Federal tax conformity

Each year, Congress makes changes to federal tax code and states must consider whether to adopt the same changes for state income taxes. In strong budget years, Minnesota typically conforms to many, if not all federal changes. Because the legislature hasn’t approved a tax bill since 2014, however, the state’s tax code has not conformed to federal code since Tax Year 2014. This causes confusion and frustration for individuals and businesses affected by the changes. Without an early bill, millions of taxpayers with tuition costs, teacher expenses, business expenses and other issues will face confusion, higher tax bills, and potentially a need to file amended returns after the April 15 filing deadline.

Taxing Social Security benefits

Excluding Social Security benefits from Minnesota income taxes has been a top GOP priority for several years. In 2015, House Republicans included the policy in their tax bill but phased it in over five years to spread out the $1 billion cost of fully exempting these benefits. The state still does not have money to absorb this sweeping change that would mostly benefit wealthier seniors – a 2015 estimate noted 39% of the tax benefit would be claimed by Minnesotans with income over $100,000 a year – but Senate Republicans have noted this will once again be a priority in their tax bill.

  • The DFL has not closed the door on some tax reform related to Social Security benefits. We are always supportive of ways to reduce financial burdens on our aging seniors, but we will ensure the benefits are targeted at those that need them most.
  • If we are going to commit $1 billion to the state’s senior citizens, we need to ensure the money is being spent effectively. Spending $1 billion every two years solely on tax relief that largely benefits well-off seniors exhausts state resources that could be used to bolster other important priorities, such as improved health care and long-term care options, housing assistance, or property tax relief.
  • Because Minnesota follows the federal government’s tax standard for Social Security benefits, we already forego about $489 million every two years to exempt a minimum of 15% of benefits for all recipients. In fact, many Minnesota beneficiaries don’t pay any tax at all on their Social Security benefits.
  • Generally, a married couple with an average Social Security benefit and total income (including benefits) under $44,000 does not pay taxes on their benefits.
  • In 2012, about 65% of Social Security benefits received in Minnesota were fully exempt from taxes.
    • Note: this reflects total benefits received in Minnesota are included in taxable income. On a personal basis, about 50% of Minnesotans pay taxes on at least a portion of their benefits.
  • 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 if we were to spend $1 billion every two years to fully exempt all benefits.
  • About one-third of Social Security beneficiaries in Minnesota have incomes below $50,000. However, about 88% of the tax reductions delivered by a full exemption would go to Minnesotans with incomes over $50,000. More than 39% of the tax reductions would be realized by taxpayers with incomes over $100,000.
  • 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.

K-12 tax credit

Minnesota currently offers a K-12 tax subtraction and K-12 tax credit to offset education-related costs for Minnesotans. The subtraction is available to taxpayers of any income level who itemize expenses. Tuition for non-public education qualifies for income that may be eligible for a subtraction. The credit is based on income and number of children – a taxpayer with two children cannot have household income exceeding $37,500 – and tuition payments are not eligible to be used toward the credit calculation.

Sen. Chamberlain has long been an advocate for allowing non-public school tuition payments to count toward credit amounts, and the policy was included in the 2015 House tax bill. In 2016, the Republicans offered this change as virtually their only idea for addressing the opportunity gap facing minority communities in this state. It is very likely this will once again be a priority.

  • Quick refresher: a tax subtraction reduces a person’s taxable income. A tax credit directly reduces a person’s tax liability. Some credits, including the K-12 credit, are refundable, meaning the credit amount may be added to tax refund totals and even taxpayers with no tax liability (many low-income earners) may receive the credit amount in the form of a refund.
  • Adding private school tuition to the K-12 credit is controversial and potentially unconstitutional, and would likely lead to litigation and associated costs to the state.
    • In 1983, the U.S. Supreme Court upheld the Minnesota dependent education deduction, but an earlier Minnesota tax credit that applied to private school tuition was invalidated by the Minnesota Supreme Court in 1974.
  • This proposal is incredibly expensive. A Sen. Chamberlain bill from 2015 had an estimated $52 million/biennium cost attached. Investing $52 million into public education that is accessible to everyone would have a much broader impact.

Local Government Aid (LGA) and property taxes

The vetoed 2016 tax bill included a $45 million base increase to Local Government Aid (LGA) and a $10 million increase to County Program Aid (CPA).

This was a hard-fought effort by Senate Democrats, as the former and current House Property Tax chair has made public statements decrying LGA, particularly the amounts provided to Minneapolis, St. Paul and Duluth. The House tax bill originally provided no increase in LGA or CPA and actually cut amounts to the three large cities by $85 million.

In addition to protecting LGA, Democrats may be asked to vote on levy limits. The House Property Tax Committee chairman has voiced support for restricting the ability of local government officials to increase local levies over a certain amount.

  • Democrats worked hard to invest more than $500 million into property tax relief during the past four years, including LGA increases, property tax refund increases, agricultural homestead credit increases, and other forms of relief. Last time Republicans controlled the legislature, they increased property taxes by $1 billion. We will not let them forget about homeowners, renters, small businesses and farmers again.
  • Democrats strongly believe in local property tax relief supported through the city and county aid programs. The funding helps municipalities provide quality, equitable local services across the state without relying on property tax payers to fund all of the needs.

Statewide business property tax

The 2016 tax bill exempted the first $100,000 of commercial/industrial property value from the statewide business property tax, at a cost of $31 million in 2016-2017, and $115 million in 2017-2018. This would have benefited all businesses, but especially small businesses with lower values. There has been bipartisan support for attempting this type of relief once again this year.

Republicans also are interested in removing the annual inflator on the statewide business property tax levy. A bill to do so was introduced in 2015 and cost an estimated $98.5 million in 2018-2019. Other Republicans have pushed for a full elimination of the statewide business property tax. That was included in the House’s 2015 tax bill, at a cost of nearly $1 billion a year.

  • The DFL supports property tax relief for all Minnesotans. If we pursue specific relief for businesses, we should ensure the resources are first used to ease property tax burdens on our small businesses.
    • Fully eliminating the statewide business property tax would cost more than $1 billion and would disproportionately benefit large, out-of-state businesses.
    • According to the Minnesota Tax Incidence Study (nonpartisan Department of Revenue), 53% of the statewide business property tax is paid by non-resident corporations, meaning most of the tax benefit of eliminating the levy would go to companies not headquartered in Minnesota.
    • In other words: for every $1 spent to eliminate the statewide business property tax, Minnesota-based businesses would only see 47 cents of that reduction.
  • When these types of proposals have been considered in the past, it’s been noted that the Chamber supported the tax when it was enacted in 2002 because it was coupled with significant class rate reductions. The Minnesota Chamber of Commerce predicted a 10.3% reduction in C/I property taxes resulting from the change in 2002.

Fourth income tax tier

Many Republicans have denounced the fourth-tier income tax rate of 9.85% on the wealthiest 2% of Minnesotans, but there seems to be little support for actually repealing the rate. Such a move would likely cost about $1 billion and would only affect married couples earning more than $256,511 or single filers earning more than $156,911 in 2016. Instead, Republicans could push a bill to exempt pass-through entities from the fourth tier. Those would include S-corporations or other businesses that pass income through the individual income tax system. In 2015, this effort had bipartisan co-authors in the Senate but did not make it beyond a first committee hearing.

  • Only 2.5% of Minnesota tax filers in 2014 were impacted by the new income tax bracket – the wealthiest in the state. 97.5% of Minnesotans were completely unaffected by the new income tax bracket, aside from the improved tax fairness and new tax relief for the middle-class that came along with the 2013 law changes. Any effort to undo this progressive tax change would be a giveaway to the wealthiest Minnesotans and an irresponsible use of state resources.
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