The first of three ICBM Advocacy Hour sessions was held Feb. 23, with lawmakers from southern Minnesota in attendance. The session allowed Association leadership to explain some of its top legislative priorities while also allowing community bankers to articulate the real world impact behind those priorities.
Rep. Zack Stephenson (DFL-Coon Rapids), chair of the House Commerce Finance and Policy Committee (through which any banking legislation must pass), and Sen. Gary Dahms (R-Redwood Falls), chair of the Senate Commerce & Consumer Protection Committee, addressed approximately 15 bankers in attendance at the Southern Minnesota session. Additionally, seven other state legislators listened in, with some contributing comments.
In his opening statement, Rep. Stephenson said his No. 1 concern for the 2021 session was to “ensure small businesses can survive this pandemic and return to prosperity.
“I know the banks are an important part of that equation,” Stephenson said.
Community bankers worked diligently throughout 2020 and continue to work to get Paycheck Protection Program loans to businesses throughout the state. They are uniquely positioned to hear business owners’ concerns about whether Minnesota will conform to federal law exempting PPP loans as taxable income once they are forgiven. Eligibility for loan forgiveness required businesses to use PPP funds for specific business expenses such as payroll, rent and utilities within a specific time period. Minnesota, which faces an expected $1.4 billion budget shortfall, has not said it will conform to federal law rewarding the tax exemption of forgiven loans, or would even allow businesses to deduct qualifying expenses as they figured their state tax liability. Minnesota is alone among upper Midwest states in non-conformance to federal law on this issue.
“It’s just not right what businesses will be asked to do,” said Rep. Greg Davids (R-Preston) chair of the House committee on Taxes. Davids said he tried to get out ahead of the issue in the spring of 2020 by attempting to keep potential PPP-related income projections out of the state budget.
Sen. Carla Nelson (R-Rochester), who chairs the Senate committee on Taxes, said the issue of conformity was raised in the special session, during which the Governor fought against the idea. “I don’t know why because quite frankly it doesn’t have a price tag in and of itself, because all of those expenditures that were allowed were tax deductible. It would save on some stress and provide certainty.”
First National Bank of Waseca processed about 170 PPP applications for about $11 million in the first round, said Bernie Gaytko, president and CEO, and applications for the latest round are still flowing into the bank. “The money is going to expenses and personnel,” Gaytko said. “This isn’t money going into their pockets to get rich, and a lot of these people are looking at the tax obligation, they will be using the funds from the second round of the PPP or the third to pay for the tax obligation.”
The uncertainty over non-conformity is really difficult for any business person, added Dan Christiansen, CEO and chair of F&M Community Bank, Chatfield. “The business coming back in this year will use those funds to pay taxes, which they might be able to file and get a refund for. But why push it off? Why not conform now?”
The state estimates about $438 million in revenue is at stake over the issue of tax conformity.
Sen. Nelson said it was “heartbreaking” to hear how businesses already on the brink of closure might have to take out a loan, or use the third round of PPP funding, to pay state taxes for participating in the PPP .
In addition to advocating for their commercial loan customers who are struggling, Gatko underscored why swift resolution on tax conformity is critical. “When we don’t have the tax information because everything is always pushed off, and people are waiting to file returns, it makes it tough for us to make credit decisions,” Gatko said. “So it has a double impact. We’re not getting the tax returns because they are extending filing, waiting for conformity, and we can’t make the decisions we have to make to keep them in business. It’s a big waiting game and it’s unfortunate.”
Rep. Davids defended the legislature’s record over the last several years on federal tax conformity, saying “not conforming with the Feds” is a relatively new occurrence. PPP conformity, he predicted, would not happen. “We have to plan for it not happening.”
The session with southern Minnesota bankers and legislators also touched on the recently introduced idea (HF823/SF662) to form a work group to study the acquisition of taxable entities (banks) by tax-exempt entities (credit unions).
Pledging that the bill is designed to study the issue without a predetermined outcome, ICBM President and CEO Jim Amundson said bankers understand such transactions cannot be prohibited but they wanted a study in order to find a way to make them more equitable.
“We don’t mind fair competition,” Gaytko said. “But if the Governor and lawmakers want to maximize revenues, yet allow taxpaying entities to be taken out of the system only to be replaced by non-taxpaying entities, that doesn’t meet those objectives.”
“It’s part of my plan to grow,” added Gaytko. “As I’m looking at other banks to acquire, or other branches to acquire, if I have to compete against a credit union that has a different funding and earning mix that we have, and they are willing to pay an astronomical price, it’s really going to impede my ability to grow and service the communities that we are in.”
Legislators also listening to the Feb. 23 session were: Rep. Brian Pfarr (R-Le Sueur); Sen. Gene Dornink (R-Hayfield); Rep. Liz Boldon (DFL-Rochester); Rep. Paul Torkelson (R-Hanska), and Rep. John Petersburg (R-Waseca). Also in attendance were Elizabeth Emerson, Andrew Hasek and Pierre Willete from Goff Public Relations.
ICBM has an Advocacy Hour session for its Metro/Central Minnesota constituency on Feb. 24 and a session for northern Minnesota bankers and legislators scheduled for March 2.