AUGUSTA — A partisan impasse over a budget bill could force thousands of Maine businesses and unemployed workers to pay state taxes on federal pandemic relief benefits.

Led by majority Democrats, the Legislature’s Appropriations and Financial Affairs Committee endorsed the supplemental budget bill in an 8-5 party-line vote Thursday night.

The bill would exempt all businesses from state taxes on forgivable federal Payroll Protection Program loans received in 2020. It would also give an estimated 160,000 unemployed Mainers a state income tax exemption on up to $10,001 in unemployment benefits.

The bill expands on a proposal by Democratic Gov. Janet Mills, who would only have imposed state income taxes on profitable businesses that received more than $1 million in PPP funds.

House and Senate Democratic leaders said Friday they met Republicans more than halfway on the measure, but GOP legislators refused to support it.

That means it might fail because a two-thirds majority is needed to pass the bill before the April 15 federal tax filing deadline. The full Legislature will consider the bill next week, when it meets for the second time this year in a COVID-19 restricted session at the Augusta Civic Center.

Republicans are pressing for full federal tax conformity, including provisions allowing businesses to deduct 100 percent of business meal expenses and take advantage of other federal deductions. Republicans also want the law changed to give them more say in how additional federal COVID relief funds are spent, by requiring a two-thirds majority to approve such expenditures.

“We presented the notion that the federal government recognized the difficult situation for employers of all kinds and sizes during 2020 and made adjustments in order to help them keep their employees and stay afloat and not fall by the wayside when the customers went away,” said Rep. Sawin Millett, R-Waterford, the lead House Republican on the Appropriations Committee.

But top Democrats disputed the Republican arguments.

“While Democrats want to use resources to support Maine families, Republicans would rather prioritize giving lavish tax breaks that pave the way for write-offs for three-martini lunches,” Senate President Troy Jackson, D-Allagash, during an online news conference Friday morning.

Sen. Cathy Breen, D-Falmouth, the committee’s Senate chair, said Republicans appeared willing to put tax relief benefits for thousands of workers and businesses at risk to expand tax breaks for a relatively small fraction of businesses.

Democrats were listening, she said, when Maine’s business community balked at being taxed on forgivable federal loans that are exempt from federal taxes, she said.

“We heard the outcry from businesses, we heard from the Maine (State) Chamber of Commerce that they needed this double tax benefit for the business community that had been hit so hard and is shouldering so much of the responsibility of this pandemic,” Breen said.

The PPP exemption would cost the state about $100 million in tax revenue and the exemption for jobless benefits would cost about $50 million in revenue. Democrats and Republicans both said their proposals depend on additional revenues flowing to the state from increased liquor sales.

The supplemental budget would also direct $10 million – matched with $20 million in federal funds – to support caregivers for people with intellectual disabilities, autism, developmental disabilities, mental health and substance use disorders, Breen said.

“This is a great plan,” Breen said. “What we did not do is spend another $32 million of state resources on arcane tax changes in the federal law that are not related to the pandemic and in fact go back into tax years 2019 and 2018 that have to do more with the Trump tax cuts from earlier than anything to do with the pandemic.”

Breen said supplemental budgets are typically passed to put the state’s budget in balance, a constitutional requirement, but state revenue forecasts for the remainder of the current fiscal year, which ends June 30, suggest the budget will finish in the black.

Maine State Chamber of Commerce President Dana Connors said businesspeople appreciated the decision to make PPP fully tax exempt, conforming with federal tax law.

“That was a high priority for us and that Democrats and Republicans were able to come together on that was extremely welcomed,” Connors said. He added there are also other components to the supplemental budget that could be a problem for some Maine businesses.

Connors said he is optimistic lawmakers will still broker a deal that keeps full federal conformity on PPP in place. He said he also believes there may still be time to reach compromise on some other issues that concern Republicans.

Without a compromise, a supplemental budget impasse would set hard battle lines for the state’s next two-year budget, which must be in place by the end of June and which also requires two-thirds support. Mills has proposed a basically flat $8.4 billion spending package, which is also the subject of ongoing public hearings before the Legislature.