The Governor vetoed two tax bills this year. As a result, Minnesota is significantly out of conformity with new federal tax laws. Governor Dayton released a plan that responded to federal changes in early March, but Republican lawmakers waited until May – less than three weeks before the Legislature’s constitutional deadline. Republican lawmakers left little time for public input on a massive tax overhaul and they refused to negotiate with the Governor on a reasonable solution. As a result, this is what Minnesotans can expect when they file taxes next year:
$60 million tax increase. About 300,000 Minnesotans are expected to see a total $60 million tax increase. Most of those are the roughly one-third of Minnesotans who itemize. The new, higher federal standard deduction ($24,000 married/joint; $12,000 single) may provide additional tax savings on federal taxes, but those who choose the federal standard deduction must also take the standard Minnesota deduction, which remains at the lower level ($12,700 married/joint; $6,350 single). This link will cause a Minnesota tax increase for these filers. All three tax plans allowed residents to choose the standard deduction at the federal level and retain the ability to itemize in Minnesota. This idea received bipartisan support and is an important feature of any conformity bill.
Complicated filing. 2018 taxes – filed in spring of 2019 – will be more complicated. Minnesotans will need to calculate federal taxes first, and then complete a Minnesota tax form that has many different features. The Department of Revenue is already working with tax software companies and tax preparers to plan for next year, but it will still be a cumbersome process.
Some see no financial impact. Many Minnesotans will see no state tax impact. About two-thirds of tax filers select the standard deduction and will not be affected by non-conformity, aside from a potentially longer tax-filing process.
PASSED AND SIGNED INTO LAW
DID NOT PASS
Tax rate cuts
The original Senate tax bill cut the first-tier rate from 5.35% to 5.10%, at a cost of $237.8 million in FY 2018-2019 and $337.5 million in FY 2020-2021. DFL Senators voted against this bill for the same reasons that the Governor vetoed the tax rate-cuts included in the tax conference report.
Governor’s $60/person tax credit
Governor Dayton proposed a new $60-per-person personal and dependent tax credit, providing 1.9 million filers an average $117 tax cut per year. His plan phases out the credit, meaning middle- and lower-income Minnesotans benefit most. DFL Senators offered an amendment to the tax bill that replaced the Republican rate-cut plan with the larger tax benefit for working families proposed by Governor Dayton. Republican lawmakers killed the amendment on a party-line vote.
Working Family Credit increase
Governor Dayton’s tax plan expanded the Working Family Credit, which creates economic security for low-income Minnesotans. Under his plan, 329,000 families would receive a $160 tax cut and eligibility would expand to adults ages 21-25. DFL Senators offered an amendment to the tax bill that repurposed the $82 million Republicans spent on estate tax cuts for multi-millionaires to pay for the Working Family Credit expansion, but Republicans killed the amendment on a party-line vote.
Estate tax changes
The Senate Republican tax bill spent $82 million to increase the income threshold at which Minnesota estate taxes are collected, moving it from $3 million to $5 million. Farmers and small business owners already have a $5 million exemption under current law. The Republican plan only helped a fraction of wealthy Minnesotans with between $3 million and $5 million of assets upon death. It provides an $82 million tax break for about 350 very wealthy people. Republicans defeated an attempt by DFL Senators to delete the change and repurpose the revenue for school safety improvements.
Tax cut triggers
The Senate Republican tax bill triggered automatic individual and corporate tax rate-cuts in times of budget surplus. It requires future November budget surplus projections to activate a 0.1% cut in all four individual income tax rates and the corporate tax rate until a total 1% rate cut is achieved. The Department of Revenue estimated each 0.1% reduction would cost the state at least $186 million per year. The plan is a recipe for structural budget deficits, which result in severe under-funding of priorities such as education.
MNsure budget cuts
The Senate Republican tax bill included an entire article of health care-related language that reduced MNsure’s budget by 25% and prohibited the state from establishing a MinnesotaCare Buy-In option for consumers.
Provider tax sunset repeal.
The Governor proposed repealing the Dec. 31, 2019 sunset on the provider tax, which is a 2% fee charged to health care providers that helps fund Medical Assistance and MinnesotaCare. Lawmakers never discussed this proposal in committee and the sunset remains in statute. Determining how to accommodate the hundreds of thousands of people served by these programs after the funding expires will be an urgent issue facing next year’s Legislature.
529 withdrawals for K-12 tuition
The Senate Republican tax bill conforms the state tax code to new federal rules allowing individuals to withdraw up to $10,000 per year from 529 college savings plans for spending on K-12 public or private education expenses. As a result, public taxpayer dollars would be used to pay private-school costs. The House and Governor did not include this provision in their tax plans. Withdrawals from 529 plans may only be used for qualified higher education expenses. If not, withdrawn earnings are subject to Minnesota taxes.
Reversal of 2017 high-cost items
After the 2017 session adjourned, Governor Dayton tried to reverse three high-cost changes from last year’s tax bill: a $1 million increase in the estate tax exemption, a freeze on the statewide business property tax, and a freeze on tobacco taxes. These giveaways cost the state more than $5 billion over the next 10 years and exclusively benefit the wealthy, corporations, and Big Tobacco. DFL Senators offered an amendment to reinstate the annual inflator on the tobacco tax. Republican lawmakers killed the amendment and instead stood by the $30 million tobacco tax break they passed last session.
Governor Dayton vetoed the first tax bill sent to him about a week before session adjourned. He vetoed a second bill sent to his desk the last day of session, which was nearly identical to the first. The Governor outlined his objections in a three-page letter.
Republican lawmakers released their first bill, HF 4385, just three weeks prior to the Legislature’s constitutional deadline. The second bill, HF 947, was nearly identical. Republican lawmakers rushed it through the legislative process on the final day of session. The bill included one-time K-12 education funding in an attempt to fulfill the Governor’s request for $138 million in emergency school aid to prevent teacher layoffs. The Republican tax bill appropriated $50 million in one-time expenditures for education, but used budget shifts and gimmicks to do so. Their approach does not adequately address the need to stabilize K-12 education funding.
Governor Dayton offered a compromise to provide a 0.2% rate cut on the first bracket, delivering a tax cut to those earning under $150,000 a year, and phasing out the benefits past that point. His compromise also conceded many corporate tax cuts favored by Republican lawmakers and provided a clear path toward agreement. Republicans rejected the plan without reading the bill and instead basically re-passed the same bill the Governor vetoed.
Tax rate cuts
Both tax bills included a tax rate cut for the first and second tax brackets. Each bracket of a person’s income is subject to the progressive rate structure: 5.35% on the first $37,850 of income, 7.05% on income between $37,850-$150,380, 7.85% on income between $150,380-$266,700, and 9.85% on income above that level.
Under the Republican proposal, those in the higher brackets would see the full value of the rate cuts but those without enough income to fully be in the first or second brackets would see little or no benefit.
FIRST TIER: Rate cut from 5.35% to 5.30% in Tax Years 2018 and 2019, and to 5.25% in Tax Year 2020 and thereafter.
SECOND TIER: Rate cut from 7.05% to 6.95% in Tax Years 2018 and 2019, and to 6.85% in Tax Year 2020 and thereafter.
The rate cuts cost $137.1 million in 2018-2019, $341.1 million in 2020-2021, and a whopping $567 million by 2022-2023. The Governor vetoed the bill partially because of the enormous, ongoing cost and the disproportionate tax relief they produce. By cutting rates, Republican lawmakers were able to accurately state that their bill cut taxes for 99.8% of filers. DFLers objected because the higher income earners benefited most. For example, a family of four earning $65,000/year would see about $92 under the rate cuts, while a family of four earning $250,000 would see $263.
Corporate tax cuts
The tax bill cuts the corporate rate from 9.8% to 9.65% in Tax Years 2018 and 2019, and to 9.1% in Tax Year 2020 and thereafter. It also eliminates the corporate Alternative Minimum Tax. Together, the plan costs $45.9 million in 2018-2019, $152.6 million in 2020-2021. Republican lawmakers cut corporate taxes at double the size of individual income tax rate cuts. This is on top of the 40% rate cut corporations received at the federal level. Corporations received 92% of total benefits in the Tax Cuts and Jobs Act passed by Congress in late 2017.
The original Senate Republican tax bill provides a huge tax break to corporations by letting them return income earned overseas back to the United States tax-free. The process of returning foreign income is better known as repatriation. However, the conference committee accepted the House position of only partially taxing these profits. DFL Senators proposed an amendment to the Senate bill that would have taxed the income companies have been holding overseas and put the revenue into the budget reserves. Republicans killed the amendment on a party-line vote. The Governor called it a $200 million corporate tax giveaway.
New or extended tax deductions
The tax bills conform the state tax code to a few specific tax cuts and “extenders” that Congress approved early in 2018. These ideas received bipartisan support, but unfortunately were linked to the other destructive items that caused the Governor to veto the entire tax bill:
- Lower medical expense deduction threshold: The vetoed bill would have conformed to federal changes that allow medical expenses exceeding 7.5% of gross income – rather than 10% under current law – to be deducted from taxable income for Tax Years 2018 and 2019 only.
- ‘Tax extenders’ including tax considerations for disaster relief contributions, tuition expenses, mortgage indebtedness, and mortgage insurance premiums. Retroactive to Tax Year 2017.
The Senate bill made the mortgage insurance premiums deduction and tuition expense deduction permanent. This bill did not.
- Section 179 expensing: The vetoed bill would have conformed to new federal rules allowing increased amounts and full expensing in the first tax year, which allows businesses to invest more money into their operations.