Keeping taxes high

Opposing Joe Biden's student debt relief plan

Photo by Tim Gouw on Unsplash

In one of her TV ads, Iowa Gov. Kim Reynolds brags about cutting taxes.

What it doesn’t say is this: Kim Reynolds is fighting to keep taxes higher on Iowans who already face significant economic challenges.

You hadn’t heard this?

Here’s what’s happening:

Last month, Reynolds joined a lawsuit with some other conservative-run states challenging President Biden’s student debt relief plan.

In a news release, Reynolds complained the plan isn’t fair to people who paid off their college debt or never took out a loan in the first place. But what she didn’t say is if the plan goes through, Iowa and some other states won’t be able to rake in as much tax money from hundreds of thousands of borrowers across the country.

I’m not surprised you haven’t heard about this. Reynolds not only didn’t say this in her TV ad, but she didn’t say anything about it in the news release announcing the legal challenge, either.

It is discussed in the states’ court filing, however.

Here’s how it works:

Iowa and some of the other states that are challenging the Biden plan (which they dub “Mass Debt Cancellation”) figure state taxable income by using a person’s federal adjusted gross income as a baseline.

Normally, the states say, federal adjusted gross income includes student loan discharge. But that was put on hold by the American Rescue Plan Act through the end of 2025.

On Jan. 1, 2026, that will change. At that point, student loan discharges will again be subject to state income tax.

However, it won’t be as lucrative for state tax collectors if Biden’s debt relief plan survives.

Here’s why:

In their filing, the conservative states point to the federal Income-Driven Repayment program, a federal initiative that allows for debt cancellation for borrowers who make payments for a certain number of years.

The states, including Iowa, say that 1.5 million student loans held by 600,000 borrowers will be eligible for cancellation by 2030.

Of those, 1.2 million will be cancelled after 2026, the states say.

Thus, significant amounts of federal loan cancellation will occur after 2026—including for residents in Nebraska, Iowa, Kansas, and South Carolina. … The Mass Debt Cancellation, however, will reduce that tax revenue by decreasing the amount of outstanding student loan debt. As a result, the Mass Debt Cancellation costs Nebraska, Iowa, Kansas, and South Carolina tax revenue.

Did you get that, kids? If your debt is forgiven now, these states won’t get as much of your tax money later.

No wonder it wasn’t in the news release.

Of course, this isn’t the tax plan that Reynolds wants you to focus on.

The governor likes to talk about the tax plan the Iowa Legislature passed during the 2022 session, which is just beginning to kick in. The thing is, she’s not telling you the whole story about that plan, either.

Among other things, the Republican plan slashes the corporate tax rate and works toward imposing a flat 3.9% income tax rate for individuals and families. And just like they have for every other tax cut plan they’ve passed over the years, Republicans say: This is the one that will finally boost Iowa’s economy into the stratosphere.

Most Democrats opposed the plan. They argued people making more money ought to pay a higher tax rate than those down the income scale. They also cited an Iowa Department of Revenue report documenting that a household making $68,000 a year would get an average tax cut of roughly $600 under the Republican plan, while somebody making $1 million or more would see an average state tax cut of $67,000.

That’s quite a difference. At least the Biden student debt plan is capped at individuals making $125,000 a year ($250,000 for couples.)

To make matters worse, the $1.9 billion annual loss in state revenue will significantly constrain the state’s ability to invest in a whole host of things important to Iowans – like clean water and public schools.

So, I suppose, it’s understandable the governor wants to collect as much tax money as she can from Iowans who are carrying an average debt of $31,000.

It’s also understandable why she’s not bragging about it.

Shaky ground

I’ve written previously about the White House’s student debt plan.

I understand why people who paid off their debt or didn’t go to college in the first place might not like it. My college loan, taken out 40-some years ago, wasn’t forgiven by the government. I paid it off. But I also know my loan was subsidized in a way that wasn’t available to middle-class families like mine before then.

I also know there are ways that others in our society get off the hook for debts they owe – like through federal bankruptcy courts.

Still, I have my doubts about the legal basis for the administration’s plan, not to mention its cost.

Biden is relying on a post-9/11 law that allows the government to waive certain loan provisions in order to respond to a “war or other military operation or national emergency.”

The administration says, in this case, the Covid pandemic is the national emergency.

Critics, including the states challenging the plan, say relying on a post-9/11 law for this purpose is a big stretch.

They may be right.

Fortune reports that a hearing on the lawsuit Iowa is involved in is scheduled for this week, and the article points to a response to the suit in which the Biden administration says the states’ claim of future lost tax revenues is “speculative.” The administration also defends its legal authority for granting debt relief.

We’ll see how this plays out. But the next time you hear Reynolds talk about cutting taxes on Iowans, remember she’s also arguing in court that Iowa will be harmed because the Biden student debt relief plan will stop the state from being able to collect even more tax money from Iowans who already are facing crushing financial challenges.

That’s not the kind of thing you put in a TV ad during an election year. But, apparently, it’s OK for a court filing hardly anybody will see.