RALEIGH, NC—Lawmakers in the North Carolina House fast-tracked a bill today that would allow businesses that received Payroll Protection Program loans from the federal government to have any expenses the funds were used for deducted from state tax.

At the federal level, both PPP loan amounts and expenses are tax exempt. North Carolina is one of only three states — joined by California and Hawaii — that does not allow a state tax deduction for both loan income and expenses.

House Bill 334 would change that by coupling North Carolina’s tax treatment with the federal approach. It’s estimated the tax change will result in a $600 million cost to the state over three years.

The bill passed second reading on the House floor in a 111-2 vote and will be voted on a third and final time on April 20.

A bipartisan coalition of Republicans and Democrats — plus representatives from the small business community — praised the bill at a press conference on Thursday, April 15.

“These business owners have worked very hard to keep their employees,” said Rep. Jason Saine, R-Lincoln, one of the primary sponsors of H.B 334. “They did their best to make sure their people had a place to work. That’s one of the reasons why we see our state in a good position as we bounce back from the pandemic.”

“Our small businesses are what make up North Carolina,” said House Minority Leader Robert Reives, D-Chatham. “We love our corporations, but without the small businesses and the employees they have, we can’t get North Carolina to where it needs to be.”

Jason Smith, owner of Cantana 18 in Raleigh and Harvest 18 in Durham, shared with lawmakers and the press about the struggles his businesses faced during the height of the COVID-19 pandemic. Smith only had 15% of his staff working. Two weeks into the shutdown, his businesses were losing $2,000 a week, despite an uptick in curbside service.

“The idea of the PPP loan gave us a lot of hope, so we decided to push forward,” Smith said. “We received funding on Friday night, and the following Saturday had 85% of our workforce back on the job.”

Sam Hobgood, the owner of Big Ed’s in Raleigh, said that he and his wife used their own funds to continue paying staff when his restaurants were forced to close a year ago. “The PPP was a literal lifeline,” he said. “The state of North Carolina will continue to survive and thrive without collecting this tax revenue.”

In North Carolina, about 130,000 companies with 1.27 million employees have received PPP loans, totaling over $12 billion.

Advocates of fiscal responsibility have praised H.B. 334.

“Currently, North Carolina conforms to an outdated version of the federal tax code—a version that contains a glitch that has since been fixed by Congress with regard to the taxation of forgiven PPP loans,” said Katherine Loughead, senior policy analyst with the Tax Foundation. “Denying the deduction for expenses covered by forgiven PPP loans has a tax effect very similar to treating those loans as taxable income in the first place.”

“From a pre-pandemic baseline perspective in which PPP loans didn’t exist, providing the exclusion from taxable income while allowing the expense deduction is a revenue-neutral approach,” she added. “States never counted on or expected revenue from this source, and following federal tax treatment will help struggling businesses in North Carolina get back on their feet faster.”