No tax-related bills have passed out of the Tax Committee yet, with the exception of the sports betting bill (see below) that is awaiting a hearing in State Government Policy and Finance Committee. The omnibus tax bill has not yet been released. The committee briefly “heard” Gov. Walz’s tax budget proposal on Wednesday, Apr. 10, 2019, allowing time only for an explanation and no public testimony. The House DFL released its tax bill on Apr. 8, 2019; the bill passed out of committee on Apr. 10, 2019 after a day of public testimony.
At this point, only the targets of the three bills can be compared:
Gov. Walz tax target: $734.5 million
House DFL tax target: $1.2 billion
Senate Republican tax target: $0
The Senate Republicans’ tax target is $0, but that does not mean it won’t have spending. They will simply spend any revenue raised within the tax budget. The Tax Committee has considered at least $2 billion in tax-spending proposals so far this year.
After the cautious February forecast, the Senate Majority Leader said, “The last thing we should do is add permanent spending commitments to the state budget.” Senate Republicans will point to very low budget targets – and cuts – in other budget areas to sell a message of restrained spending, however, any new tax cuts paid for in the tax bill also represent permanent, ongoing spending that will constrain future state budgets.
There is wide consensus that this session should include some targeted tax relief, particularly for low- and middle-income Minnesotans who did not benefit from federal tax changes in 2017. Governor Walz’s initial budget includes more than $440 million in tax relief. However, his bill also proposes balanced options to pay for that spending. The proposals heard in the Senate Tax Committee so far this session largely focus on corporations and wealthy earners and would spend far more than the state can afford.
Minnesota has yet to conform with federal tax changes passed in 2017, but significant back-room work done by the Department of Revenue last year has allowed 2019’s tax filing season to be relatively smooth for most taxpayers. However, some constituents have complained about a more complicated process and businesses would appreciate more clarity.
The Senate Tax Committee has not yet discussed a comprehensive conformity plan, aside from a brief “hearing” on Gov. Walz’s tax bill on Apr. 10, 2019, which prohibited public testimony. The House and Governor’s tax conformity articles contain many of the bipartisan tenets form the vetoed 2018 bill that would hold most individual income taxpayers harmless. The federal bill eliminated most individual deductions and exemptions but doubled the standard deduction. The two Minnesota tax proposals on the table retain most of the state’s current deductions and exemptions for state tax purposes while allowing Minnesota taxpayers to choose whether to take the state standard deduction or itemize, depending on which is more financially beneficial.
On the business side, the federal bill dealt corporations a 40% rate cut, representing 85% of total tax benefits approved by Congress in 2017. That bill also expanded the share of business profits that are taxable, including federal profits that have been held overseas for many years. The House DFL and Governor’s tax plans raise revenue by conforming to many of these base-broadeners, and much of that revenue is reinvested in tax relief for low- and middle-income Minnesotans that did not benefit from Congress’ tax reform.
Social security tax relief
The Legislature spent $246 million in 2017 on a significant new tax subtraction for Social Security benefits. For Tax Year 2018, married-joint filers may subtract up to $4,700 of Social Security benefits and single filers may subtract up to $3,660 of benefits from taxable income. The subtraction is phased out based on a taxpayer’s provisional income – adjusted gross income plus one-half of Social Security benefits – so it is focused on married taxpayers earning less than about $104,000 and single filers earning less than $80,000.
Governor Walz’s budget as well as the House DFL tax bill include $23 million to increase and expand the state’s current subtraction to more senior citizens. If passed, the proposals would increase the percentage of Minnesotans paying no taxes on their benefits to 56%. This would be achieved by increasing maximum subtraction amounts and the income phase-out thresholds.
Senate Republicans have promised Social Security tax relief will also be part of their tax bill, but the Tax Committee has only considered one bill on the topic with a cost of nearly $1 billion. Under their bill, the full value of Social Security benefits could be subtracted from Minnesotans’ taxable income, but it would cost the state nearly $800 million in the next biennium and even more in the years following as more baby boomers reach retirement age. More than half of Social Security recipients already do not pay taxes on their benefits, so the Senate Republican’s plan would primarily benefit wealthier seniors. Governor Walz’s budget is a more affordable approach that focuses the tax benefits on middle-income seniors, rather than allowing very high-earning retirees to reap the biggest benefits. (SF 245)
Local government aid / county aid
State aids to local governments are critical to helping cities and counties provide essential services, such as public safety, without having to rely entirely on local property tax payers to fund community necessities. Since 2002, both local government aid to cities and county aid to Minnesota counties have seen dramatic cuts. A bipartisan proposal this year, championed by greater Minnesota cities and counties, asks for a $30 million annual increase in both accounts to bring them back to 2002 levels, when the major aid cuts (and property tax increases) began. In general, every dollar of LGA delivered to a city results in a 50-cent levy reduction, so a $30 million bill could reduce property tax levies by $15 million across the state.
The House DFL budget and Gov. Walz’s budget both propose the $60 million/year requested for cities and counties. The Senate Tax Committee never heard the bill that requested the full amount, but it did consider one bill that would provide a $15 million increase and funnel the increase to small cities with less than 5,000 in population. It’s unclear what will be included in the tax budget, but there are concerns with only providing aid increases to small cities. It ignores a carefully developed formula that equitably delivers aid increases across the state, and it excludes many regional centers and growing communities that rely upon this aid to provide quality services while keeping property taxes affordable. (SF 1939)
Private school education tax credits
The Senate Tax Committee chairman has promised to include language for Equity and Opportunity Tax Credits in the Republican tax bill. Each year, $35 million in tax credits would be made available to corporations or taxpayers that donate to nonprofit school foundations providing private-school scholarships to select low-income or disabled students. It is unclear how public-school foundations would be able to utilize the donations to support students.
The bill commits $70 million of taxpayer dollars each budget cycle – an amount that could fund a roughly 1% increase in the basic education funding formula benefiting all public schools in an equitable fashion, not just the schools able to attract wealthy donors. Another concern is that creating an enhanced tax credit for a specific charitable purpose would place greater value on donations to these school foundations than other charitable causes. In other words, other Minnesota nonprofits and charities could suffer from donors choosing the more profitable donation option.
Additionally, an out-of-state corporation could be eligible to receive these Minnesota-funded tax credits. The donation may support a very select group of Minnesota students, but the state would not be able to guarantee the bulk of the $70 million investment actually remains in the state. Senate DFLers will advocate to keep Minnesota tax dollars in Minnesota and to equitably increase direct investments in kids and classrooms across the state.
The bill was laid over for possible inclusion in the Omnibus Tax Bill. (SF 1872)
School equalization aid
The Chair of the Senate Tax Committee presented an education bill that would deliver equalization aid to school districts. Equalization helps taxpayers in property-poor districts pay a tax rate closer to those in property-rich districts in order to attain the same level of revenue. Under current law, Minnesota’s operating referendum is equalized in three tiers, with lower levels of equalization in the second and third tiers. This bill changes the tax rates and helps increase aid (and therefore lowers the total tax) for certain districts. Given the E-12 committee’s very low target, it’s likely Republicans will combine efforts in the education and tax bills to claim investment into education. (SF 670)
Corporate tax cuts
As noted in the conformity section, tax bills from the House and Governor propose closing a number of corporate tax loopholes as well as conforming to some federal business tax base-broadening in order to raise revenue for other tax cuts. Those policies recognize the considerable tax relief provided to corporations in the federal tax bill, and attempt to deliver equitable tax relief to average Minnesotans.
The Senate tax bill is likely to include some of the business tax base conformity, but the Senate Tax Committee Chair has indicated he may consider corporate rate cuts as well. The committee heard a bill to lower the corporate tax rate from 9.8% to 8.8%, which costs more than $250 million per biennium. The committee also considered a bill to reduce the commercial/industrial portion of the statewide business property tax by $50 million. In contrast, the House and Governor propose rolling back the 2017 change that froze the statewide levy at 2017 levels because of the $1 billion that move is expected to cost the state over the next 10 years.
There is general consensus that landowners should be compensated for the portion of farmland they have converted to buffer strips under the state’s buffer law that passed in 2015. Several farm groups as well as the governor are recommending compensation for agricultural landowners that have converted their land to help improve water quality throughout the state.
The Senate considered a bill to provide a credit equal to the net tax capacity-based property taxes on the portion of the property containing the buffer. Governor Walz’s proposal is slightly different, proposing a $50-per-acre credit for eligible landowners. His proposal would cost about $15.8 million a year and would affect class 2A agricultural landowners; the Senate’s bill costs about $8.8 million per year and would be available to both 2A and 2B (rural vacant) landowners. The bill was laid over for possible inclusion in the omnibus bill. (SF 1937)
Under current law, estates must have more than $2.7 million in assets — $5 million for small businesses and farmers – before the estate tax is triggered. Because of significant estate tax cuts passed by the Legislature in 2014 and 2017, only 300 wealthy estates reached this threshold and thus owed estate taxes in 2017. The Senate Tax Committee considered a bill this session to repeal the estate tax entirely. The proposal would spend nearly $300 million to provide 300 wealthy heirs an average $383,000 tax cut.
In contrast, tax bills from the House DFL and governor both recommend freezing the current estate tax exemption at $2.7 million. (SF 1448)
Working family tax credit
Part of Governor Walz’s budget proposal recommends a $100 million increase to the Working Family Tax Credit, partially to offset the effects of his recommend gas tax increases on lower-income families. His proposal would lower taxes by an average $227 for 46,700 low- to middle-income working Minnesotans. The House DFL Tax Bill expands the credit as well by adding a new tier for taxpayers with three or more children while increasing the income phase-out levels.
The tax credit has been a proven tool to lift working families out of poverty and is widely used in every corner of the state: 48% of the recipients live in Greater Minnesota. About one out of every six tax-filing households in Greater Minnesota received the credit. Despite a number of bills being introduced on this topic, the Senate Tax Committee has yet to hold a hearing on any of them this session.
Angel investment tax credit
The governor’s bill requests $20 million to reinstate the Angel Investment Tax Credit program which helps spur economic development in high-tech and start-up companies in Minnesota. The bill also contains important policy updates that better target the resources at Greater Minnesota, minority- and women-owned businesses. The Senate heard a proposal to permanently reinstate the program at $20 million a year with no policy changes included. The Senate bill was laid over for possible inclusion. (SF 788)
The Senate Tax Committee considered a proposal to legalize sports wagering in Minnesota and collect taxes on the earnings. This is a new topic since last year’s U.S. Supreme Court decision in Murphy v. NCAA, which found a federal ban on the practice in all states but Nevada was unconstitutional.
The Senate bill would establish a Sports Wagering Commission that would be responsible for many rules and regulations surrounding the new form of gaming, including determining which sporting events could legally be bet upon. Federally recognized Indian Tribes and racetracks that are licensed to conduct wagering would be eligible to apply for licenses. The tax rate of 6.75% is the same rate that Nevada imposes on the casino’s take of the pool in that state.
Advocates for this bill say sports betting is already happening, but through unregulated forms. Providing for a legal structure in Minnesota would provide recourse for consumers who are cheated through the underground market and would provide regulation and tax revenue. Opponents include those who see this as an expansion of a dangerous habit and something that could encourage a new generation of gamblers. There is also concern about negative effects on Minnesota’s current legal gaming structures, including tribal casinos, charitable gaming operations, and the state lottery. The bill was referred to the Committee on State Government where it awaits a hearing. (SF 1894)
Charitable gaming taxes
The Tax Committee spent an entire day hearing several bills related to taxes paid by charitable gaming organizations in Minnesota. Organizations that sponsor pull-tabs, bingo, and other forms of charitable gaming say the amount they pay in taxes to the state often eclipses what they retain for local purposes. Opponents, however, worry about using limited tax-relief dollars to support gambling. Some of the proposals carry large price tags of up to $150 million per biennium.
The bills considered ranged from providing sales tax exemptions on the purchase of pull-tabs and paddlewheels, to reducing the overall tax rates applied to an organization’s earnings. They were all laid over for possible inclusion in the omnibus tax bill (SF 437, SF 845, SF 414, SF 219[KB1] , SF 549, SF 371, SF 578).
It’s unclear whether anything will be included in the Tax Bill regarding affordable housing, despite the lack of affordable housing being identified as an imminent challenge across the state. The Tax Committee has considered three bills related to affordable housing, including:
Workforce housing tax credit: This credit was recommended by former Governor Dayton’s Housing Tax Force and is modeled after North Dakota’s Housing Incentive Fund, which provides a dollar-for-dollar tax credit to individuals or corporations who contribute to a fund that would finance affordable housing projects across the state. Total credits would be capped at $25 million per year. (SF 404)
4d properties:Multi-family rental housing that reserves at least 20% of units for low-income residents is assigned a property tax class rate of 4d. Under current law, the first tier of market value is taxed at a rate of 0.75% and the second tier is taxed at 0.25%. This bill would assign a rate of 0.25% to the entire value of the property to help about 2,700 parcels statewide that maintain the required affordability standards. (SF 2571)
Affordable housing fund: This proposal would capture any annual increases in the mortgage registry tax and the deed tax from Fiscal Years 2020 to 2030 to raise an estimated $10 million a year for the Workforce and Affordable Homeownership Development Program. Under current law, this program provides homeownership development grants to nonprofits, cooperatives and community land trusts. The bill would expand the program to also provide loans, and to include cities and tribal governments as eligible recipients. (SF 942)