Effects of federal tax conformity becoming clearer

Since Congress passed the tax reform package at the end of 2017, the Minnesota Department of Revenue has been diligently working to determine potential effects on Minnesota tax filers. This week, the department released a preliminary estimate of Minnesota tax impacts if the legislature simply conforms, or updates Minnesota’s tax code to match the federal government’s changes with no corresponding changes to definitions at the state level.

Under that scenario, about 658,516 filers would see a Minnesota tax increase of $150 or more, while 354,897 taxpayers would see a tax cut of more than $150. Broken down, the highest number of filers experiencing a tax increase – 299,473 – would be those upper-middle-income filers earning $80,000-$150,000, who would see an average tax hike of $493. In that same income range, 221,929 filers would see an average tax decrease of $173.

In the $30,000-$80,000 range, 298,074 taxpayers would see an average tax increase of $340, while 579,249 filers would see an average $100 tax decrease.

This is not a complete estimate because it does not include the effects of another federal change, which allows more opportunities for business pass-through income, but it provides a preliminary landscape for lawmakers to consider. Typically, the legislature passes a “conformity bill” each year that delivers tax savings to almost all filers. This year is different because Minnesota tax calculations begin with federal taxable income (FTI). Congress’ changes increased FTI but also included new federal rates and credits that partially offset the increase. Aligning Minnesota’s tax code would capture the higher FTI definition but not the new federal decreases, unless lawmakers develop similar adjustments for Minnesota taxes.

It’s a complicated subject that will take some time to navigate. Governor Dayton’s supplemental budget recommendations are scheduled to be released on March 15 and will include recommendations for updating Minnesota’s tax code, which will be the starting point for conversations among House and Senate leaders as the session progresses.

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