State Tax Reforms Target Student Debt and Service Workers

A wave of state-level tax reforms sweeping across eight states aims to reshape financial landscapes for students, service workers, and corporations. With 23 bills introduced in February 2025, legislators are testing innovative approaches to income tax modifications that could set new precedents for economic policy.

Targeted Relief for Student Borrowers Mississippi's HB1720 leads the charge in addressing student debt burdens by excluding Public Service Loan Forgiveness (PSLF) discharges from state income taxes. This measure specifically targets graduates working in underserved rural communities, creating potential workforce incentives for areas struggling with provider shortages. Similar provisions appear in Illinois' HB3871, which creates deductions for student-athlete endorsement income.

Service Industry Tax Innovations The most striking policy development emerges in tip income exemptions. Six states including Mississippi (HB1710) and Michigan (SB0091) propose excluding gratuities from gross income calculations. This directly affects:

• 2.4 million tipped workers nationwide
• 72% female-dominated occupations (restaurant servers, personal care)
• 32% Latinx workforce in hospitality sectors

Regional Implementation Patterns

State	Focus Area	Key Mechanism
Minnesota	Broad tax reform	Unlimited Social Security exemptions (HF828)
Washington	Business taxation	B&O tax clarifications (SB5774)
Arkansas	Disability accommodations	Enhanced care tax credits (HB1540)

Implementation Challenges

1. Tracking Exempt Income: Minnesota's HF1115 combines tip exemptions with gambling winnings deductions, creating complex reporting requirements
2. Federal-State Coordination: Student loan forgiveness provisions depend on federal program eligibility criteria
3. Revenue Impacts: Mississippi estimates $18M annual revenue reduction from tip exemptions alone

Historical Context These measures recall:

• 2010 Small Business Jobs Act (federal tip reporting requirements)
• 2017 Tax Cuts and Jobs Act's pass-through deductions
• California's 2022 Fast Recovery Act tip protection provisions

Demographic Considerations

• Latinx Workers: Comprise 34% of tipped restaurant staff in participating states
• Older Adults: Minnesota's Social Security exemptions benefit 28% of residents over 65
• Disability Community: Arkansas' reforms could aid 15% of adults with documented disabilities

Emerging Policy Tools

1. Phase-in thresholds (New Mexico's HB484)
2. Rural service requirements (Mississippi's PSLF provisions)
3. Dynamic corporate rate adjustments (Minnesota's HF1131)

As states balance fiscal responsibility with economic stimulus, these tax experiments may redefine how local governments use code modifications to address workforce development and income inequality. Success metrics will likely focus on retention rates in targeted sectors and consumer spending patterns in service industries.