Outstanding issues with the 2017 Tax Bill
Although the Governor signed the 2017 tax bill that passed during special session, he immediately objected to the overall cost of the bill and three specific items that mainly benefit the wealthy. The Governor’s objections manifested in the line-item veto of legislative funding, which prompted the lawsuit that left the Legislature without 2018-2019 budget appropriations. The items to which he objected:
- Overall cost: $650 million 2018-2019; $5 billion by 2027
- Estate tax cut: Increasing threshold from $2 million to $3 million benefits only a handful of the richest people in Minnesota and costs $34.8 million in FY 18/19, $74.5 million in FY in FY 20/21, and even more in years following.
- Statewide business property tax: Removing the inflator on this levy costs $85 million in FY 20/21 and more than $1 billion by 2027, mostly to benefit large corporations. The tax bill also spent $85 million this biennium to exempt the first $100,000 of property from the levy, which was supported by Democrats and is not part of the Governor’s criticisms.
- Tobacco tax cuts: Eliminating the annual inflator on the tobacco tax and reducing the tax rate on premium cigars costs the state about $13.8 million in FY 18/19, $39.7 million in FY 20/21, and even more in subsequent years.
The Governor may introduce a bill asking to repeal or modify these items. Since legislative funding for 2018-2019 still has not been restored, his repeal requests could be tied to reinstatement of that budget. Republicans are very opposed to considering any changes and currently are more interested in pursuing additional tax cuts in light of the federal tax reform that happened late in 2017.
Federal tax changes and Minnesota
In early January, the Department of Revenue released a preliminary analysis of the federal tax reform bill that suggested full conformity to federal tax changes could result in an $849 million tax increase on Minnesotans in FY 18/19, and a $1.5 billion increase by FY 20/21.
The increase is largely because Minnesota bases its tax calculations off federal taxable income. Conformity would mean adopting the federal definition of income – which is now drastically changed because of the elimination of many tax deductions that previously reduced taxable income – but not the numerous new credits or rate changes also adopted at the federal level.
In a very basic sense, Minnesota lawmakers are facing three main choices at this point:
- Do not conform: Next year, Minnesotans would need to calculate federal taxable income twice: once according to new federal standards and once according to Minnesota tax law, which would be based off the pre-2018 system.
- Fully conform: This would adopt the new federal definition of income and elimination of deductions and exemptions, but not the new rates and credits offered at the federal level, resulting in a massive tax increase on most Minnesota individuals and businesses.
- Conform to some extent and pass new state-based credits or rate changes: This would reopen a large tax debate about where to direct tax relief. Congress passed its bill largely in private and in about six weeks’ time. Minnesotans would demand a more deliberative approach, especially for the sake of our budget – the federal changes add $1.3 trillion to the federal deficit in the next decade.
At this point, Republicans are vaguely stating their preference to follow the federal government’s lead of lowering taxes and adopt similar tax “reforms” in Minnesota, but they have not identified specific plans. The Governor has not yet made a commitment to pursue any tax changes related to the federal bill. If the Legislature ends session without a tax bill, however, 2018 tax filing could be very complex for most individuals and businesses trying to navigate between two very different systems next spring. These conversations will be an ongoing challenge for lawmakers during the 2018 session.
The federal bill increases the national debt by at least $1.3 trillion. If Minnesota is going to consider aligning with the federal bill – or making any dramatic tax changes, for that matter – we must do it in the context of our own state budget and consider the long-term impact such changes could have on our budget and our taxpayers.
The Legislature passed a $650 million tax cut last year – most of which benefited the very wealthy, big tobacco, and big corporations. The Senate DFL prefers focusing on more relief for middle-class Minnesotans if there are any tax changes in response to the new federal law.