Last session, the Legislature passed two tax bills in 2018 attempting to update Minnesota’s tax code to massive federal tax changes made at the end of 2017. Governor Dayton vetoed both bills mainly because of imbalanced tax relief, lack of emergency school funding, and other provisions not approved by the Department of Revenue. Tax conformity remains the top priority of the Tax Committee this year.
What has happened in this issue area since last session?
The Department of Revenue has spent the entire summer updating tax forms and preparing Minnesotans for a different tax-filing experience in 2019. A major development came in July when the Department used a previous court decision to modify the traditional practice of requiring Minnesota taxpayers who take the federal standard deduction to take the Minnesota standard deduction as well. New for the 2019 filing season, Minnesotans now will be able to select the newly increased federal standard deduction but still itemize on their state returns, preserving several itemized deductions and exemptions that have been eliminated for federal taxes. This change was accounted for in the November forecast.
What is expected to happen this session?
As a reminder, Governor Dayton vetoed both tax conformity bills in 2018, meaning Minnesota’s tax system is significantly out of line with federal tax changes implemented in Tax Year 2018. Overall, there was fairly wide bipartisan agreement on the basic building blocks of tax conformity last session. The Governor vetoed the bills because they lacked emergency school aid the Governor requested, included tax rate reductions that benefitted the wealthy more than the middle-class, and did not conform to key corporate tax changes (namely, “repatriation”).
Although tax conformity will be a key priority this session, it may not happen immediately. The Department of Revenue has said it would be very difficult to implement a new tax code so close to the start of the 2019 filing season, which opens in late January. Tax preparers also recommend waiting, and even suggest any changes should not take effect until Tax Year 2020 so business owners and individuals have a full year to prepare for new standards and make appropriate plans. Sen. Chamberlain told MPR in December that he didn’t think it was wise to rush through a conformity bill, although Sen. Gazelka has made some comments about wanting to pass a bill sooner rather than later.
This spring’s tax filing season will be different and more complicated than previous years for Minnesota taxpayers, but the Department has developed extensive state tax forms and instructions to help taxpayers navigate the new system. They also began support outreach to tax preparers much earlier than usual and have been working with software vendors to ensure the process is as seamless as possible. Nevertheless, members should expect constituent questions as they become accustomed to the changes.
Republican leaders have said their top 2019 priority is tax conformity, with the caveat that “no one pays more taxes.” After the November forecast announcement, they all called for tax cuts to continue driving economic growth. They specifically mentioned:
- Child care tax credit
- It’s unclear what Republicans prefer, but expanded tax relief for those paying child care costs has been a DFL priority for the past several years. Gov. Dayton again included an expanded Dependent Care Credit in his tax budget last year.
- Lowering the individual income tax rate on all brackets (including the top tiers)
- This delivers a disproportionate benefit to higher-income Minnesotans. The DFL has preferred targeted tax relief that primarily benefits the low- and middle-income taxpayers who need it most.
- Fully exempting Social Security benefits from state income taxes
- Minnesota spent $256 million on a new Social Security benefit tax subtraction in 2017. Fully exempting all Social Security benefits would cost upwards of $1 billion. More than 50% of tax filers do not pay taxes on Social Security benefits under current law.
- Tax relief for child care providers (no details available on what that would look like)
DFL tax leaders are interested in:
- Property tax relief that might include LGA/County Aid increases, increased K-12 education funding, or expanded property tax refunds
- Past Republican tax bills have been nearly silent on property tax relief. The average projected statewide levy increase in 2019 is 5.7%.
- Working Family Credit expansion
- This has been a DFL priority for several years. It is one of the most effective tools to provide economic mobility to lower-income, working families. A majority of taxpayers who qualify for the credit live in Greater Minnesota.
- Tax conformity that doesn’t include significant new, ongoing spending. Much of the budget “surplus” is one-time money, meaning any new tax relief should be fiscally sustainable in future years.
Online sales taxes
The U.S. Supreme Court made a significant decision this summer in South Dakota v. Wayfair that requires online sellers to collect and remit state sales taxes, regardless of whether the seller has a physical presence in the taxing state. In accordance with this decision, Minnesota began implementing its marketplace statute in October. The November forecast projected an additional $70 million in 2018-2019 and $225 million in 2020-2021 due to the decision, although revenue estimates could change once more tangible examples become available.
Last year, Sen. Chamberlain authored a bill that would have prompted automatic sales tax rate reductions if new revenue occurred because of this decision. There may be another push to use the additional sales tax revenue to drive sales tax cuts.
This summer, Governor Dayton’s Housing Tax Force recommended a new tax credit program to support this growing challenge in Greater Minnesota as well as the metro region. The report also called for a dedicated, permanent source of funding for affordable housing programs, but it left the decision of how to raise that money up to the Legislature. The group’s recommended tax credit is modeled after North Dakota’s Housing Incentive Fund, which provides a dollar-for-dollar tax credit to individuals or corporations who contribute.
See the Jobs and Economic Development section for more information on this topic.
E-cigarette and tobacco taxes
Vaping e-cigarettes has become widespread among teenagers and is a rapidly expanding industry. The Tax Committee will be examining current statutes to ensure taxes are appropriately and effectively applied. The House DFL and/or Governor-elect Walz also may include a rollback of the 2017 tobacco tax cuts in their budget proposals. As a reminder, the 2017 tax package removed the automatic annual inflator on the tobacco excise tax and reduced the tax on premium cigars from $3.50 to $0.50. Those items cost about $13.8 million in FY 18/19, $39.7 million in FY 20/21, and even more in subsequent years.
See the HHS section for more tobacco-related initiatives.
Some lawmakers have signaled interest in legislation that would legalize recreational cannabis sales in Minnesota. Such a bill would need to include not only a regulatory framework, but also a tax structure that provides for both excise taxes and sales taxes on the new product. Of the states that currently allow legal sales, Washington has the highest sales tax rate at 37% and collected $319 million in Fiscal Year 2017.
See the Judiciary section for more information on this topic.
Many communities across the state are experiencing double-digit levy increases next year. Inadequate funding for K-12 education and Local Government Aid have been two commonly cited reasons for the growing reliance on property taxes. City groups will once again ask the Legislature to consider an LGA increase that at least returns to 2002 levels, before the dramatic cuts began. As of 2017, returning to 2002 aid levels would have cost about $21 million in FY ‘18/19 and $87 million in FY ‘20/21.
Recent Republican tax bills have been virtually silent on the issue of property tax relief. The 2017 bill included a one-time, $6 million LGA increase and the new School Bond Agricultural Tax Credit for some farmers. DFL attempts to increase property tax refunds, sufficiently fund LGA and County Aid, and improve school funding to relieve local budgets have been blocked. Expect DFLers to heartily push these efforts this year.
Cabin property taxes
A Star Tribune story published this summer highlighted the high number of cabin parcels in Northern Minnesota currently listed on vacation-rental websites and the effect it is having on market values of neighboring properties. There is concern that traditional cabin owners who don’t earn revenue from their property are assuming higher tax rates because of other area cabins that are on the rental market. County officials may seek a new classification for vacation-rental properties that is more in line with commercial property, or at least ask the Legislature to consider this changing landscape.
Agricultural property taxes
Some farm groups have indicated their top priority this year will be property tax relief for farmers that have removed land from production in order to comply with the state’s buffer law. A $50-per-acre tax credit proposed last year used the Clean Water Fund to finance the new credits, which was opposed by some environmental groups. Expect a similar push this year.
Sports betting and charitable gaming taxes
Sen. Chamberlain was quoted in a December MinnPost story saying he will immediately introduce a bill to authorize sports betting in Minnesota. This topic will involve a series of decisions in various committees, but one important component will be deciding on a tax structure for any new revenue collected. Sen. Chamberlain said his goal is to generate adequate revenue but not discourage betters from engaging in the legal market. See State and Local Government section for more information.
Tax decisions on another form of gambling – charitable gaming –may be discussed in the Tax Committee again this year. The November forecast reflected a revision in U.S. Bank Stadium funding. Originally, charitable gaming taxes were supposed to flow into the stadium reserve account to pay off debts, but those revenues were significantly lower than projected and the state later supplemented the fund with $20 million a year in corporate tax revenue. Charitable gaming revenue has now rebounded and the stadium reserve account has a sufficient balance, so the corporate tax revenue has been redirected to the state. Charitable gaming groups have used this as a reason to once again push a reduction in charitable gaming tax rates, saying they now pay out more in state taxes than toward the charitable purposes their games are intended to support. At least one Republican has signaled interest in pursuing this issue again.
Dark Store loophole
Lawsuits hinged to the “dark store loophole” have become a big property tax issue in other states, and this year, Minnesota lawmakers may attempt to get ahead of the problem before more occur in this state. Under the dark store loophole, retailers use market value assessments of nearby vacant storefronts to allege their market values are out of line, and they often are successful in lawsuits brought against taxing jurisdictions. As a result, municipalities are required to refund hundreds of thousands of dollars in property tax payments to these large commercial properties, causing enormous stress on local budgets and property tax payers. Lawmakers have been talking with officials and exploring ways to safeguard local communities from similar lawsuits in Minnesota.
Provider tax sunset
Any proposals to repeal the sunset of the provider tax will be evaluated by the Tax Committee.
See the HHS section for more information on this topic.
Any proposal to increase the gas tax will be evaluated by the Tax Committee.
See the Transportation section for more information on this topic.