State taxes on student debt relief would hit black borrowers the hardest

Wellor certain borrowers, the impact of the White House Student Debt Relief Program may be affected by the interpretation and application of tax law.

Several countries may prove taxing this relief, creating a situation where borrowers must make a payment of up to $1,000 in the near future as a result of receiving a long-term financial benefit from the cancellation. On Nov. 4, Superior Court Judge Amy Coney Barrett refused to block the forgiveness plan after two borrowers claimed in a lawsuit would result in paying higher state taxes.

To find out how state tax policy could affect eligible borrowers, Bloomberg News spoke with Dorothy BrownMartin D. Ginsburg Chair in Taxation at Georgetown University Law Center and author of The Whiteness of Wealth: How the Tax System Impoverishes Black Americans—and How We Can Fix It.

The conversation began with the recent lawsuit filed by two plaintiffs in Indiana and took place before Connie Barrett’s ruling on Friday. The suit was first submitted in September with one plaintiff who is an attorney at the libertarian Pacific Legal Foundation; in response, the Department of Justice said the government had taken steps to ensure that person – and anyone else who wanted to – could opt out of the program. The latest lawsuit similarly asked the Supreme Court to act to prevent the repeal from taking effect.

What do you think of the legal challenge that state taxes will be negatively impacted by borrowers whose loans are forgiven?

The Indiana lawyer will fail because he claims he will have to pay higher taxes when he can opt out. If you don’t have to get debt relief, you don’t have to pay any taxes.

More importantly, there’s this legal doctrine that says you can’t sue on any matter if you don’t have something called standing, which means there’s a specific injury that you’re alleging. There are long-standing cases that basically say you can’t sue as a taxpayer just because your taxes will go up. Because if that were the case, you can imagine the lawsuits against Trump’s tax cuts in 2017. The argument that “my taxes are going up” flies in the face of a lot of precedent.

Federal law allows this debt relief to be tax-free because of the US bailout that the president signed in March 2021. In any state that immediately complies with federal law, there will be no taxes on it.

Two of the states that said they would tax student debt forgiveness — and several states that said they might — are in the South, which has highest concentration black residents in the country. How can taxation disproportionately harm certain groups of people?

It is true that 56% of black Americans live in the South. But of the population whose debt is being forgiven in the South, what are those racial demographics? That’s what I’d like to know. How many black borrowers get this debt relief and currently live in the south? Do we see black grads living anywhere else?

Black borrowers and other borrowers of color are more likely to receive a Pell Grant, meaning they qualify for $20,000 in relief, versus $10,000 for some other borrowers. Does it stand to reason then that if they receive the full $20,000 and live in states that tax their relief, they would be disproportionately affected?

Absolutely. The tax bill will be higher, and three-quarters of Pell Grant recipients are black and Latino.

Do you imagine that this immediate burden might be too much for some people?

You must earn less than $125,000 per year if you are single [to qualify for the relief]and we need to talk about how much less than $125,000 these people make. And if they’re living paycheck to paycheck, then $1,000 [tax] a bill you didn’t expect will be difficult to pay – and people may need to weigh in on that. Obviously, in the long run, [erasing] up to $20,000 might be great, but how are you going to finance that thousand dollars? Will you take out a credit card advance that will be a huge interest rate – much higher than your student debt? Some may have the luxury of [support from] family members, but research shows that black people don’t tend to access this intergenerational wealth.

Is it worth considering whether someone can absorb this additional tax next year before applying?

I would say find a way to pay the taxes and get this debt forgiven. Consider this: $1,000 from a [tax] bill for $20,000 debt relief or $500 of a [tax] account for $10,000 in debt relief. It’s a real short-term pain, but I think it’s worth the pain.

You noted in testimony to Congress last year that black borrowers already pay more in taxes than their white counterparts. How can the student loan tax lump sum be combined with other bills?

Every April 15, black Americans pay more than their white counterparts. So this is just another example of a policy that I would say is designed to help black borrowers — and at the federal level it helps black borrowers because they don’t pay any additional taxes. States that often have regressive tax schemes would hit black borrowers the hardest.

What could states do to make student loan forgiveness fairer?

Just follow the federal rules that would allow it to be tax free. A state legislature can pass a one-time and basically say, “The pardon will not be taxed.”

And what can the federal government do to further help people?

More student loan debt forgiveness – $10,000 or $20,000 is a good start. Now let’s do some more.

Student loan debt is an obstacle. It hinders home purchases, it hinders investing in their future. It’s really a drag on the economy. If they didn’t have that debt around their necks, they could make better financial plans going forward.

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