COVID-19 provisions passed
Grants to tribal nations
The first COVID response bill passed by the Legislature in March transferred $11 million in FY 2020 from the general fund to the Revenue commissioner for grants to the following tribal nations for emergency response activities related to COVID-19:
- Fond du Lac Band
- Grand Portage Band
- Mille Lacs Band
- White Earth Band
- Bois Fort Nett Lake Band
- Leech Lake Band
- Red Lake Nation
- Upper Sioux Community
- Lower Sioux Community
- Shakopee-Mdewakanton Sioux Community
- Prairie Island Mdewakanton Dakota Community
Each tribal nation must use the funding for activities that mitigate the immediate health and economic impacts of COVID-19, including reimbursable activities under the Robert T. Stafford Disaster Relief and Emergency Assistance Act; securing basic needs, including but not limited to food and shelter, for tribal members. (HS 4531)
A business with a liquor license is subject to “liquor posting” for delinquent taxes (sales tax, withholding). A business that is delinquent is not allowed to receive alcohol from a distributor until the tax is paid. A bill signed by the governor in April allowed businesses impacted by Executive Order 20-04, 20-18, 20-33, or future extensions to receive alcohol from distributors, despite being late in paying certain taxes. The primary purpose for the temporary change was to allow closed businesses to receive liquor upon the date of re-opening, despite being delayed in paying certain taxes. The authority was retroactive to taxes and filings due after Jan. 31, 2020 and expires four months after EO 20-33 or a related order extending the closure of bars or restaurants expires. (SF 4462)
Property tax assessment appeals
The first COVID response bill passed by the Legislature in March, extended the deadline to file an appeal of a property assessment from April 30 to May 30 for taxes payable 2020 only. (HF 4531)
COVID-19 provisions not passed
Federal COVID funds to local governments
Minnesota received $1.86 billion from the federal CARES Act Coronavirus Relief Fund. About $667 million of that amount was allowed to help local units of government with pandemic-related expenses. The Senate Finance Committee considered a bill to distribute that revenue to cities, counties, and townships – except for Hennepin and Ramsey County. Because those counties have populations over 500,000, they were eligible for a direct distribution from the U.S. Treasury. The Senate’s bill would have required those two counties to share their initial distributions with cities and townships within their borders, and the suggested formula ended up sending more money per-capita to counties with zero COVID cases than counties with the highest case-counts.
The bill passed the Senate floor with Republican support. A House DFL proposal used a different formula to distribute funds on a per-capita basis to cities, counties, and towns, but it reserved about $100 million for later distributions that would be based on need and expenses. That bill also did not pass.
Local governments have incurred great costs related to COVID responses, so this topic will likely return this interim. There is a December 2020 deadline for the state to spend these federal funds. (S.F. 4564)
Additional tax filing, payment delays
The Minnesota Department of Revenue used existing authority to delay a number of tax filing and payment deadlines, including:
- 2019 income tax filing and payment deadline to July 15, 2020
- Sales tax payments due March 20 and April 20 moved to May 20
- Provider tax payments due April 15 and filings due March 16 extended for 60 days
- Lawful gambling tax payments moved to May 20 for organizations that request an extension for their March 20 or April 20 payment
- Occupation Tax payments due May 1, 2020, extended 60 days
The IRS delayed a number of federal tax deadlines that Minnesota did not match, including:
- 2019 filing and payment deadline for fiduciaries, partnerships, S-corps, and corporations from April 15 to July 15
- Estate tax payments due July 15, 2020
- Estimated 2020 tax payments for first and second quarters
The Senate Republican tax bill (SF 3843) proposed moving these dates as well. In total, their bill would have shifted $1.2 billion from Fiscal Year 2020 into Fiscal Year 2021. Delaying this amount of revenue could have caused serious cash-flow concerns for the state at a time when it is scrambling to address and pay for COVID-related measures. Taxpayers who cannot file or pay a specific tax by the stated due date already have the ability under current law to request abatement of penalty and interest for reasonable cause, including emergency declarations by the president and governor due to COVID-19. That information is available at: https://www.revenue.state.mn.us/our-response-covid-19 .
Property tax delays
The Senate Republican tax bill also included a two-month delay in State General Levy payments for commercial/industrial and cabin properties. That provision did not pass, and those payments were due May 15. The bill did not recommend any payment changes for regular local property taxes, although several counties across the state made independent decisions to move those deadlines and/or relax penalty and interest for late payments. Property taxpayers concerned about local property taxes should contact their local governments. Depending on how these changes affect local government budgets, the Legislature may need to address ramifications in the future. (SF 3843)
Paycheck Protection Program federal loans tax-exempt
Loans provided through the federal Paycheck Protection Program are forgivable if the amounts are used on eligible expenses. When a loan is forgiven, the amount is typically considered taxable income. There was bipartisan support for a provision in the Senate Republican tax bill that would have ensured the discharged debt will not be considered income for Minnesota tax purposes. Since many of the eligible expenses for which the loans must be used are tax-deductible business expenses, the bill also clarified a taxpayer may not deduct the expense as well as exclude the forgiven amount from taxable income. This did not pass, but it may be addressed in the future. (SF 3843)
Provisions not passed
Social Security tax relief
In January, Senate Republicans announced their top priority would be exempting all Social Security benefits from Minnesota income taxes. Fully exempting all benefits from taxes would cost nearly $1 billion per biennium so once the state’s budget projections changed, Republicans quickly dropped this expensive idea.
As a reminder, the $1 billion cost of exempting all Social Security benefits from taxes would and impact fewer than half of Minnesota households currently collecting Social Security benefits and do nothing for low- and middle-income seniors who are truly struggling to navigate fixed-income budgets.
The Legislature did pass a new Social Security tax subtraction in 2017 and increased it again in 2019, which is more targeted toward seniors who need tax relief. 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, even this subtraction leaves out 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.
Private school tax credits
The last two sessions, Republicans have tried to divert up to $35 million per year away from public education and into the pockets of wealthy donors and corporations who choose to support private or religious schools. The plan would starve public schools that are constitutionally created to serve our entire state, while supporting a few private institutions primarily in the metro area. This is not about low-income kids; it’s a tax write-off for the wealthy.
This year, they announced their intent to try once again to divert money for public education into the pockets of wealthy individuals and corporations. This proposal was thankfully dropped once the state’s fiscal outlook worsened.
The federal government has made a handful of tax-related changes in three recent bills: one passed in December and two passed since the COVID-19 pandemic began. The House DFL tax bill included about $15 million to bring Minnesota’s tax code into conformity on items that mostly affect some businesses and specific individual taxpayer situations. The Senate Republican tax bill did not contain any conformity language. It is likely that tax conformity will need to be discussed later this year or during the 2021 session.
School fundraiser accounting/tax changes
A technical provision in the 2019 education bill required all funds from extracurricular activities to be deposited with the school district. An unintended consequence arose that prompted some previously sales tax-exempt school fundraising sales to become taxable. This includes sales of flowers, wrapping appear, wreaths, and certain other activities if they do not qualify for one of the exemptions that also is listed in that law. The House tax bill included language to exempt these sales from sales tax; the Senate tax bill did not. Lawmakers received many emails about this issue last interim so if that continues, expect the topic to resurface next session.
The 2017 federal Tax Cuts and Jobs Act (TCJA) changed the treatment of like-kind exchanges – an exchange of personal property, such as farm equipment – so that any gain from such an event now must be reported as taxable income. This caused unexpected tax impacts for some business owners and as a result, many Senators heard about a “farmer penalty” related to like-kind exchanges last interim.
This session, the Senate tax bill included language to abate penalties and interest for late tax payments resulting from gains from like-kind exchanges for tax year 2018 for taxpayers whose tax liability increased at least 12% due to the retroactive application. The House tax bill included a different approach that would have retroactively allowed the gains to be added back to the taxpayer’s income over five years. Nothing passed, so this likely will continue to be an issue in future years.
The following items from the Senate Republican tax bill (SF 3843) did not pass
Referendum equalization levy increases
The Senate Republican tax bill proposed to increase the first tier and second tier equalization levy maximum factors and add a third potential ratio: “or the ratio of the district’s referendum market value per adjusted pupil unit to $650,000.” Adjusted pupil units are all students served by the district, including those open enrolling into the district. Adding that consideration would have provided some levy relief to districts that are net importers. This did not pass. However, the 2019 tax bill did spend $27 million over four years to expand equalizing factors.
In order to qualify for 4d classification, at least 20% of a property’s units must serve as low-income rentals that meet certain qualifications, such as being reserved for residents whose household income does not exceed 60% of the greater of area or state median income. Under current law, 4d housing has two classification rates: 0.75% on the first tier of market value and 0.25% for the remaining value. The Senate tax bill eliminated that language and set the Class 4d property rate at 0.25%. That would have been one of the lowest rates in the state and shifted $43 million in property value onto other properties. The bill did not pass.
K-12 education credit increase
The Senate tax bill increased the phase-out threshold for the current K-12 education tax credit. Under current law, the credit begins to phase out at household income over $33,500. The Republican bill would have changed those thresholds so phaseouts would begin at the federal income eligibility guideline for reduced-price lunch as of July 1 of the taxable year. For 2019-2020, that amount is $47,640 for a family of four. While this idea has bipartisan support – increases to the credit amount or income thresholds were part of at least two of Gov. Dayton’s budget proposals – it cost nearly $40 million over the budget period. It did not pass.
Charitable contribution subtraction expansion
The Senate tax bill expanded the charitable contribution subtraction for taxpayers who do not itemize from 50% of the excess of charitable contributions over $500, to 60% of the excess of contributions over $300, effective beginning TY 2020. It cost $26.9 million this biennium and $55.6 million in ’22-23. The provision did not pass.
Charitable gaming tax reductions
Senate Republicans spent $33 million over the budget period to reduce various tax rates for charitable gaming organizations. It is the same proposal that was included in the 2019 Republican tax bill and did not become law. Senate DFLers questioned why it was included in COVID-19 response legislation, especially when the state has a budget deficit. The provision did not become law.
Section 179 conformity
Full Section 179 expensing conformity was the Senate Republicans’ top tax priority until the end of session. It cost about $203 million this biennium, by far the largest cost item in their tax bill. Conformity would eliminate Minnesota’s 80% addback requirement on Section 179 expensing for individuals and corporations retroactive to property placed in service TY 2018 and thereafter.
It is an important item for business groups and farmers, and it has received bipartisan support in the past – it was included in the House, Senate, and Governor tax bills in 2019. The provision disappeared during special session negotiations, however. It is a very expensive change and in 2019, Senate Republicans also refused to adopt about $400 million worth of corporate foreign income tax changes passed by the federal government in the final bill. This conversation likely will return next session but without additional revenue, it is an expensive item to consider.
Short-term vacation rentals
Some Minnesota cabins that are advertised for short-term rentals on Airbnb, VRBO, and similar websites have been subject to recent assessments that have increased their property tax rates. The Department of Revenue issued a memo in May 2019 to all county assessors instructing them how to consistently assess property based on its primary use, which is what prompted many of the reassessments. Affected cabin and small resort owners that offer short-term rentals are frustrated that they are now compared to larger commercial property, which carries a 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.
Two different proposals were included in the House and Senate tax bills this year, but neither became law. The Senate approach placed a two-year moratorium on reclassification, which would have provided the Legislature time to discuss a long-term plan to this emergent issue. The House tax bill proposed moving these properties into Class 4(b)1, which has a class rate of 1.25%, is not subject to the state general levy, and is subject to referendum market value taxes. Expect this discussion to return next session.