Broad support emerges for wiping away Minnesota tax on student loan relief

Key lawmakers in both political parties and Gov. Tim Walz say they support eliminating state income tax liability on federal student loan forgiveness.

Unless lawmakers act, Minnesota will treat debt relief as taxable income because state law is out of step with federal tax changes. On $10,000 of loan forgiveness, state income tax would be at least $535, higher if the person would see reduced credits or deductions because of the increase in taxable income.

"We need to change that," Walz, a Democrat, said in an interview. "I fully support that."

Broad support does not guarantee legislation will pass. Lawmakers agreed on a series of tax changes this year that included conforming with federal law, yet the bill failed to pass after it got held up in broader end-of-session negotiations.

Walz's Republican challenger, Scott Jensen, has not said whether he would support wiping away the tax liability. Jensen compared President Joe Biden's debt relief plan to "playing Santa Claus."

"Because Joe Biden decided yesterday to give away billions of dollars -- or whatever it amounts to -- doesn’t mean today I should speak to the issues," Jensen said in an interview last week. A spokesman did not provide an update on Jensen's position Wednesday.

Lawmakers in both parties were quicker to support wiping away tax liability on student loan forgiveness.

"This is just one more reason why the governor needs to call a special session so Minnesotans can get tax relief now," said state Sen. Carla Nelson, who chairs the Senate Taxes Committee. Nelson, R-Rochester, supports the $4 billion tax break package that never passed this year.

An application will be available in early October for student loan relief, U.S. Department of Education officials have said. If forgiveness happens in 2022 and Minnesota lawmakers don't make a change, filers will need to pay in during next spring's tax filing season.

Lawmakers have stepped in before under similar circumstances.

Last summer, they wiped away tax liability for thousands of businesses that had received federal Paycheck Protection Program loans during the COVID-19 pandemic. The loans were exempt from federal taxes.

One of the PPP beneficiaries was a business owned by Jensen's running mate, Matt Birk, whose firm received $64,000 in federal relief.

House Speaker Melissa Hortman said lawmakers could approve the tax change in a special session or during next year's regular session that starts in January.

"If we could get that across the finish line before the election, we’d be happy to do that in the Minnesota House," said Hortman, DFL-Brooklyn Park. "If not, we will do a bill next year that does some federal conformity."

All 201 seats in the Minnesota Legislature are up for election in November. Republicans have a narrow majority in the Senate, while Democrats hold a slight edge in the House.

House GOP Leader Kurt Daudt said he too supports exempting student loan forgiveness, though Daudt said he's unsure that Biden's plan will survive a legal challenge.

"I absolutely would do that. I don’t think the money should be taxable," Daudt, R-Crown, said in an interview. "I’m not convinced it’s going to happen yet because there is no congressional appropriation for that money, and I know that (Biden's plan) is just an election-year gimmick."