Federal student debt relief will be subject to Minnesota state taxes unless legislature acts, revenue department says
MINNEAPOLIS -- Millions of Americans are expected to see some student loan forgiveness under a plan from the Biden administration. But Minnesotans who qualify could see a higher tax bill next year because of it.
The plan would relieve up to $10,000 in federal student loan debt for single filers making less than $125,000 and provide additional $10,000 in forgiveness for Pell Grant recipients. Minnesota is one of just five states that would tax the relief as income, according to an analysis by think tank the Tax Foundation. It would not be subject to federal taxes.
In an email, a spokesperson for the Minnesota Department of Revenue confirmed the state has not matched the federal law, so the state's taxpayers who have their student debt discharged "will have to add back this amount for Minnesota income tax purposes."
The White House said eight million Americans may be eligible for relief automatically because the government already has key income data; the application for others opens this fall. Any debt discharged this year would impact next year's tax bills.
An analysis from the Tax Foundation estimates Minnesota borrowers could face up to $985 in additional tax liability if they receive $10,000 in relief. State Rep. Paul Marquart, DFL-Dilworth, who chairs the House taxes committee, said more people would likely see a tax increase between $535 and $785 for that amount of college debt forgiven.
"This increase in taxes students are going to face on these forgivable loans -- it's a big problem. That's just another reason we have to come back for special session," Marquart said. "It's going to create a lot of angst and uncertainty for students who have their loans forgiven."
The state revenue department said piece of the a $4 billion tax bill at the Capitol this year would've made the student debt relief tax-free by conforming to a federal provision approved by Congress in the American Rescue Plan. Session ended before the legislation passed, leaving Minnesota in a minority of states that would tax it as income.
Marquart worked with his GOP counterpart Sen. Carla Nelson, R-Rochester, to broker the tax deal -- an agreement that he acknowledged can be complicated to sort out and hard to come by in St. Paul. Because Republicans and Democrats in the divided Capitol found compromise, lawmakers should return before January's regular session and pass it, he said.
Nelson believes the move by Biden was an overreach of executive authority, but agreed with Marquart that the Legislature needs to come back to pass the tax bill and assess the impact of the executive order.
She suggested language in the tax bill might need to change to include the Biden administration policy, and would like to have public hearings on the issue. The chair of the Senate Taxes Committee also said she doesn't believe Minnesota should tax the relief if the federal government isn't.
"I believe the governor should call a special session so we can look at this and make sure that we are doing what is best by Minnesota taxpayers," said Nelson. "We know students need relief from their tax burdens for student loans. We know higher education costs have been increasing. But we know Minnesotans across the board need tax relief as well."
A spokeswoman for Gov. Tim Walz said he supports making any student loan debt forgiven from the federal government exempt from state taxes.
The Minnesota Legislature adjourned in May and left key proposals unfinished, including education and public safety spending. The tax legislation would have eliminated all income taxes on Social Security benefits and provided a refundable tax credit for renters.
