GOP Debt Relief: It’s Complicated, For Some

The Haves and Have Nots in the 'All For Me None For Thee' Republican Economic Policies

October 2, 2022 0 comments

Private Loans and Loan Servicers

The Biden-Harris administration appeared to be aiming to include certain private loans in the student loan debt reduction last week.

This week, the administration was forced to exclude private loans due to a joint lawsuit filed by Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina aiming to block all student loan relief, arguing that student loan servicers and banks would lose large amounts of expected revenue if those loans were not available to collect fees and interest on for the next decade or more.

Opt-Out and PSLF

Because borrowers can opt-out, a federal judge dismissed a lawsuit filed by a Pacific Legal Foundation attorney who claimed “irreparable harm” from Biden’s student forgiveness plan because it would cost him a couple of hundred dollars in state income taxes.

Garrison isn’t opposed to student loan forgiveness, only Biden’s plan. Garrison plans to take advantage of the Public Service Loan Forgiveness (PSLF) program to have all his loans forgiven and Indiana already exempts income tax on PSLF-forgiven debts.

13 Reasons Why

Normally, regardless of your income level, the IRS considers all canceled and forgiven debt to be taxable income.

The American Rescue Plan Act (ARPA) suspended student loan forgiveness taxes from 2021 to 2025. That includes people whose student loans are classified under the Income-Driven Repayment program.

ARPA’s comprehensive relief extends to other repayment plans, making student debt forgiveness tax-free for most borrowers.

That is, the amount of student loan forgiveness, including loans forgiven through the recently expanded Public Service Loan Forgiveness program, will not be included in your taxable income until 2025.

But, under current law for 13 states, federal student loan forgiveness is taxable state income unless they update their state tax code.

All 13 states approved a tax package in 2021 that permitted taxpayers to exclude from income debt forgiveness on federal Paycheck Protection Program (PPP) loan proceeds and even deduct expenses paid using PPP loan funds that are otherwise deductible.

Meanwhile, the IRS has directed student loan servicers not to produce 1099-Cs to borrowers or state tax agencies, which is required for filing debt cancellation.

State Departments of Revenue cannot know who obtained student debt relief without 1099-Cs.

Harm and Inflation

Arizona Attorney General Mark Brnovich filed a lawsuit on Thursday to stop student loan relief, stating that because interest and payments were suspended during the pandemic, the 886,000 Arizonans with an average of $36k in student loans have not been harmed by the debt.

He also claimed that borrower debt relief would harm the state Attorney General’s Office because it relies on public service forgiveness programs to recruit employees and that the plan would increase the state’s law enforcement costs due to student debt fraud.

[Don’t government agencies undertake their own investigations into fraud?]

Finally, Brnovich’s complaint alleged, as did Ducey’s letter to Biden last month, that student loan relief would increase discretionary income for too many people earning less than $75k, leading to even more inflation.

The “more money to spend causes inflation” argument is perplexing, especially when Ducey also announced today that the wealthy tax cut slated to take effect in 2024 will now take effect in 2023, providing Arizonans earning more than $500k an average tax savings of more than $16,000 per year.

[Households making $70,000 a year get a $58 annual tax cut.]

It’s worth noting that, since taking office in 2015, Arizona Attorney General Mark Brnovich has launched zero investigations and filed zero complaints against for-profit predator colleges that have been known to deceive and defraud Arizona borrowers, including Arizona-based colleges.

At least 54 for-profit colleges have complaints against them and many have closed, preventing the Department of Education from pursuing them for student loan losses.

Aside from this lawsuit, the Arizona AG’s only other student loan action was against Navient, the loan servicer whose illegal behavior was so widespread that 38 other state AGs led the way first.

Deficit Costs

President Biden’s planned student loan debt reduction is estimated to cost between $300 billion and $980 billion IN TOTAL over the next 10 years (depending on who you ask).

The tax gap, which the US government could collect but cannot because people underreport their income or utilize other tax evasion tactics, is estimated to be worth $400 billion EVERY YEAR. 

Republicans oppose both the student loan debt relief and collecting from tax cheats reporting over $400,000 income per year.

Two years after the Republican 2017 Tax Cut and Jobs Act (TCJA) went into effect, the Congressional Budget Office (CBO) estimated the 10-year deficit cost of corporate tax cuts at around $750 billion, $400 billion higher than pre-TCJA projections. 

According to the Tax Policy Center, households with incomes of $25,000 or less saved an average of $60 in 2018 as a result of the tax cut, while the wealthiest 1% of households saved more than $51,000 on average. 

According to the Institute on Taxation and Economic Policy (ITEP), of the 379 profitable Fortune 500 companies, 91, or roughly one-quarter, paid zero income tax in 2018.

Feds Give and States Take Away

States with high taxes and GDP rely less on the federal government, whereas states with low taxes and GDP depend more on federal aid.

Balance of payments is the revenue paid to the federal government from a state’s residents and economy (taxes) minus the federal spending in that state.

According to a recent WalletHub analysis, six of the ten “taker” states most dependent on the federal government traditionally vote Republican.

Local Republicans in those states utilize low-tax and tax-breaks-for-the-rich policies to win voters, knowing the federal government will pick up their funding slack.

The ten states with the highest positive balance of payments (the biggest takers) are:

Virginia ($111,785,000,000)

Kentucky ($63,229,000,000)

Florida ($50,999,000,000)

Maryland ($49,942,000,000)

Ohio ($42,004,000,000)

Pennsylvania ($41,516,000,000)

North Carolina ($35,437,000,000)

Alabama ($33,033,000,000)

Arizona ($30,907,000,000)

South Carolina ($28,209,000,000)

Eight states are among the top 20 in terms of average debt held by borrowers, with Maryland, Virginia, South Carolina, and Florida ranking in the top five.

However, the same Republican states that are the biggest takers and whose residents would benefit the most from Biden’s student loan debt relief proposal are also the states that are most adamantly opposed to reducing the financial burden of 43.4 million people across the United States.

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