By MADISON HIRNEISEN
THE CENTER SQUARE
(The Center Square) – California lawmakers vowed Friday that California would not tax the federal student debt relief offered to many borrowers, promising to take “immediate action” if the relief is not already exempt under state law.
“Once the federal government finalizes details of the student debt relief program, we will know whether the relief is tax exempt under current California law,” Senate President Pro Tempore Toni Atkins and Assembly Speaker Anthony Rendon said in a joint statement Friday. “If not, we will make the relief tax exempt through immediate action in early 2023.
“Rest assured, one way or another, California will not tax the federal student debt relief.”
The announcement comes a few weeks after President Joe Biden announced a plan for student debt relief that will offer up to $20,000 in debt cancellation to Pell Grant recipients and $10,000 in debt cancellation to non-Pell Grant recipients. Those eligible for the debt relief include individuals making less than $125,000 annually or joint filers making under $250,000.
In the weeks since the plan was announced, some states have indicated that federal student debt relief may be taxed as income.
Though student loan forgiveness is typically counted as taxable income, the American Rescue Plan Act of 2021 exempted student loan forgiveness from federal taxation through 2025. States that follow federal tax policy are likely to follow suit and exempt debt forgiveness from state income tax bases, but a handful of states likely won’t, according to the Tax Foundation.
Indiana, North Carolina, Arkansas, Minnesota, Mississippi, California and Wisconsin are among the handful of states that could treat the forgiven debt as taxable income unless additional action by lawmakers is taken. North Carolina’s General Assembly recently declined to adopt the Internal Revenue Code that would have exempted debt forgiveness from being considered taxable income for the purpose of state income tax.
California’s Franchise Tax Board told the Los Angeles Times this week that they need more information from the U.S. Department of Education about how the program is being administered to tell whether or not the forgiveness will be taxable. The board told the Times that whether or not the debt forgiveness is taxable depends on what section of the law is used.
If further action is necessary, it’s likely lawmakers would address the tax issue via a budgetary fix.