In January, Governor Dayton proposed $280 million of tax relief for Minnesotans. He focused on targeted relief for Minnesotans not yet experiencing the economic recovery and those struggling to make ends meet. Senate Republicans proposed a $900 million tax bill with ballooning costs, and House Republicans passed a $1.35 billion tax bill. In early May, Republicans independently passed a $1.13 billion tax budget with no public testimony, which was promptly vetoed.
More than half of the Republicans’ first two tax budgets benefited the wealthy and corporations. Governor Dayton and Senate DFLers insisted on more targeted tax relief for individuals and a smaller cost that would not burden future state budgets.
The legislature and Governor Dayton agreed to a $657.9 million tax bill for the 2018-2019 biennium and passed it in the May 23 special session. The bill still spends $772.4 million in 2020-2021 and its costs continue to grow, a lingering concern for many Democrats. Highly controversial private-school voucher language from previous bills was removed from the final agreement, but tobacco tax cuts were retained. Although much of the tax relief had bipartisan support, many Democrats remain concerned about the imbalance of wealthy taxpayers and big businesses receiving a majority of the tax benefits in the bill, while relief for average Minnesota families remains rather small. (H.F. 1)
Included in the final bill:
Nearly half of Minnesota households do not currently pay taxes on their Social Security benefits, but those that do now will qualify for up to a $4,500 tax subtraction ($3,500 single). Married couples earning between $32,000 and $115,300 in provisional income and single filers earning between $25,000 and $90,100 could qualify. Provisional income is Adjusted Gross Income plus one half of Social Security benefits.
Graduates working to pay off student loans are eligible for a new, $500 tax credit – a first-in-the-nation credit that Senate DFLers designed last year. Democrats added higher benefits for teachers and those serving in public service jobs; that unfortunately is not part of the final agreement. The credit is the lesser of $500 or: loan payments minus 10% of income over $10,000, earned income for the year, or the sum of loan interest payments plus 10% of the original loan amount.
Minnesota’s estate tax exemption threshold is increased from $2 million to $3 million, phased in over the next four tax years. About 1,100 taxpayers are subject to the estate tax. Small businesses and farmers already have a $5 million exclusion in current law so this bill does not provide additional relief beyond what is already available to those taxpayers.
Agricultural Bond Property Tax Credit
DFLers designed this tax credit last year, which will provide real savings to farmers who are impacted by local school bond referenda. Now, the state will pick up 40% of the property taxes linked to local levies.
Business Property Tax
The first $100,000 of commercial/industrial market value is excluded from the statewide business property tax, a proposal developed by DFLers last year. In addition, the annual inflation factor is removed. According to the Minnesota Tax Incidence Study, 53% of the statewide business property tax is paid by non-resident corporations, meaning most of these tax reductions go to companies not headquartered in Minnesota. The cost to freeze the levy also grows dramatically in the future – $192 million by 2020-2021.
Disabled Veterans Property Tax Exclusion
More surviving spouses are allowed to qualify for the current property tax exclusion and for the entire time they remain living in their home, rather than being subject to the current eight-year limit. The final tax bill also provides a window after a veteran’s death in which surviving spouses may apply for the exclusion if their spouse did not take advantage of the program.
New tax credits to help beginning farmers are included in the final tax bill. Current agriculture land owners may apply for up to $5 million in tax credits available, equal to a percentage of the sale or rental price of transferring agricultural assets to beginning farmers. Beginning farmers (someone with up to 10 years farming) will be able to access a new tax credit for participating in an approved financial management program, equal to 100% of program costs for up to three years of participation.
529 Savings Plans
The final tax bill included a provision from 2016’s tax bill, which would provide tax incentives to families saving for their children’s higher education. Those making contributions to 529 college savings plan accounts may be able to access a $500 nonrefundable credit as well as a maximum $3,000 tax subtraction for a portion of those contributions.
Dependent and Child Care Credit
Minnesota has some of the highest child-care rates in the nation. This year’s tax bill takes the Governor’s proposal to increase the current Dependent Care Credit to make childcare more affordable for more families. The income eligibility phase-out now will begin at $50,000, rather than $39,400 under current law.
High School Tournament Ticket Sales
Democrats have been working to revive a sales tax exemption on Minnesota State High School League admission sales for several years. This year’s bill includes the exemption for tickets sold to games, events and activities sponsored by the MSHSL. Savings are transferred to a nonprofit charitable foundation to promote high school extracurricular activities.
Federal Tax Conformity
Congress typically makes several changes to federal tax code toward the end of most tax years. Until states take action to update their tax codes to match federal law, taxpayers face confusion and, often times, higher tax bills. This year, DFLers worked with Republicans early in January to pass a conformity bill that delivered $21 million in tax relief to at least 220,000 Minnesotans.
This year’s bill was particularly important because it included updates from Tax Years 2015 and 2016. Taxpayers filing 2016 tax returns this spring don’t need to act – the updates are included in state tax forms. Constituents that may be affected by Tax Year 2015 updates will be contacted by the Department of Revenue later this year. No one will owe more taxes, but as many as 178,000 taxpayers will be owed additional refunds. In most cases, no action will be required by taxpayers to receive this money.
Some of the groups most likely to see additional refunds include taxpayers with tuition costs, educators with classroom expenses, homeowners paying mortgage insurance premiums, business owners, and taxpayers receiving the Working Family Credit. (HF 2)
Tax Bills that Did Not Become Law
VETOED: Tax Bill
The first Republican tax bill passed in early April and went to the Governor’s desk – without any public input – a week before adjournment. The Governor promptly vetoed the measure over its unsustainable $1.13 billion price tag, and the inclusion of numerous controversial and potentially unconstitutional policy provisions, including private education voucher-type programs.
Among the Governor’s top concerns was the bill’s ballooning cost. It would have cost $1.45 billion just two years down the road; special cuts for big businesses and tobacco companies would have spent $1.3 billion of taxpayer money over the next 10 years. That kind of spending isn’t just unsustainable – it’s irresponsible. The current-year cost of the bill ate up more than two-thirds of the state’s budget surplus and left very little to invest in education, health care, transportation, or other important Minnesota priorities. Finally, it gave more than half of the total investment to wealthy businesses and individuals. Most average taxpayers wouldn’t benefit from a single item in the bill. (H.F. 4)
Items of concern included:
Private School Vouchers
The vetoed bill included three voucher-type provisions that would have diverted about $85 million from public education funding in Minnesota:
Tax credits for corporations or individuals making donations to school foundations that provide scholarships to low-income children;
Allowing private-school tuition to qualify for K-12 credit eligible expenses; and
Allowing pre-K expenses for public or private programs to qualify as eligible expenses to claim both the K-12 credit and subtraction.
Estate Tax – Federal Conformity
The bill provided a $162 million estate tax cut for the wealthiest 1,000 estates in Minnesota by fully conforming to federal estate tax treatment. Current law already allows farmers and small businesses to claim a $5 million exemption on the state’s estate tax. The Republicans’ claims that this would help family farmers is not accurate.
Tobacco Tax Cuts
The bill eliminated annual indexing of the state’s tobacco excise taxes, costing $30 million by the next biennium. It also included a $3 million cigar tax cut that was added in the middle of the night with no public input. *These ultimately passed in the final agreement tax bill*
Business Tax Cuts
Republicans sent more than half of the tax budget – about $600 million – to businesses, including a statewide business property tax cut. The first $150,000 of value would be exempt from the statewide tax. However, the bill also froze the statewide levy at 2018 levels, which would cost the state $1 billion over the next 10 years and disproportionately benefit out-of-state building owners, not Minnesota businesses. Nearly half of this levy is paid by out-of-state corporations, meaning most of this expensive tax relief also will be going out of state.
Lack of Property Tax Relief
The bill would have yielded a 0.3% property tax cut for homeowners statewide, but commercial-industrial property owners would have seen a 23.5% reduction. By supplying just $6 million in one-time funding for LGA and County Program Aid, this bill would have increased property taxes statewide by 2019. The insufficient K-12 education funding in the vetoed education budget bill would have caused additional property tax increases in many districts around the state.
First-Bracket Tax Cut
The Senate Republican tax bill included a reduction in the first-bracket tax rate, from 5.35% to 5%. The first-tier rate is paid on all income up to $37,500 for married-joint filers. The proposal cost significant money ($400 million) but resulted in a relatively small per-paycheck tax savings. Married filers would see a maximum $2.15 savings on each paycheck if this rate cut had passed. This was not included in either tax bill.
Working Family Credit Increase
Despite being included in the 2016 vetoed tax bill that received strong bipartisan support, Governor Dayton’s budget priority to expand and increase the state’s Working Family Credit was not included in the final 2017 Tax Bill. The agreement only expanded eligibility to adults ages 21-25, an important adjustment but one that will reach far fewer people than Gov. Dayton’s proposal. This tax credit is a proven tool to lift low-income working families into the middle class, which is why it has received wide bipartisan support in the past. At least 346,000 households receive the credit. In greater Minnesota, 13.8% of tax-filing households receive the credit, compared to 11.8% in the seven-county metro area. Of the total credits paid out, 52% go to greater Minnesota taxpayers.
Debt Service Equalization Aid
Debt equalization revenue helps ensure that school districts can provide adequate facilities for their students by offsetting property owners’ relatively high tax burden in areas with low- to moderate tax bases. The Governor’s proposal would have increased the number of districts receiving debt service aid from 40 to 61, and increased the amount of aid for 38 of the 40 districts currently receiving the aid. The Republican proposal only provided one-time funding for this priority, and nothing was included in the final bill.