I was out of state for much of the last two months (vacation and family medical emergency) and wasn’t paying as much attention as usual to ongoing developments. The following are quick reactions to a few random developments over that period – nothing of consequence and nothing that I have given careful thought to (dangerous, I know).
Student loan debt forgiveness
President Biden issued an executive order forgiving up to $20,000 in student loan debt for lower income borrowers, fulfilling a campaign promise. I’m not going to weigh on the underlying policy. I have mixed feelings – how America pays for higher education is in need of a permanent fix; this isn’t it, but good arguments can be made for and against an ad hoc partial student loan jubilee to address past problems. (Full disclosure: all three of my children graduated from college while incurring no student loan debt but I do not begrudge government help for those whose financial circumstances required them to do so and are now saddled with more debt than a reasonable ability to pay it. 1(B) of this post and Susan Dynarski’s NYT op-ed provide some useful context, I think.) But there is a Minnesota tax angle.
As I blogged about ad nauseum in the context of PPP loans, the general rule is that loan forgiveness generates taxable income. Absent a special statutory provision, student loan forgiveness would be taxable. Congress in the American Rescue Plan Act (ARPA) addressed that by exempting the income. This TPC blog post by John Buhl has the details.
The Minnesota angle:
- Higher conformity price tag. The 2022 session meltdown and failure to enact a tax bill means Minnesota has not conformed its income tax to the ARPA loan forgiveness provision. That means the Biden executive order (assuming it survives likely court challenges (NYT paywall)) raised the cost of a Minnesota conformity bill by a material amount. Of course, the state likely will have a large surplus after the November forecast, so paying for a larger conformity price tag should not be a problem except the usual competition for scarce budget resources is always fierce no matter how big the surplus.
- Political fallout? Republicans nationally have opposed the Biden order (e.g., see this Axios story on ads), mainly arguing it is unfair to those who paid their loans back or didn’t incur debt at all. Given the nationalization of partisan issues, I assume Minnesota Republicans will fall in line if they haven’t already. That raises an interesting political question as to whether that opposition will carry through to opposing the favorable Minnesota tax treatment – if they don’t think the forgiveness is a good idea, then exempting the income also should be a bad idea? Of course, Republican DNA finds it hard to not like any kind of tax cut, so who knows? Stay tuned to the 2023 session.
As an aside, it is useful to point out that the student loan debt forgiveness does not involve the extra twist that PPP loan forgiveness did – there is no double benefit. PPP loans were required to be used to pay tax deductible expenses (payroll etc.) and the issue was whether those payments should be allowed to reduce tax on other income (business profits) in addition to not taxing the forgiveness itself. (Congress and the legislature said yes.) The student loan forgiveness is just a straightforward exemption of the income, like the expanded rules for home mortgage debt write-downs after the Great Recession.
Update – lawsuit filed using state taxation to assert standing. In a weird twist, Indiana’s taxation of the forgiveness is being used as the basis for asserting standing in a lawsuit challenging the forgiveness executive order. Federal law does not recognize taxpayer standing to challenge illegal spending (unlike Minnesota law). As a result, a plaintiff must be found whose personal interests (not as a taxapayer) are adversely affected, The plaintiff in the lawsuit claims he is because the forgiveness will trigger a $1,000 Indiana tax bill on his $20,000 in forgiveness. WaPo story. To finesse the fact $20,000 is greater than $1,000 (i.e., is he net to the good which doesn’t seem adverse to me) he says he would qualify forgiveness of his debt anyway under the Public Service Loan Forgiveness program and (I presume although the story does not say) Indiana (like Minnesota) exempts that forgiveness from taxation.
Clever argument if the loan forgiveness is not voluntary (i.e., you don’t need to apply and cannot opt out). That strikes me as implausible. The story quotes a White House spokes person that he could opt out. But Larry Tribe, the Harvard law professor and author of a standard treatise on con law, is quoted in the article as saying the argument is “not beyond the realm of possibility.” Seems highly implausible to me but standing is a malleable and inscrutable concept that seems to regularly morph. My guess is the suit wll be dismissed.
Corporate AMT
The Inflation Reduction Act (IRA) is now law. One of its major revenue raisers is a reenactment of a corporate alternative minimum tax based on book (i.e., accounting) income, about $20 billion/year (JCT estimate). This is a rerun of an idea from the 1980s that did not last long and is down the list of what I would have done (the global minimum tax or raising the corporate rate were better corporate tax revenue raisers).
But the silver lining is that it will give Minnesota a path out of its linkage to the pre-TCJA federal corporate AMT. The feds have not used that tax for five years now. Legislators must have viewed repealing the old minimum tax as an unacceptable benefit to profitable C corps or they couldn’t agree on how to deal with the lost revenue. But administering and complying with a complex tax based on obsolete federal law grows increasingly untenable with each passing year. Enacting a Minnesota minimum tax based on IRA’s new minimum tax would be preferrable if only from a compliance and administration standpoint. Since Minnesota has not conformed on bonus depreciation (the major preference that will be nicked by the new federal AMT), it’s unclear whether conformity would mainly be a matter of appearance. Careful analysis of corporate returns will be needed. If conformity with the book income AMT is largely a fig leaf to permit deep sixing the old AMT, so be it.
IRA’s funding of the IRS will provide a revenue bonus to the state that should grow over time, although probably very little for several years given how long it takes to ramp up enforcement. CBO’s estimates of the revenues keep shrinking (down $23 b). The reasons are that Congress withdrew the hiring and compensation flexibility for new hires (no idea why) and the stupid Biden tax pledge that Yellen promises to stick by. Ugh.
On a related issue, GOP opposition to the IRA appears to be totally focused on demonizing the IRS funding. See Howard Gleckman’s TPC blog post characterizing the nature of the political debate. The over-the-top and outright false characterizations that elected officials get away with is appalling (former chairs of the Senate Finance Committee should be held to higher standards of conduct; I expect it from Ted Cruz). Much of the funding just restores IRS enforcement to 2010 levels; I think the increase over the real 2010 levels may only be 5% by 2030 (can’t find where I saw that now). Double ugh.
July revenues – nothing to see here
The MMB report on July revenues, in a change from relentlessly above forecast monthly collections, shows that they are about on target (up a modest $64 million). Sales tax up and everything else flat.
The only point perhaps worth noting is that evidence of unwinding of overpayments by owners of pass through entities (PTEs) is still MIA. That probably doesn’t mean much but who knows. The hypothesis is that many owners of PTEs double paid – first by making individual income tax declarations for the income during 2021 and, then, when the 2021 legislature created the PTE entity option (allowing unlimited deduction of the state taxes paid for federal purposes) by paying the PTE entity tax as well. MMB has said the amount may be $1 billion. That will unwind when the PTE owners file their 2021 individual returns and claim the credit for the PTE entity tax. Most of that money would typically show up in September and October because of the due date for extension returns (October 15th). But given the amounts at stake, some earlier filings could be expected, especially with short term interest rates rising. But a host of other factors involved with individual income tax collections could be masking the effects. August, September, and October collections will tell the real story (probably muddled by other factors if history is any guide).
Childcare facilities as exempt schools
The Minnesota Supreme Court has held that a childcare (er, early childhood education) facility qualified for a property tax exemption under the constitutional and related statutory provisions exempting “academies, colleges, universities, [and] all seminaries of learning[.]” This reversed a tax court ruling that denied the exemption.
Back when I was working, I tried to stay away from property tax issues as much as possible (too often unsuccessfully) and do not consider myself an expert on them. So, I won’t weigh in on the merits of the decision although I have read it a couple times. I will make a few random observations, though.
This same plaintiff was unsuccessful in an attempt at a property tax exemption claiming to be as an institution of purely public charity about 15 years ago. That case spurred a legislative effort to clarify the statutory rules for qualification as an institution of purely public charity. A main pressure point was the requirement for meaningful support from donations or contributions, rather than service revenue (fees paid by parents or the government). The legislative changes diluted that requirement. That is irrelevant under the exemption for schools. In fact, I don’t think they even need to be nonprofits. At least, it’s not an explicit requirement in the statutory or constitutional language and the Supreme Court has said as much in dicta (“The profit or nonprofit character of the institution is immaterial to a determination of whether or not an institution is a “seminary of learning.” Graphic Arts Educational Foundation, Inc. v. State).
The plaintiff, congruent with the basis of its claims, in the meantime changed its name from “childcare” to “early education” center. Contrary to Shakespeare, an early education center may smell more like a school than a childcare center.
I am sure that the authors of the constitutional language and attendees at the constitutional convention (the relevant language dates to the original constitution) did not think that they were exempting entities that largely cared for children under the age of 5. They likely were thinking more along the lines of traditional teaching of the 3 R’s. Of course, if you’re not an originalist (I’m not), that probably isn’t that important. The actual distinction – what characterizes the collection of entities enumerated in constitutional language and how does that align with what is done in pre-K settings – should matter, though. Both the Supreme and Tax Courts agreed (but not the county) that the nature of its program was educational. The dispute was over whether it was sufficiently “general” and “could readily assimilate” into the public schools, the other two prongs of the test, whatever they may mean.
I suspect the case will cause more childcare centers to seek exemption as schools. That will be a headache for assessors, who will likely require apportionment of the portions of the facilities that are devoted to infant and toddler (earlier than age 3, maybe) care. Goodhue County failed to do that until the case was on appeal (too late). In the larger scheme of things, I doubt this will be much of a hit to the property tax base. But that is a pure guess.
The exemption for schools is not one that the constitution authorizes the legislature to clarify or modify (unlike that for institutions of purely public charity). So, it is unclear how much the legislature, rather than litigation, can clarify this.
Empirical economic research has concluded that early childhood education yields material positive social benefits. Retired federal reserve economist Art Rolnick has been making this case for years now in a variety of Minnesota forums (here, e.g.). So, devoting more public resources to the effort can be easily justified. But I am skeptical that using the property tax under rules devised and enforced by judges is an optimal way to do that.
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