Gov. Tim Walz was applauded after he signed the final copy of the federal tax conformity bill Thursday in the reception room at the State Capitol. Among those with him were, from left, Lieutenant Governor Peggy Flanagan, First Ave. President and CEO Dayna Frank, House Taxes Committee chair Aisha Gomez and at right, Senate Taxes Committee Chair Ann Rest. (Jeff Wheeler, Star Tribune/The Minnesota Star Tribune)

Gov. Tim Walz signed a fast-tracked proposal Thursday to cut more than $100 million in taxes for Minnesota restaurants and other businesses that got federal aid at the height of the pandemic.

The new law, the first signed under DFL-controlled government, would also wipe away state taxes on student loan debt that could be forgiven under a plan unveiled last year by the Biden administration.

"For the naysayers and the pessimists, yes, work can get done, and yes, folks came together collectively," Walz said while surrounded by leaders in both parties.

The state Department of Revenue set a Friday deadline for lawmakers to pass the proposal so the department has enough time to implement the changes for the coming tax filing season. The DFL-controlled Legislature is expected to debate broader tax changes this session with a $17.6 billion budget surplus on the bottom line.

"There is more that we can do to lower costs for Minnesotans," Lt. Gov. Peggy Flanagan said. "This is just the beginning."

The tax breaks are the result of making Minnesota's tax code mirror the federal code, known as conformity. But one tax cut is in limbo, pending a challenge in the U.S. Supreme Court. Here's what you need to know:

What is tax conformity and why does Minnesota have to do it?

Minnesota doesn't automatically align its tax code with the federal government when changes are made in Washington, instead selectively choosing which areas to conform. Since 2019 — the last time state and federal tax laws were aligned — the federal government has passed several expansive aid packages to respond to the COVID-19 pandemic.

How will this bill help people with student loan debt?

In August, President Joe Biden announced his plan to forgive $10,000 in federal student debt for most borrowers, while canceling up to $20,000 for recipients of Pell Grants.

But without the change signed into law Thursday, Minnesotans would have had to pay income taxes on the forgiven loan — for some, more than $1,000. The Department of Revenue estimates more than 600,000 Minnesota filers could see tax cuts under the new law.

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"We know this student debt crisis is still hitting people like me," said Rep. Aisha Gomez, DFL-Minneapolis, chair of the House Taxes Committee who sponsored the bill. "A lot of us are really caught in an economic bind related to this ballooning debt that people are dealing with."

The new law eliminates that tax liability for Minnesotans if Biden's student loan plan takes effect. That proposal is being challenged before the U.S. Supreme Court, with oral arguments scheduled for February.

What about entertainment venues that got federal aid during COVID?

Hundreds of Minnesota entertainment venues — from the Guthrie Theater and concert halls to movie theaters — received grants offered by the federal government to help venues that had to shutter during the pandemic. The size of their grant depended on their operating expenses.

Minnesota venues got more than $300 million in grants, said Dayna Frank, CEO of the First Avenue concert venue in Minneapolis. The law signed Thursday means those venues won't have to pay state taxes on that funding.

"It would have been business-ending," said Frank, who said her venue spent the pandemic aid to stay afloat and doesn't have any money left to pay tax liability. "We saved our stages once, and now we're saving them again."

Do restaurants that got pandemic aid get tax breaks under the bill?

Yes. To help keep restaurants open, the American Rescue Plan gave them funding equal to their pandemic-related revenue loss, up to $10 million per business. Like the entertainment venues, the restaurants don't have state tax liability on those federal grants under the law signed Thursday.

What about small businesses that got federal loans?

Roughly 72,000 small businesses in Minnesota received a total of $250 million in disaster assistance loans from the Small Business Administration to help cover operating expenses during the pandemic. The federal government exempted that aid from taxes, but Minnesota didn't until Thursday. Now, those businesses won't owe taxes or expenses on those loans.

In 2021, Minnesota lawmakers did something similar when they eliminated state liability on Payroll Protection Program loans, which many businesses received so that they could continue paying their employees during the pandemic.

Will this make filing my taxes easier?

The Department of Revenue produces a form that helps Minnesotans figure out their deductions and how they interact with federal taxes. While Minnesota doesn't align with federal tax code in every area, the changes made Thursday will reduce the size of that form and simplify tax filings for many this year.

However, because it's been four years since state lawmakers passed tax conformity, some taxpayers may still have to file amended returns for the 2017-2021 tax years.