made less than $150,000.
The unemployment tax will directly affect many more people than the PPP tax: While an estimated 2,000 for-profit businesses will now have to pay for their PPP grants, the state Department of Labor and Training received 294,070 regular unemployment claims and 298,673 pandemic unemployment assistance claims in 2020. (That could include duplicates.)
All told, not giving that tax break will bring the state another roughly $30 million from people who were laid off last year, according to estimates. The tax on PPP grants above $250,000 would raise about $47.8 million, according to House estimates. That’s about $13.7 million less than the state would have gotten if they’d stuck with McKee’s original proposal to tax amounts above $150,000, according to House estimates.
A minority of states will tax PPP grants in some way, and a minority will tax people’s full unemployment benefits, according to national experts. Rhode Island will join North Carolina and Hawaii as the only states to tax both if the budget, as expected, becomes law.
Business-focused groups were united in opposition to the PPP tax, but they also pushed to give a tax break to people who were on unemployment last year. That’s despite some lawmakers raising concerns that generous unemployment benefits might dissuade people from reentering the workforce.
State Representative David Morales, a Democrat of Providence who pushed for the $10,200 unemployment tax break along with Lima, said in an interview that he sees little prospect of it passing now because it’s not in the budget. A hearing on the issue failed to bring out the sort of opposition from regular working people that business groups were able to muster for the PPP tax, Morales said.
“Thousands of working people across our state would have benefitted from having tax relief,” Morales said. “And very similar to what we did for some of our larger businesses that received the PPP loans, I think it’s important that working people who were unemployed also deserve a form of relief. (But) overall I just don’t believe it was seen as a priority to allocate $30 million for.”