TAXES

TAX OVERVIEW

The final tax bill contained several bipartisan tax-relief measures, federal tax conformity, and several local tax provisions to help communities across the state. The biggest complaints were lack of conformity to at least $400 million of corporate foreign income provisions, the use of $491 million in budget reserves during a time of surplus, and unsustainable tax cuts that will put strain on the budget in future years.

The Governor’s and House’s tax bills attempted to raise responsible revenue to invest in other budget priorities as well as tax cuts, with respective targets of $734.5 million and $1.2 billion. The Senate Republican target of $0 eventually prevailed, but that does not mean it did not raise revenue.

Major revenue-raisers in the final bill include:

  • $530 million ’20-21 | $718.9 million ’22-23 from federal tax conformity, not including foreign corporate income provisions.
    • This is less than the original Senate bill raised ($603 million) and about $400 million less than the Governor’s bill due to the Republicans’ refusal to tax corporate foreign income.
  • $873.1 million ’20-21 and $1.42 billion ’22-23 for the Health Care Access Fund by repealing the provider tax sunset and resetting the rate at 1.8% (See HHS for more information).
  • $491.5 million from the Budget Reserve account.
  • $48 million by eliminating TANF funding traditionally used to fund the Working Family Credit ($44 million of this is used in the HHS bill to fund a $100 increase in MFIP).
  • $43.2 million ’20-21 | $95.7 million ’22-23 by moving to Chained CPI as a measure of inflation, which slows inflation-adjusted growth linked to income tax items and property tax refunds. In effect, this causes “bracket creep” and will minimize the effect tax benefits in future years.

The final tax bill used that revenue to fund a number of tax-reduction priorities, detailed below.

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ITEMS THAT PASSED

Tax conformity

Minnesota has been out of conformity with federal tax changes passed in 2017, as the Republican-led Legislature failed to pass a bipartisan conformity agreement last session. This year, the final tax bill contains a conformity article that will make the tax-filing process easier for all Minnesotans. Almost all individual filers are protected from tax increases and many could see tax relief.

Comprehensively, the conformity portion of the bill:

  • Increases Minnesota’s standard deduction to $24,400 married-joint/$12,200 single (matching the federal amount), which will cut taxes by $134 million for over 1.9 million taxpayers. The average tax cut is $160 – about a 7% tax cut for the median household income.
  • Permanently allows taxpayers to either select the standard deduction or itemize for Minnesota tax purposes, whichever is more beneficial.
  • Eliminates Minnesota’s personal exemptions.
  • Establishes a new state dependent exemption equal to $4,250 in tax year 2019—the amount allowed under prior federal law and current Minnesota law.
  • Matches the federal government’s $10,000 State and Local Tax (SALT) deduction cap of $10,000.
  • Retains the charitable contributions deduction but increases the threshold from contributions in excess of 50% of AGI to 60%.
  • Retains Minnesota’s miscellaneous itemized deductions that the federal government eliminated, including union dues, work-related travel expenses, school supplies purchased for classroom use, etc.

Other high-profile conformity items:

  •  ‘Tax extenders’
    • Minnesota conformed to several additional tax benefits that Congress extended including tax deductions for disaster relief contributions, tuition expenses, discharged mortgage debt, and mortgage insurance premiums.
  • Section 179 expensing
    • Minnesota permanently adopted the federal government’s increased expensing limits – the amount of equipment or software purchases businesses are allowed to deduct in a single tax year. However, the state’s current 80% addback requirement is also retained, meaning the full deduction must be taken over the course of five tax years.
      • Expensing limits increased from $500,000 to $1 million, with the phase-out limit increased from $2 million to $2.5 million, indexed for inflation.
  • Historic Rehabilitation Tax Credit
    • The state conformed to federal changes that require the credit to be paid out over five years instead of during the year in which the project is placed in service.
  • Not included: allowing more medical expenses to be deducted
    • Congress allowed medical expenses exceeding 7.5% of gross income – rather than 10% in prior law – to be deducted for Tax Years 2018 and 2019 only. Minnesota will retain the 10% threshold for all tax years.

Income Tax Cuts

The final tax bill includes at least $430 million of individual income tax reductions.

Tax rate cut

The first income tax rate cut in nearly 20 years will reduce the second tax bracket rate from 7.05% to 6.8% beginning Tax Year 2019. The fourth-tier income thresholds also are adjusted so the wealthiest earners do not see the benefit (one criticism of Senate’s original approach).

Second bracket income ranges, TY 2019:

  • Married-joint: $38,771 – $154,020
  • Married separate: $19,391 – $77,010
  • Head of Household: $32,651 – $131,190
  • Single: $26,521 – $87,110
  • Working Family Credit
    • Low-income taxpayers that don’t earn enough to reach the 2nd tax bracket does not benefit from the income tax rate cut in the final tax bill, but many will be able to take advantage of an expanded and increased Working Family Credit. Credit amounts and income eligibility thresholds are increased for taxpayers with 0 and 3+ children, and the phase out rate for all eligible taxpayers is reduced so more taxpayers will qualify.
  • Standard deduction doubled
    • The bill raises the standard deduction to $24,400 married-joint/$12,200 single (matching the federal amount), which will cut taxes by $134 million for over 1.9 million taxpayers. The average tax cut is $160 – about a 7% tax cut for the median household income.
  • Social Security tax subtraction
    • This year’s final tax bill increases the current maximum Social Security tax subtraction for married-joint filers from $4,500 to $5,150; from $3,500 to $4,020 for single or head-of-household filers.

The Legislature spent $246 million in 2017 on a significant new tax subtraction for Social Security benefits. 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 about $80,000.

Property taxes

  • 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 those community necessities. Since 2002, both Local Government Aid to cities and County Aid to counties have seen dramatic cuts. The final tax bill included a $26 million increase in both accounts in 2020 and $30 million thereafter to bring both LGA and CPA 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. (LGA, CPA)
  • Business and cabin property tax cut
    • Effective Tax Year 2020, the state general levy will be reduced by $47.5 million for commercial/industrial (business) property and $2.5 million for seasonal-recreational (cabin) property. This amounts to $100 million in property tax savings to both properties each biennium.
  • School equalization aid
    • Minnesota’s school referendum formula is equalized, meaning the state pays the difference between what is raised by local levy and a guaranteed revenue amount. This is intended to help equalize property tax burdens among districts with varying property values. Under current law, the formula is equalized in three tiers, with lower levels of equalization in the second and third tiers. This year’s tax bill increased the equalization factor in the second tier, which increased equalization aid amounts for some school districts. (Run)
  • School building bond agricultural tax credit
    • In 2017, a new Minnesota law created a property tax credit for agricultural land owners equal to 40% of property taxes attributable to school district bonded debt levies. It was intended to take some tax burden off agricultural land owners in hopes that would help more rural districts pass local school levies. This year’s tax bill increased that property tax credit over the course of the next four years: from 40% to 50% in 2020; to 55% in 2021; to 60% in 2022; and to 70% for taxes payable in 2023 and thereafter. The fully phased-in cost (annual benefit to agricultural land owners) of this provision is more than $70 million.
  • Agriculture Homestead Tax
    • The final tax bill made several changes to agricultural homestead and estate tax rules, aimed at making it easier for farm families to pass on their land to future generations:
      • Qualified property regarding the estate tax: Allows a decedent and/or spouse, or trust, to own property within three years after death and not trigger the estate tax recapture clause.
      • Ag homesteads owned by trusts: Allows ag homestead classification to continue when property is owned by a trust, spouse or surviving spouse, or grantor (Helps avoid penalties when farm families utilize estate planning to plan for the farm’s future).
      • Ag homesteads owned by business entities: Allows ag homestead classification when the business entity that owns the land is different from the business entity that operates the farm, rather than requiring the same entity to own and operate.
      • Fractional homesteads: Requires fractional ownership for homesteads owned by more than one person to be determined based on the ownership percentage found in the county land records, rather than strictly by how many people own the land. Also applies to ag homestead market value exclusion and homestead market value exclusion calculations.
      • Land used for environmental purposes: Agricultural land is allowed to continue qualifying as agricultural classification even if up to three acres are used for environmental purposes, including buffer strips, old-growth forests, or retention ponds.
  • Disabled Veteran Homestead Credit
    • Disabled veterans with a 70% disability rating may exclude up to $150,000 of their home’s market value from property taxes, and those with 100% ratings are eligible to exclude up to $300,000 of market value. Previously, surviving spouses were eligible to continue receiving this benefit for only eight years after the qualifying veteran’s death. This year’s tax bill removes the eight-year limit on surviving spouses continuing to receive the homestead market value property tax exclusion and allows it indefinitely, until the property is sold or transferred, or the surviving spouse remarries. The application deadline also is changed from July 1 to December 15.

Section 179 expensing and bonus depreciation

Minnesota permanently adopted the federal government’s increased expensing limits – the amount of equipment or software purchases businesses are allowed to deduct in a single tax year – in the tax bill’s tax conformity article. However, the state’s current 80% addback requirement was also retained, meaning the full deduction must be taken over the course of five tax years. The higher expensing limits increased from $500,000 to $1 million, with the phase-out limit increased from $2 million to $2.5 million, indexed for inflation. The tax bill also treats bonus depreciation the same way: it conforms to increased amounts and maintains the 80% addback schedule.

The final tax bill spent about $12.14 million through 2023 on this benefit, but the initial Senate, Governor and House proposals initially would have eliminated the 80% addback requirement. That would have cost more than $170 million but would have represented a significant investment tool for small businesses and farmers.

Angel Investment Tax Credit

The governor’s bill requested $20 million to reinstate the Angel Investment Tax Credit program that helps spur economic development in high-tech and start-up companies in Minnesota and contained important policy updates that better target the resources of greater Minnesota, minority- and women-owned businesses. The final agreement appropriates $10 million one-time, in Tax Year 2021, and also includes the governor’s targeting language.

Duluth Regional Exchange District

The final tax bill created the Duluth Regional Exchange District encompassing St. Luke’s Hospital and Essentia Health. It appropriated up to $97.7 million to finance public infrastructure in the city of Duluth, allowed MMB to sell 25-year appropriation bonds and authorized up to $8.1 million per year from 2022 through 2055 to pay debt service on the bonds.

The medical entity must make at least $50 million in qualified expenditures before public financing for parking structure construction is available. Each year for 25 years after the parking facility is placed into operation, 50% of the net revenue must be paid to the state and deposited into the general fund.

Duluth also may increase its local sales tax by 0.5% to pay for road and bridge improvements. At least $10 million in combined revenue from the sales tax increase or the city’s utility fund must be used to fund road improvements within the district.

MERF

The annual appropriation to the Minneapolis Employees Retirement Fund is increased from $6 million to $16 million, effective the day following final enactment.

Changes to local tax approval

The final tax bill included a number of new requirements for local governments hoping to authorize local sales, lodging, or food and beverage taxes. Local governments now will be required to provide a detailed list of proposed projects to be funded with new taxes in order to spend money disseminating information on the proposal. The local resolution supporting adoption of a tax must include several pieces of information, including documentation of the regional significance of each project. Local governments must bring the resolution to the Legislature and receive legislative approval before submitting the tax for approval of local voters in a general election. The proposed projects must be listed separately on the ballot.

Taxpayer Assistance Grants

The final tax bill included $200,000 in FY 2020 and 2021 for grants to nonprofits that provide tax preparation services to low-income, elderly and disadvantaged Minnesotans. This is in addition to the $400,000 appropriated in the state government bill.

Aquatic herbicides sales exemption

Herbicides purchased by lakeshore property owners or nonprofit association of lakeshore property owners and used as part of an invasive aquatic plant management program are exempt from sales tax, thanks to inclusion in the final tax bill.

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PROVISIONS THAT DID NOT PASS

Private school education tax credits

The Senate tax bill included $28 million for Equity and Opportunity Tax Credits, available to corporations or taxpayers that donate to nonprofit school foundations that provide private-school scholarships to select low-income or disabled students. Aside from diverting public dollars for private education, there was concern 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 types of nonprofits and charities could suffer as donors choose the more profitable donation option. The provision was not included in the final tax agreement.

Buffer credit

A large number of farm groups and Gov. Walz were advocating for landowners to be compensated for the portion of farmland they have converted to buffer strips under the state’s buffer law that was passed in 2015. Senate DFLers unsuccessfully offered an amendment to the Senate 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 was slightly different, proposing a $50-per-acre credit for eligible landowners. Neither proposal was included in the final bill.

Estate tax

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 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 and Governor both recommend freezing the current estate tax exemption at $2.7 million. In the end, nothing regarding estate tax thresholds was included in the final bill.

Corporate tax cuts

A number of corporate tax-relate provisions did not pass:

  • Conformity to about $400 million worth of corporate foreign income tax changes passed by the federal government (GILTI, FDDI, deemed repatriation).
  • A Senate proposal to reduce the corporate tax rate from 9.8% to 8.8%, at a cost of $250 million per biennium.
  • A governor and House proposal to reverse the 2017 statewide business property tax freeze, which is expected to cost the state $1 billion over the next 10 years.

Sports betting

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 have established a Sports Wagering Commission and allowed federally recognized Indian tribes and racetracks that are licensed to conduct wagering to apply for licenses. The tax rate of 6.75% is the same that Nevada imposes on the casino’s take of the pool in that state. The bill passed out of the Tax Committee, but never received a hearing in the State Government Committee.

Charitable gaming taxes

The Senate tax bill reduced the combined net receipts tax rate imposed on paper or electronic pull-tabs, tip boards, and electronic linked bingo by $10 million: first tier from 9% to 8%; second tier from 18% to 16%; third tier from 27% to 24%; and fourth tier from 36% to 32%. It also amended the star rating thresholds and increased the percentage of profits that must be spent on lawful purposes to avoid probation. For bingo sites, the lawful expenditure requirement is increased from 20% to 25%; for others, it is increased from 30% to 40%. The final bill included nothing on charitable gaming taxes.

Affordable housing

The final tax bill included nothing on affordable housing, despite the fact that lack of affordable housing has been listed as an imminent challenge across the state. The original Senate tax bill did include three bills related to affordable housing, including:

  • Workforce housing tax credit study
    • A study of a new tax credit that 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
  • 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%. The Senate bill would have assigned 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
  • Affordable housing fund
    • This proposal would have captured 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, that program provides homeownership development grants to nonprofits, cooperatives and community land trusts. This bill would expand the program to also provide loans, and to include cities and tribal governments as eligible recipients

PERA State Aid

PERA aid is paid to any county, city, town or special taxing district with an account or accounts in the Public Employees Retirement Association as of 1997. That aid is set to sunset on June 30, 2020. The Senate DFL offered an amendment makes sure the 1,100 local governments that rely on this aid were kept whole by extending the sunset to 2048, but the amendment failed, and no provision was included in the final bill. Without an extension of this aid, local governments will be forced to pass the costs onto local property tax payers or reduce local services.

Vapor pod surcharge

The Senate DFL successfully added an amendment to the Senate tax bill that would have added a surcharge to vapor “pods” used in e-cigarette nicotine systems to ensure they are taxed similarly to the state’s other nicotine products. The change was not included in the final agreement, despite skyrocketing vapor product usage among teenagers across the nation.

ICWA Aid

The Tax Committee heard a proposal this year to allocate $20 million/year in new aid to help counties bridge the gap between out-of-home placement expenses and federal reimbursements related to the Indian Child Welfare Act. The Senate tax bill increased current state aid ($5 million/year) by $2 million and allowed counties to dispute DHS’ determination whether it is in compliance with ICWA. The final agreement contained no statewide ICWA aid, although it did provide grants for child welfare-related costs to Wadena and Mahnomen counties. (The Senate DFL offered an amendment on the Senate floor to increase this aid, which also was voted down.)

Container fee/tax ban

Prohibits a county, city, town, or other taxing authority from increasing a current excise tax or fee or imposing a new one on food, beverages or food/beverage containers. “Container” is defined as a bottle, cup, can, bag, straw, or other packaging that is made from plastic, aluminum, glass, cardboard, or other material.

K-12 Education Credit

The Senate tax bill increased the income phase-out threshold for the K-12 education credit from $33,500 to $39,000. It also allowed expenses for pre-K expenses at public or private facilities to count as an eligible expense to claim the credit, which many viewed as diverting state dollars to private education purposes. Nothing related to the K-12 credit was included in the final bill.

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