(This analysis was written by Katherine Loughead, senior policy analyst with the Center for State Tax Policy at the Tax Foundation and author of the Badger Institute’s Wisconsin Tax Options: A Guide to Fair, Simple Pro-Growth Reform.)

Nearly 90,000 Wisconsin small businesses that have taken out loans under the federal Paycheck Protection Program (PPP) will face hundreds of millions of dollars in state income tax liability on those loans this spring, despite the loans being tax-free at the federal level. Unless the legislature acts, businesses that have received PPP loans and related federal assistance will face $457 million in state taxes through 2024—with more than half of those taxes coming due this spring—despite Wisconsin being on track to see continued general fund revenue growth even amid the pandemic.

Under current Wisconsin law, first-round PPP loans (those issued in 2020) will not be treated as taxable income, but expenses paid for using those loans will be ineligible for the usual expense deduction. This means that Wisconsin businesses that took out PPP loans will have a higher level of Wisconsin taxable income than if they had not used the federal lifeline. Second-round PPP loans (those issued in 2021) are also on track to be taxed by the state, albeit in the opposite manner: expenses will be deductible, but the loans are set to be treated as taxable income.

Read the full analysis here.