Minnesota lawmakers consider wiping away taxes on $600 a week unemployment boost, PPP loans

Minnesota lawmakers are considering whether to use a budget surplus to wipe away surprise tax bills facing some workers and business owners this spring.

House Democrats are proposing to forgive $600 a week in pandemic unemployment benefits from the state's income tax. Meanwhile, Republicans who control the Senate are eyeing a $438 million tax break for businesses that received federal Paycheck Protection Program loans.

Minnesota's $1.6 billion projected budget surplus is driving the conversation, though it's unclear whether there's enough money to provide both tax breaks.

On top of regular Minnesota benefits, many laid-off workers got a $600 a week boost last year through the federal CARES Act, which was later extended at $300 a week after an executive action from President Donald Trump. To get the benefits out quickly as unemployment filings mounted, Minnesota didn't set up a mechanism to tax the payments, even as it taxed regular state benefits as income.

"It was the right decision they made to not do withholding at the time, to get the money out the door as quickly as possible. We just need to protect people on the back end now," state Rep. Zack Stephenson, DFL-Coon Rapids, said in an interview. "For them to get hit with an unexpected tax bill is just the cherry on top (of a difficult year). We can’t let that happen."

The size of each person's tax liability will vary based on that person's income, how long he or she received pandemic benefits, and whether the boost was $600 or $300 a week. A worker who makes $50,000 a year and got the extra $600 for 10 weeks may face a $408 tax bill. 

Neither Stephenson nor the Minnesota Department of Revenue knew how much forgiving pandemic benefits would cost the state. 

Minnesota has paid out $5.4 billion in benefits through the federal boosts. Using state income tax brackets of 5.35 percent to 9.85 percent, the cost would likely be in the hundreds of millions of dollars.

Meanwhile, Senate Republicans plan to vote within one week on a proposal eliminating Paycheck Protection Program loans from the state's income tax.

More than 102,000 Minnesota businesses received a total of $11.3 billion in loans through the program, which was promoted as tax-free federally. Businesses do not have to pay the money back if they used it to retain workers.

Minnesota is the last state in the region to tax the forgivable PPP loans as income. Wisconsin was the most recent state to change its law.

"We don’t want to be an outlier," Senate Majority Leader Paul Gazelka, R-East Gull Lake, told reporters at a news conference. "All the states around us have conformed. New York has conformed. So there’s no reason not to get this done with the surplus that we have." 

Gov. Tim Walz has expressed openness to both tax breaks. What's unknown is whether Minnesota can fully provide both under its current budget constraints.

Gazelka said he was talking with House Speaker Melissa Hortman about the PPP loan issue. Gazelka said Hortman was asking for other items in a potential deal; a spokesman for the speaker told FOX 9 that Hortman was seeking more education funding and an increase in summer school funding.

State Sen. Tom Bakk, I-Cook, said lawmakers were likely to discuss pandemic unemployment benefits in addition to the PPP loans, calling it a "very legitimate conversation" to forgive COVID-related benefits.

"If you’re going to forgive income tax on unemployment benefits, it should be directly linked to COVID," Bakk said.

In the House, Stephenson said he was unlikely to vote for a bill that included PPP loan forgiveness without the same treatment for unemployment benefits.

"I think it’s pretty hard to imagine we wouldn’t take care of both our small businesses and our working families," he said. "I don’t see why we would do one and not the other."