Many of Maine’s tax rules are tied to federal law, so when federal tax laws change, the state must decide whether to follow or set its own rules. Following the passage of HR 1 — the federal Republican megabill also known as the One Big Beautiful Bill Act — states now face key decisions about whether to conform or decouple from these new tax provisions.
This blog is the third in a series (read parts one and two) examining Maine’s most pressing and impactful decisions.
In addition to hundreds of millions of dollars in annual tax breaks for businesses, fully conforming to federal HR 1 changes in Maine would also mean expanding what is known as the Qualified Small Business Stock (QSBS) exemption, which allows investors in startups to avoid paying taxes on capital gains of up to $15 million per year.
The QSBS exemption is, quite simply, BS.
This tax exemption purports to benefit small businesses by attracting startup capital from investors. In reality, QSBS benefits very few small businesses, but rather investors in small businesses who are likely already wealthy. Under this exemption, investors in early-stage C-corporations can avoid paying taxes on the increased value of their shares in the business when they cash out their shares.
This is a huge windfall for those who are already wealthy, including venture capital investors with the funds to invest in the first place. Research shows 94% of those benefiting have income over $1 million1 and account for nearly 75% of gains excluded from taxation. Research also shows QSBS claims are heavily skewed to high income taxpayers making large claims.2
There are many other better policies Maine could in place to support small businesses rather than funneling a pipeline of tax dollars to the already wealthy.
There is bipartisan support for repealing QSBS, with conservative leaning think tanks arguing it is a poor way to encourage investment because businesses may make investments that otherwise would not be optimal. Their resulting decisions maximize tax benefits, but may not achieve the best return on investment, while capital is tied up in less promising or productive businesses.3
Unfortunately, Maine already conforms to QSBS. HR 1 further expands this bad policy by loosening who can qualify for the tax exemption and increases the costs to states by up to 70%. Now is the time to get rid of it completely. Maine could save an estimated $4 million by decoupling from this policy in 2026. By 2031, QSBS will cost Maine an additional $15 million per biennium.4
Maine has too many unmet needs to waste taxpayer dollars on conformity proposals like QSBS. A handful of other states have rejected QSBS and do not allow taxpayers to exclude it from their taxes.5
Maine’s tax code should not be a tool for perpetuating wealth inequality. QSBS is BS — and instead of conforming to its expansion Maine should repeal this policy completely.
Notes:
[1] Austin, Sarah and Nick Johnson. “Quite Some BS: Expanded ‘QSBS’ Giveaway in Trump Tax Law Threatens State Revenues and Enriches the Wealthy.” 2 Oct 2025. Institute on Taxation and Economic Policy.
[2] Abdulrauf, Zahrah, Gerald Auten, Paul R. Organ, and Quinton White. “Quantifying the 100% Exclusion of Capital Gains on Small Business Stock.” Office of Tax Analysis Working Paper 127 January 2025. US Treasury.
[3] Shilov, Aleksei. “Quite the Skewed Business Subsidy: QSBS Exclusion Is a Poor Way to Encourage Investment.” 11 Dec 2025. Tax Foundation.
[4] Austin & Johnson (see Note 1).
[5] Ibid.