Minnesota businesses got some badly needed help in the form of the federal Paycheck Protection Program (PPP), designed to provide loans that would keep workers on the payroll during the pandemic and ease the massive revenue drop-offs that were a byproduct of lockdowns.
For those workers who lost their jobs anyway, the federal government stepped in with heightened unemployment benefits. The forgiven PPP loans are exempt from federal income taxation, as is the first $10,200 of individual unemployment benefits. State taxation? That's another matter.
The Minnesota Legislature is debating whether — and to what degree — it can afford to offer state tax exclusions, and it turns out to be no small matter. So many businesses received PPP loans that a tax exclusion would cost the state treasury more than $430 million. Unemployment benefits, typically taxed in a majority of states, including Minnesota, would cost another $260 million or so.
That adds up to nearly $700 million — a big part of the projected surplus that Democrats had other plans for. House Taxes Chairman Paul Marquart, DFL-Dilworth, told an editorial writer that a sum that large needs careful consideration and must be weighed against other, perhaps more pressing needs.
Earlier the Republican-led Minnesota Senate passed a bill on a 55-21 bipartisan vote that would exempt 100% of PPP loans from state taxation but only a fraction of UI benefits — about $31 million worth. Offering full exemption for business loans but only a smidgen for unemployment benefits is fundamentally unfair.
(In the interests of full disclosure, the Star Tribune received a PPP loan of $10 million. It was among 2,200 news organizations across the country to do so in the face of pandemic-related advertising declines.)
So what now? Rep. Greg Davids, the House lead on taxes, points out that Minnesota's neighboring states have all exempted PPP loans, although by no means has every other state done so. Marquart notes that 68% of businesses that got the federal loans posted no profit for 2020 and so gain no immediate benefit from the tax exclusion. Marquart said he prefers immediate aid that helps businesses that operated at a loss, as well as those that didn't make the cut for PPP loans.
House Minority Leader Kurt Daudt wants full conformity on PPP loans but, in a break with the Senate, full conformity on unemployment benefits as well. Aid to preserve payrolls and help the jobless was never intended as a financial windfall for states, he argues.
We agree that a tax break on the first $10,200 in unemployment benefits — which ends at $150,000 of income — is only right. It seems cruel to add a tax bite on top of the other woes visited upon those who lost jobs during the pandemic.
House Speaker Melissa Hortman told an editorial writer that a tax exclusion on unemployment benefits and aid for suffering businesses are "top priorities" for the DFL-led House. But like Marquart, she'd prefer aid that helps struggling businesses now. That makes sense. The universe for government aid is not unlimited. Some form of direct aid to the thousands of businesses that made no profit should be a priority.
California allows a deduction on the first $150,000 of PPP loans. The average PPP loan in Minnesota was $101,000. If the idea is to help small business, that seems to be the best way to do so while preserving the state's ability to send direct aid to businesses that need it.
It's not something that fits on a bumper sticker, but nuanced tax policy seldom is. It requires thoughtful leadership and difficult choices. The House, Senate and Gov. Tim Walz should strive for compromise here and resist any retreat to separate corners.