The Minnesota Senate is moving quickly on state tax relief for some businesses and unemployed workers who received federal pandemic aid, arguing lawmakers must act now as people are filling out their 2020 tax returns.

A proposal that passed on a bipartisan 55-12 vote on Thursday would conform state and federal tax code for the tens of thousands of state businesses that received forgivable Paycheck Protection Program loans, which were used to help cover employee salaries even as some businesses were shuttered due to the pandemic.

State tax law treats those forgiven loans as taxable income, even though Congress moved late last year to make the assistance tax-free at the federal level. The deadline for individual tax returns is April 15, but businesses must file by Monday or seek an extension.

"Taxing our struggling small-business owners who did the right thing, by keeping their workers on payroll, would make it much more difficult to get our state's economy back moving again," said Sen. Tom Bakk, I-Cook, who sponsored the bill. "Small businesses and their workers are the lifeblood of our communities, and we cannot afford to take them for granted."

The changes are a priority for the business community, but the proposal is getting pushback from some Democrats in the Senate and in control of the House, who say it focuses relief on businesses that were already able to tap into federal help.

It doesn't go far enough to help other struggling businesses or workers, argued opponents.

"It's a double tax cut for those businesses," said Sen. Jen McEwen, DFL-Duluth, who voted against the bill. "If we're going to do this economic stimulus for businesses, then what we also need to do is provide fairness for workers. We need to stand up for average Minnesotans, for the workers in Minnesota."

The Senate bill also exempts taxes on a portion of the $600 federal stipend that Minnesotans received through the CARES Act on top of their weekly unemployment benefits last year. Democrats say it should fully exempt taxes on all supplemental unemployment collected by Minnesotans during the pandemic. A bill moving in the DFL-controlled House would do that.

"It was that part that was not withheld, so people are going to get this sticker shock," said Rep. Paul Marquart, DFL-Dilworth, chair of the House Tax Committee. "To me, it's a package. They have to go together."

But there was also sticker shock for legislators on the price of the proposals. It would cost $438 million to conform state and federal tax code on PPP loans. The House proposal to exempt taxes on unemployment benefits would cost $237 million.

Together, the proposals could consume a big chunk of the state's projected $1.6 billion surplus and leave less money on the table as both sides debate spending for broadband, schools and other businesses as part of end-of-session budget negotiations. Much of that surplus is based on one-time federal aid.

"There's more one-time money coming into the state, and we are going to put that to good use. We are," said Sen. Erin Murphy, DFL-St. Paul. "We can put that toward all sorts of needs and issues Minnesotans are talking about."

It's an early look at the broader budget and taxes fight shaping up at the Capitol this year as the divided Legislature and DFL Gov. Tim Walz work to set a two-year, roughly $50 billion state budget. Walz is pitching a number of tax increases on businesses and the highest earners to pump money into schools and other areas hit hardest by the pandemic.

Visiting a high school in Plymouth on Thursday, Walz said he wants lawmakers to consider joining a tax cut plan with his push for $150 million for schools to set up a summer learning program. "To rush through and throw a tax cut out there, and say, 'Well if there's a little extra left over then we'll take care of the schools,' I don't want to do it that way," he said. "Let's put them together."

But Republicans in control of the Senate are emboldened in their push for tax relief by last month's news that a state budget deficit had turned into a surplus. On top of that, President Joe Biden signed the $1.9 trillion stimulus package on Thursday, which will direct an estimated $4.9 billion to Minnesota state and local governments to use for pandemic response and recovery.

Minnesota doesn't automatically conform its tax code with new provisions at the federal level, so each year lawmakers debate which changes they want to adopt. Many other states, including all of those bordering Minnesota, have adopted the federal provision that doesn't tax PPP loans.

Sen. John Jasinski, R-Faribault, said the 150-year-old Faribault Woolen Mill Co. in his district used a PPP loan not only to keep employees on staff, but also to increase staff and their pay and add more protections against COVID-19.

"They had no expectation this money was going to be taxed," he said. "Now they're forced with a bill to pay these taxes."

Briana Bierschbach • 651-925-5042

Twitter: @bbierschbach