Taxes

Tax Omnibus Budget Bill

The original Senate Republican tax bill spent $660 million on business tax relief and only $54 million on working Minnesotans. In addition to excluding full federal tax conformity for unemployed Minnesotans, it included harmful private-school voucher language and underfunded bipartisan tax priorities. The final bill still includes significant tax relief for business, but it also provides full tax relief to Minnesotans who were unemployed in 2020, provides $24 million for targeted community grants, $30 million in affordable housing and homelessness prevention efforts, and $250 million in supplemental payments to frontline workers. DFLers worked together to make sure the tax bill invests in Minnesota communities and people recovering from the pandemic – and DFLers will continue working together to secure ongoing, stable new revenue sources to help fund the many needs that continue to face our state in the future. (HF 9)

Notable items in HF 9 include:

FOR BUSINESSES

Paycheck Protection Program (PPP) loan tax conformity

The tax bill spent $409 million to fully conform to federal treatment of PPP loans received: the total loan amount (currently taxable under MN law) can be fully subtracted from income, and PPP-supported expenses can also be deducted as a business expense.

The governor’s and House’s original tax bills proposed capping the PPP tax subtraction at $350,000; Senate DFLers offered a floor amendment capping the loan subtraction at $1 million. DFLers argued the roughly $100,000 saved could be used on tax relief for other businesses that were not fortunate enough to receive PPP loans and, therefore, could not benefit from the tax relief. The final bipartisan agreement offered a full subtraction for the entire PPP loan amounts received.

The Senate also passed a bipartisan bill in March to provide full PPP conformity but because Senate Republicans would not also provide full unemployment conformity at that time, that standalone bill did not pass before the income tax filing deadline. (SF 263)

Statewide business property tax

Businesses are currently allowed to exclude the first $100,000 of market value from the statewide business property tax general levy. This bill increases the exclusion to $150,000, benefitting many small businesses. Cost: $40 million. This was a bipartisan provision included in both the House and Senate tax bills.

Small business and nonprofits

The bill includes federal tax conformity for small businesses that received Small Business Association advances or Economic Injury Disaster Loans in 2020. This is $7.6 million of tax relief to many Minnesota small businesses and nonprofits that received help last year.

Angel Investment Tax Credit

The Angel Investment Tax Credit is available to investors in start-up companies in Minnesota. The tax bill extends the credit by one year, through 2022, and appropriates $5 million for the program (current 2021 funding is $10 million).

Historic Structure Rehabilitation tax credit

The Historic Structure Rehabilitation Credit is modeled after a federal credit of the same name, which exists to encourage preservation of historic buildings. The state offers a 20% credit for qualifying investments in historic rehabilitations. This year’s tax bill extends the credit one additional year, through 2022, with no cap on the amount of credits available next year. 

June Accelerated Sales Tax requirements

The tax bill spends $12.6 million to provide some cash-flow relief to businesses that must pay a portion of June sales taxes earlier than normal under an often-used state budget mechanism. The bill adds a sixth provision to the statutory list of priorities for November-projected budget surpluses requiring the June Accelerated Sales Tax requirement to be reduced until it is $0; and it exempts certain vendors that make retail sales to construction materials from the June Accelerated requirement.

Pass-Through Entity tax option

The tax bill provides a new filing option for pass-through entities to file as corporation. This provides a way for pass-throughs to avoid the federal State and Local Tax (SALT) cap of $10,000. The PTE filing option is only available as long as the federal SALT cap is in effect.

Section 179 conformity update

The Legislature passed full Section 179 conformity in 2020, but the language inadvertently did not apply to carryovers from a previous year if the property was placed in service before tax year 2020. Some taxpayers that need to carry over prior-year expenses into tax year 2020 cannot take advantage of the new law. This year’s tax bill extends full conformity to include these carryovers.

FOR INDIVIDUALS

Unemployment compensation tax subtraction

The tax bill spent $234.8 million to allow Minnesotans who experienced unemployment in 2020 to subtract up to $10,200 of unemployment compensation received in Tax Year 2020, matching the federal government’s treatment of these benefits.

The original Senate bill only would have allowed 18% of UI benefits received in 2020 to be excluded from income taxes, costing $28 million compared to the $409 million spent on business PPP tax relief. DFLers demanded parity for the more than 500,000 unemployed Minnesotans searching for help as they recover from pandemic-related losses. Republicans voted against DFL-proposed amendments several times, until it finally was included in the final tax agreement.

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.

For constituents asking about tax refund status: The Department of Revenue will update its guidance at this website.

Conformity to a variety of recently passed federal updates, including:

• Exclusion of discharged mortgage indebtedness, which ensures taxpayers facing foreclosure or short sale do not have to include losses in their taxable income
• Exclusion for up to $50/month in benefits paid to volunteer firefighters and EMTs
• Allows up to $100,000 of disaster-related retirement distributions for qualified disasters between Jan. 1, 2018, and Feb. 20, 2020, to be included in income over three years following the distribution
• Allows PPE, disinfectant, and other COVID-related supplies to be eligible for the educator expense deduction
• Exclusion of emergency financial aid grants provided to students under the CARES Act

Frontline Workers

The tax bill includes a global compromise to create a summer working group charged with determining how to distribute $250 million in federal funds to certain frontline workers. Some payments must go to long-term care employees. Other beneficiaries will be determined by considering each group’s increased financial burden and risk of virus exposure while working during the pandemic.

The working group must be appointed by July 15, 2021 and will be comprised of three Representatives (2 majority/1 minority), three Senators (2 majority, 1 minority), three Executive branch representatives appointed by the governor.Recommendations must be submitted by Sept. 6, 2021, and seven of the nine must agree in order to adopt. If at least seven do not agree, the group may present no more than three proposed drafts of legislation for the Legislature to consider.

Working Family Credit expanded

The tax bill expands eligibility for the state’s Working Family Credit to taxpayers age 19 and 20 without qualifying children, effective TY 21. DFLers offered amendments and bills to also increase the credit and expand eligibility to current filers, but those failed to pass.

Student Loan Credit marriage penalty

The state’s current student loan credit allows taxpayers paying on student loans to qualify for up to a $500 credit per year, $1,000 for married couples filing jointly. This bill corrects an unintentional marriage penalty attached to how the credit is calculated by requiring the couple’s combined AGI to be allocated to each individual spouse based on their share of the couple’s earned income.

Veterans’ Disability Income and property tax refunds

The tax bill allows veterans’ disability payments to be excluded from the definition of household income for the purposes of renter or homeowner property tax refund eligibility. About 34,000 homeowners and renters will receive an average increased property tax refund of $140.

FOR COMMUNITIES

Affordable housing and homelessness prevention initiatives

• Homelessness Prevention Aid: $20 million/year for 2023-2028
  • Creates a new state aid to counties that can be used to fund family homeless prevention and assistance projects and programs. Distributions contain two amounts: 1) the greater of $5,000 or the county’s per-capita share of 5% of the overall annual allocation; and 2) the remaining allocation multiplied by the county’s proportional share of the rolling three-year average of students experiencing homelessness. (Runs available on request)
• Housing Tax Credit: $10 million/year
  • Establishes the Minnesota Housing Tax Credit Contribution Fund administered by MHFA. Up to $9.9 million in TY 2023 through 2028 would be available for tax credits of between $1,000 and $2 million, equal to 85% of a taxpayer’s contributions to the fund.
• The fund would provide loans or grants to developers of multifamily and single-family developments for persons and families of low and moderate income.
• Ten percent must be set aside for non-metro areas with population less than $2,500; 35% is set aside for families at or below 50% of the area median income for the applicable county or metro area; and 25% set aside single-family housing.
• 4d affordable housing first-tier limit
  • The 4d property classification is also known as the Low-income Rental Classification; it provides a property tax reduction to building owners that maintain at least 20% of units affordable. This year’s tax bill temporarily freezes the first-tier rate for 4d property and requires a study and report of the effects of lowering the class rate to 0.25% in the future.
• TIF flexibility to help local governments invest in housing

Supplemental LGA to 96 cities

Under the current LGA formula, 96 cities would receive less LGA in 2022 than 2021. This provides a supplemental 2022 city distribution to those cities, equal to the reduction in LGA received between the two years. It also adjusts the total aid payable to $569,870,718 for aids payable 2022 and thereafter. The current appropriation is $564,398,012. (Run available on request)

Capital Grant Program for disadvantaged communities

The tax bill provides $24 million for grants to nonprofits and local governments for economically disadvantaged people and areas. Grants must be used for the betterment of land, buildings, or other fixed assets that will primarily serve people who are economically disadvantaged or is located in an economically disadvantaged area. Individual grants may not exceed $1.5 million and are subject to a 50% match unless “the project is located in an area with a very low average net tax capacity, the applicant demonstrates that the applicant is experiencing hardship, or the applicant represents or serves underserved communities.” The commissioner “must make an appropriate balance between metropolitan areas and Greater Minnesota.”

Rondo Land Bridge

The tax bill includes a $6.2 million appropriation to Mn/DOT for a Land Bridge Freeway Lid in St. Paul. This amount is available to match federal funds and for project planning and development, including area planning, community and land use planning, economic development planning, design, and project management and analysis.

Tribal Government Relationship Program

Extensive language recognizing Minnesota’s Tribal governments is included in the tax bill. The language officially recognizes the legal relationship between Tribal Nations and the state of Minnesota and requires state agencies to engage and be guided by a meaningful and timely consultation process with Tribal governments on relevant aspects of the agency work. Agencies also must submit plans to the governor and lieutenant governor. Broadly, the section is intended to facilitate better understanding and informed decision-making by spurring communication on matters of mutual interest.

Grants to counties to pay utility over-valuation

This bill provides $30 million for grants to 13 counties that must issue property tax refunds to Enbridge due to a court case that determined the Dept. of Revenue over-valued pipeline property, to be paid by Aug. 15. Counties: Aitkin, Beltrami, Carlton, Cass, Clearwater, Hubbard, Itasca, Kittson, Marshall, Pennington, Polk, Red Lake, St. Louis.

Public safety construction material sales tax exemption

Local governments already are exempt from the state sales tax, but oftentimes the exemption is unused during construction projects because of the way materials must be billed in order to receive the benefit. This bill provides a sales tax exemption on construction materials used in public safety facilities, including MSP, Virginia, St. Peter, Bloomington, Maplewood, Buffalo, Plymouth, Minnetonka.

Oriented Strand Board facility incentive

A new Oriented Strand Board production facility in northern Minnesota will receive $1.5 million in FY 25 and up to $3 million per fiscal year thereafter through 2036, for direct payments based on a formula of how much OSB is produced.

OTHER

Tax Expenditure Review Commission, sunset mandate

The bill establishes a legislative commission to review each of the state’s tax expenditures on an annual, rotating basis and evaluate them for effectiveness and fiscal impact. There are many requirements of the commission but most importantly, each existing tax expenditure must be reviewed for cost and efficacy at least every 10 years, and all newly proposed tax credits or reductions must sunset after no more than eight years.

Budget Reserve restored

The 2019 tax bill contained a $490 million reduction in the state budget reserve on July 1, 2022. This bill essentially reverses that decision and restores the reserve to $2,377,399,000 effective July 1, 2021.

Vapor and tobacco

The tax bill makes a number of definition changes to cigarette and tobacco products, none of which have a net revenue impact. However, the definitions ensure that vaping devices – including the electronic delivery systems – are taxed appropriately; requires anyone making delivery sales to file with the Department of Revenue; and clarifies retailers and out-of-state retailers must collect and pay Minnesota use tax for any delivery sale and requires these retailers to file a return with the commissioner each month.

The original Senate bill captured $5 million/year of current tobacco tax revenue to create a Tobacco Cessation Account to replace the expiring tobacco cessation program. That is not included in this bill, but the HHS bill created a cessation account at $4 million/year.

Local sales tax authorization changes

The bill creates a definition of “capital project” for which revenues collected from a local sales tax may be used and clarifies these are the only projects that may be submitted to the Legislature for approval of a local tax:  a single building or structure, including associated infrastructure; improvements within a single park or recreation area; or a contiguous trail.

The following local taxes were approved, pending local voter approval:

• Sartell – Howe
• Carlton County – Rarick
• Cloquet – Rarick
• Edina – Franzen
• Fergus Falls – Ingebrigtsen
• Grand Rapids – Eichorn
• Hermantown – Bakk
• Itasca County – Tomassoni
• Litchfield – Newman
• Little Falls – Weber
• Maple Grove – Limmer
• Mille Lacs County – Mathews
• Moorhead – Eken
• Oakdale – Wiger
• St. Cloud – Putnam
• St. Peter – Frentz
• Staples – Weber
• Wadena – Gazelka
• Waite Park – Putnam
• Warren – Johnson

Tax Increment Financing flexibility and authorization

The bill contains important general changes to Tax Increment Financing law to help communities respond to pandemic-related construction and development changes and exposed needs:

• Allows unobligated increment to temporarily be used to provide investments or assistance to private construction or rehab of buildings if doing so will create jobs; construction would commence before Dec. 31, 2025; and construction would not have commenced prior to that date without assistance. The authority to transfer expires on Dec. 31, 2022, and can only be done after a written spending plan is adopted following a public hearing.
• Allows TIF districts that have elected to increase pooling by 10% to use increment for owner-occupied housing meeting requirements of a Housing TIF district.
• Extends the five-year rule by three years for districts certified after Dec. 31, 2017, and before June 30, 2020 (provides flexibility to projects that may have been delayed due to the pandemic)

The following communities also receive TIF authority or modifications to existing authority: Minnetonka, Richfield, St. Louis Park, Bloomington (two projects), Burnsville, Mountain Lake, Wayzata, Windom.

Notable items in HF 9 that weren’t included:

Governor’s tax priorities

The governor’s budget proposal included $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 5^th income tax bracket for married taxpayers earning more than $1 million. His tax relief included a reduction in the first income tax bracket rate that would have benefited one million filers, as well as an expansion of the Working Family Credit for 371,000 low- to middle-income families. These priorities, including new revenue, were not included in the final deal.

New revenue

The governor’s tax bill included sustainable new revenue to fund Minnesota’s future, and Senate DFLers offered amendments to the tax bill to do the same. As Republicans attempt to simplify this vote, DFLers should highlight the facts:

• The governor’s budget raised $670 million in new revenue to support $1.6 billion in investments in working Minnesota families and businesses. 99.3 percent of Minnesotans would not be affected by the tax increases and at least one million would see a tax reduction.
• The proposed 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 percent of Minnesota tax filers (21,000 households) would 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 would 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.

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. Despite no evidence of a problem, Republicans passed the bill, which was never heard in the House.

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)

Property tax relief

The tax bill does include property tax relief for businesses, but no major changes to homeowner or renter property tax refunds were included in the final bill. Senate DFLers championed a bill to increase the Targeted Property Tax Refund, which helps homeowners whose property taxes have increased more than 12% and $100, regardless of income. The DFL bill would have reduced that percentage threshold to 10 percent, allowing an estimated 17,000 additional homeowners to qualify. (SF 138).

The governor’s budget proposal included an expansion of renters’ property tax refunds by increasing maximum refunds, reducing taxpayer copays by 10%, and reducing the income thresholds. That also never passed.

Social Security benefit taxes

Although Republicans persistently declare full Social Security tax relief to be a top priority, they did not pursue the effort this session – even with a $1.6 billion surplus and more than $2 billion in federal funds. In addition, they all voted against a Senate DFL amendment to enact a full Social Security subtraction beginning next year. The DFL amendment would have paid for the full subtraction 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.

The Senate Tax Committee heard several Republican 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.

Liquor spoilage tax credit

A DFL bill to establish a temporary, refundable tax credit for brewers, liquor retailers, and wholesalers affected by COVID closures under Executive Order 20-04 (March), 20-74 or any related orders was included in the Senate tax bill but did not pass. The credit would have been equal to the amount of liquor spoilage in that year and available through tax year 2021.

Childcare provider property tax credit

The Senate bill created a property tax credit for licensed, in-home childcare providers. The credit would have been equal to 50% of the amount of net tax owed on the property for current taxes payable after subtracting all other applicable credits.

Restaurant PPE sales tax exemption

The Senate tax bill provided a sales tax exemption for materials, supplies or equipment used by a restaurant to adapt to health guidelines or any executive order related to COVID-19. Maximum $1,000 refund per business, per location, and retroactive for purchases made between Feb. 29, 2020, and Jan. 1, 2022. This was not included in the final bill.