Republican tax budget target: $591 million* ($441 million for already-passed PPP bill, $150 million additional)
- Senate Republicans have already voted against providing full tax-relief conformity for unemployed workers and their tax targets do not support that priority, either.
- The PPP/unemployment tax relief bill included in Republican targets contains a $375 million tax break for businesses and just $28 million for workers.
- Republicans contrast their budget by saying Gov. Walz’s budget contains no tax relief. That is not accurate. Gov. Walz’s revised budget contains $1 billion in tax relief for Minnesotans.
Governor’s tax priorities
The governor’s budget proposal includes $1 billion in tax relief and $670 million in sustainable, ongoing revenue to support the tax relief and other investments in working Minnesotans. The revised budget released in March dropped the estate tax and cigarette tax changes but retained a fifth income tax bracket for married taxpayers earning more than $1 million. His tax relief includes a reduction in the first income tax bracket rate that will benefit one million filers, as well as an expansion of the Working Family Credit for 371,000 low- to middle-income families.
Key tax relief: $1 billion
- First income tax bracket expansion, a tax cut for at least 1 million filers
- Tax subtraction for forgiven PPP loan amounts up to $350,000
- Full $10,200 tax subtraction for unemployment benefits received in 2020
- Working Family Credit expansion, increase for 371,000 low- to middle-income filers
- Increases renters’ property tax credit maximum by $150 and expands program
Key new revenue: $670 million
The governor’s budget raises $670 million in new revenue to support $1.6 billion in investments in working Minnesota families and businesses. 99.3% of Minnesotans will not be affected by the tax increases and at least one million will see a tax reduction.
- Fifth tier: 10.85% rate on income over $1 million
- The fifth income tax bracket for married-joint filers earning more than $1 million, or single filers earning more than $500,000 – so-called “pandemic millionaires.”
- Only 0.7% of Minnesota tax filers (21,000 households) will be impacted; their average annual tax increase will be about $8,072.
- Those included in the fifth tier earn at least $20,000 per week. Their additional annual tax impact will be less than half of one week’s pay.
- Multiple studies have shown the top 1% of taxpayers have fared the best during the pandemic.
- Corporate tax increase from 9.8% to 10.8%
- Corporations received a 40% rate cut in the 2017 federal tax bill – 92% of the total tax benefits included in that bill.
- Minnesota’s effective tax rate for corporations is considerably lower than 9.8% because of the generous deductions offered in this state.
- Foreign-earned income tax
- This is a federal change that Republicans refused to conform to in 2019. As a result, the budget used $491 million of the budget reserve in FY 2022.
- The governor’s budget conforms to this tax and also pays back the $491 million to the reserves.
- Corporate tax increase from 9.8% to 10.8%
PPP loans, unemployment benefits, and Minnesota taxes
The Senate passed a bipartisan bill in March to match the federal government’s tax-exclusion for forgiven Paycheck Protection Program (PPP) loans received by businesses in 2020.
About 102,400 businesses received $11.3 billion worth of loans in Minnesota. Typically, forgiven loans are taxable at the state and federal level, but Congress made special exceptions last year. Conforming to that measure cost Minnesota $409 million over the next two years.
- Senate Republican bill: Includes full tax subtraction for forgiven loans ($409 million)
- Gov. Walz budget: Includes partial tax subtraction for forgiven PPP loans up to $350,000 ($240.6 million)
- House DFL: No bill passed yet, but Chair Marquart has indicated their budget will include a partial tax subtraction for forgiven PPP loan amounts
Unemployment benefits typically are subject to state and federal taxes. When Congress approved several supplemental payments last year, Minnesota opted to quickly distribute the money rather than update systems to withhold tax obligations before delivering the checks. As a result, many taxpayers who were unemployed in 2020 are facing unexpected tax bills this spring. The American Rescue Plan includes a $10,200 tax subtraction for unemployment benefits received in 2020.
About 821,300 individuals received $9.68 billion in unemployment insurance payments in 2020, according to DEED. Fully conforming to the $10,200 subtraction would provide an average $486 tax reduction to about 553,900 tax returns.
- Senate bill: Allows taxpayers to subtract 18% of Pandemic Unemployment Compensation approved by Congress in 2020 (maximum $1,836 subtraction of $10,200 total payments). ($28 million)
- Gov. Walz budget: Includes full $10,200 tax subtraction for unemployment received in 2020 ($259.7 million)
- House DFL: No bill passed yet, but they have indicated they will conform to the federal $10,200 subtraction
When the Senate bill was heard on the Floor, Senate DFLers offered an amendment to match the federal provision to make sure unemployed Minnesotans do not carry a larger tax burden. Unfortunately, Senate Republicans voted against the amendment and against providing equitable tax relief to Minnesota’s working families. (SF 263)
LGA penalties for mutual aid
Senate Republicans passed a bill in February that would allow communities to strip Local Government Aid from each other if they provided mutual aid services that later were unreimbursed. At the time of passage, Republicans presented this as an alternative to the SAFE Account, which would have provided clear funding for statewide public safety needs.
The bill was opposed by every major city and county organization because of the dangerous message it could send to local governments that have historically provided assistance under existing, effective mutual aid agreements. Most of the time, cities and counties do not bill each other for help during emergencies and if they do, it’s under the terms of the agreement and unpaid costs are resolved according to current law. The League of Minnesota Cities testified that they could find no significant instances where cities were owed bills or where mutual aid agreements have failed.
Despite no evidence of a problem, Republicans passed the bill, which has been awaiting action in the House.
State aid to local governments is one of the most important methods of controlling property taxes. It helps communities with less ability to raise revenue from their property tax base to fund a level of services –public works, police, and fire services – similar to what wealthier communities can provide. Starting a pattern of allowing LGA and CPA to be used as a penalty system would run the risk of increasing property taxes and crippling local public safety and public work’s needs.
Senate DFLers tried to offer a compromise that would simply improve current dispute resolution options should cities and counties need them. DFL Senators also attempted to increase LGA and CPA to help communities fund the resources they need. Both failed to pass because of a lack of Republican support. (SF 749)
Tax filing deadline moved to May 17
The IRS announced in March that it has extended the deadline to file and pay 2020 income taxes to May 17, 2021. The Minnesota Department of Revenue has matched that date. Below is important taxpayer information for those who still need to file:
Federal Recovery Rebate: The Economic Impact Payments (“stimulus checks”) distributed by the federal government in 2020 were based on taxpayers’ 2018 or 2019 tax return data. Some taxpayers did not receive the full stimulus payments or did not qualify at all. Those taxpayers should examine potential eligibility for a federal Recovery Rebate on their federal taxes, which is based on 2020 tax information. The IRS website provides more information on the Recovery Rebate Credit, but it particularly applies to:
- Those who lost wages in 2020 compared to 2019
- Recent college graduates
- Anyone who did not receive the full amount of the first EIP of $1,200 ($2,400 married-joint) or the second EIP of $600 ($1,200 married-joint)
Free state income tax filing: Free electronic filing of Minnesota taxes is available for Minnesotans whose Adjusted Gross Income is $72,000 or less or who meet certain other requirements, which vary based on the electronic tax-filing system used. To determine eligibility for each program, visit the Department’s website.
Free tax preparation: Taxpayers may qualify for free tax preparation help for federal and Minnesota income tax returns if they meet one of these criteria: be age 60 or older, have a disability, speak limited or no English, or have income less than $57,000 per year. There are more than 200 free tax preparation sites across Minnesota offering help from IRS-certified volunteers. Most sites are open from February 12 through April 15 and can be found on the Department’s website.
Fraud prevention: The Department of Revenue reviews and verifies information on all tax returns to make sure the right refund goes to the right person. Learn more about identity theft and see tips on how to protect financial information on the Identity Theft and Tax Refund Fraud page.
Track refunds: Taxpayers can track the status of their refunds by using the Where’s My Refund? system on the Department of Revenue’s website. The system will alert filers whether any additional action is needed and will display the exact date any refunds are sent.
Property tax refunds: Renters and homeowners in Minnesota may be eligible for property tax refunds. The applications must be filed separately from income tax returns and refunds will not be distributed until after August 2021. Forms may be found here.
Aside from Minnesota’s taxation of PPP loans and unemployment benefits, there are several other areas in which the state’s current tax laws do not align with federal changes. Those include a tax exclusion for discharged mortgage debt and up to $5,240 of employer-paid student loan payments. The governor’s budget recommendations include many of these updates at a cost of more than $300 million. The Senate Tax Committee has heard few of these proposals and with a $100 million target, does not appear to be planning to conform to most items. This will create confusion and higher costs for Minnesota taxpayers.
Property tax relief
Under a DFL-authored bill heard in the Senate Property Tax Subcommittee this session, Minnesota homeowners whose property taxes have increased more than $100 could qualify for an additional property tax refund next year. Minnesota’s Targeted Property Tax Refund is available to all homeowners, regardless of income. The main eligibility requirement is that homestead property taxes must have increased more than $100 and 12%over the previous year’s taxes, not due to improvements on the home. The DFL bill would reduce that percentage threshold to 10%, allowing an estimated 17,000 additional homeowners to qualify.
The maximum refund under the program is $1,000. Last year, about 100,000 homeowners received an average refund of $96, although the average refund has been as high as $152 depending on the year. The bill’s author described the legislation as an affordable way to deliver modest tax relief to homeowners trying to absorb property tax increases during a difficult financial year. (SF 138).
The governor’s budget proposal includes an expansion of renters’ property tax refunds by increasing maximum refunds, reducing taxpayer copays by 10%, and reducing the income thresholds.
Social Security benefit taxes
The Senate Tax Committee has heard several bills aimed at providing tax relief to Social Security recipients in Minnesota. Some of the bills cost more than $3 billion per biennium (SF 273, SF 441).
About 57% of households receiving Social Security income pay no taxes on this income under current law and about one-third of Social Security income received in Minnesota is currently taxable. Most of the taxes are paid by wealthier seniors in the metro area – meaning that’s who would see the greatest benefit from an additional tax reduction.
A more targeted approach, authored by a DFL Senator, offers a modest expansion of the state’s current subtraction for a portion of Social Security income, which would help more middle-income seniors and cost the state far less money (SF 1361). Another DFL bill would allow a full subtraction of Social Security benefits, but it would pay for the substantial cost by adding a new tax on net investment income over $250,000. That approach would provide a tax cut to 392,900 taxpayers compared to a tax increase for 35,300 while preserving the state’s budget. (SF 558). All bills were laid over for possible inclusion in the omnibus bill.