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President Biden’s decision to cancel billions of dollars in student debt is unfair to responsible Americans and will feed inflation. But state lawmakers can do something about it: tax the windfall. It’s a longstanding principle that the discharge of debt is a taxable event. It could provide revenue for broad-based, economically stimulative tax relief to all of a state’s residents.
Debt forgiveness, like income, is an accession of wealth and so taxing discharges of debt has been a feature of the U.S. tax code since the adoption of the first income tax in 1861. The Supreme Court upheld the validity of taxing forgiven debt in U.S. v. Kirby Lumber (1931). Last year, however, the American Rescue Plan precluded any federal taxation of student-loan cancellation through 2025.
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