Minnesotans enjoy a high-level of quality of life here in this state, and that’s due in large part to the work DFLers in the Senate, House, and governor’s office have done to invest in the state.If Minnesotans want to have an opportunity to continue making meaningful investments in E-12, health care, and higher education, the Legislature needs to guard the state’s budget for the long-term and ensure new tax relief is affordable, equitable, and effective.
The Legislature passed a large tax bill during the 2019 special session that raised $530 million from federal tax conformity provisions and used $491.5 million from the Budget Reserve account to deliver a host of tax benefits. About $430 million in individual income tax relief was approved, including reducing the tax rate on the second tax bracket and increasing the amount of Social Security benefits eligible for the state’s tax subtraction. Aid to cities and counties increased by $30 million each, and the statewide business property tax was once again reduced by $50 million.
Senate Republicans have already said a good portion of this year’s projected budget surplus will be focused on additional tax relief – their top priority is fully exempting all Social Security benefits from state income taxes. DFLers will be cautious about over-committing with permanent tax cuts and focus on more affordable and targeted tax relief that drives the economy, supports the middle-class, and doesn’t jeopardize the state’s long-term financial stability.
Social Security tax relief
For the third consecutive year, Senate Republicans announced a top priority will be exempting all Social Security benefits from Minnesota income taxes. Despite continually listing this as a priority, not once have they actually included the proposal in their tax bill. Even Republicans know it is simply too expensive and doesn’t deliver equitable tax relief to all Social Security recipients.
Fully exempting all benefits from taxes would cost nearly $1 billion per biennium and benefit fewer than half of Minnesota households currently collecting Social Security benefits.
- According to the Department of Revenue, there are about 746,000 MN households with Social Security income in Minnesota, 54.4% (404,000) of which with no Minnesota taxable Social Security under current law
- About 90% of taxable Social Security benefits in Minnesota are concentrated in the top four highest-earning income brackets, which means that’s where the biggest share of tax relief would go: to the highest earners (nonpartisan House Research analysis, March 2016)
- More Social Security beneficiaries reside in Greater Minnesota, but 52% of the tax benefits would go to the seven-county metro area because those seniors have higher incomes and, therefore, are more likely to pay taxes on their benefits under current law (nonpartisan House Research analysis, March 2016)
The Legislature has made meaningful progress on Social Security tax relief in recent years. The new Social Security tax subtraction passed in 2017 and was increased in 2019. Now, married-joint filers earning less than $101,030 in provisional income (total income plus half of Social Security benefits) may subtract $5,150 of benefits from taxable income each year, and single filers earning less than $78,900 may subtract $4,020. However, this does not help the thousands of Minnesotans whose careers did not afford them Social Security benefits (many firefighters, police officers, federal employees, and teachers), and it does not affect the 54.4% of households already not taxed on their Social Security benefits.
Talking about Social Security tax exemptions is politically popular, but it is an expensive proposal that would do nothing to help low- and middle-income seniors who are truly struggling to navigate fixed-income budgets. DFLers will focus on tax relief that helps all seniors, especially those who need it most.
On December 20, 2019, President Trump signed an appropriation bill that made several changes to the federal tax code, including tax extenders, disaster tax relief, and retirement plans. At this point, the Department of Revenue is not recommending any early session changes to Minnesota tax law that could impact the upcoming filing season, as tax law changes that impact the current filing season have the potential to cause confusion and added difficulty for taxpayers. Instead, the department will be working with legislators throughout session to determine how Minnesota should respond to the recently passed federal tax law changes. Early estimates show a full update could carry a one-time cost of about $23 million in FY 2021.
One idea to help reduce carbon emissions and address climate change is a carbon tax, or “carbon pricing”: placing a per-ton fee on CO2 producers to encourage them to move toward more renewable and sustainable forms of energy production. The idea has been introduced by DFL lawmakers many times during the last 25 years with varying mechanisms. It’s possible the proceeds could be used to reinvest in energy alternatives or to provide tax credits to businesses that make environmentally conscious changes. Lawmakers have been discussing the idea and will likely have a proposal during the 2020 session.
Cabin property taxes
Short-term rentals listed on Airbnb, VRBO, and similar websites may receive some scrutiny this session. The Department of Revenue issued a memo in May to all county assessors, instructing them how to consistently assess a property based on its primary use, which determines the property tax classification. Many cabin and small resort owners that offer short-term rentals are worried about being compared to larger commercial property, which carries a much higher tax rate. Conversely, some traditional, private cabin owners and commercial resorts are frustrated with the uneven playing field they say has been created by the emergence of this new rental market. Some lawmakers have said they will seek a new classification for vacation-rental properties that is reflective of their business model but does not unduly burden the owners and cause them to sell or close.
Buffer tax credits
In last year’s tax proposal, Governor Walz included a $50-per-acre property tax credit for landowners employing state-mandated buffer strips. This was a top priority of several Minnesota farm groups. The proposal was not included in the Republicans’ tax bill, and they also opposed a DFL amendment to add a similar provision to the tax bill when it was heard on the Floor. Expect the proposal to return this year.