The governor doesn’t like the idea. Neither does the Speaker of the House. And the Senate Majority Leader is certainly not a fan.
So that means Minnesota Democrats, who control the Legislature, won’t eliminate a state tax on Social Security benefits, right? Not so fast.
Two months into the legislative session, Minnesota lawmakers now have a clear picture of the state’s finances and are beginning to shape their plans for a two-year budget using — depending on how you count it — a massive $17.5 to $19 billion surplus.
But debate over ending the Social Security tax is far from settled. And the question has pitted Gov. Tim Walz and other DFL leaders who want to scale back the tax against a handful of Democrats who favor a repeal, including several who campaigned on eradicating it from state law and were crucial to the party’s new one-vote Senate majority. Republicans also broadly support a repeal.
As the DFL has advanced a progressive agenda so far in the legislative session, passing things like abortion rights protections and a clean energy law, they have appeared remarkably united despite their narrow majorities. The Social Security tax has been the highest-profile example of a split within the party.
After an economic forecast on Monday that revealed a larger-than-expected surplus, Walz said he still is against eliminating the tax entirely because it would slash collections from the wealthy. “All the angst over people making millions of dollars, trust me they will be fine,” Walz told reporters.
But Senate Majority Leader Kari Dziedzic, DFL-Minneapolis, said her caucus is still considering a full repeal of the tax, especially since Democrats will need all 34 votes to pass a broader tax plan in the Senate if the party receives no GOP support.
“The first bill that was heard in the tax committee was the Social Security exemption,” Dziedzic said, indicating its status as a priority for Senate DFLers.
[image_caption]State Sen. Aric Putnam[/image_caption]
“I would say it’s not dead,” Putnam said.
Competing Social Security proposals
In 2019, about 795,000 Minnesota households had Social Security income, according to the Minnesota Department of Revenue. While roughly 56% paid some federal tax on those benefits, less than half, about 46%, paid some Minnesota tax because their overall income met a certain threshold.
Those numbers are expected to change, however. Newly updated state projections expect that in 2024, about 877,800 households in Minnesota will have some Social Security income. And a slim majority, 52%, will now pay some Minnesota tax on those benefits without a change in law.
It’s important to note that any state cuts will not get rid of the existing federal taxes on Social Security. The state estimates 63% of Minnesota recipients will pay some federal tax in 2024.
Fully eliminating the Social Security tax would cost lawmakers roughly $1.26 billion in the current two-year budget and another $1.5 billion in the next biennium. State budget documents say the average tax cut would be $1,276.
Putnam said roughly half of tax returns impacted would be tied to filers with a federal adjusted gross income of less than $100,000, which may include two people. However, in 2019, a Senate fiscal analysis found the bulk of the money going back into people’s pockets after a tax repeal would help taxpayers with $100,000 or more.
“I know what some of us are thinking: That means a lot of rich people are going to get this benefit,” Putnam said in the January Taxes Committee hearing. “Let’s be grown ups rather than partisans and admit that is true.”
However, Putnam said there was still merit to the idea, and urged lawmakers to “not let a modest benefit for the wealthy make us throw out the middle class baby with the wealthy bath water.”
“Sure, the rich will get a little bit,” he said. “But beyond the numbers, that change will be felt much more profoundly by our friends in the middle class.”
Walz’s plan is more modest. He would raise the threshold for when seniors are taxed for an average reduction of $278. Administration officials estimate the plan would cost significantly less: a total of $219 million in the upcoming two-year budget and another $249 million in the following biennium.
“You are getting probably about 90% of the seniors now who receive a social security benefit would pay no taxes at all, or at least see some sort of a tax cut, under Minnesota law if this was to pass,” said Paul Marquart, commissioner of the Department of Revenue, in a House committee on Tuesday.
House Speaker Melissa Hortman has cautioned against a full repeal, too, not just for its benefit for the wealthy. She has described eliminating the tax as having “exploding tails,” which is legislative-speak for something that will become more expensive in the long run considering Minnesota’s aging population.
About $12.5 billion of the $17.5 billion surplus is leftover money from the last two years and isn’t expected to continue in the future. That means legislators have a smaller share — though still large by historic standards — to enact plans that will cost money down the road. And there are plenty of competing DFL proposals for that cash. Repealing the Social Security tax would eat up a quarter of the “structural” surplus that will carry forward into future years.
Support in the Senate
Still, in the Senate, four new lawmakers who won crucial elections campaigned on eliminating the state tax on Social Security benefits. And even though he was an incumbent, Putnam won a close race in St. Cloud while supporting elimination of the tax as well.
That makes the Social Security bill a political sticking point already, something Republicans have been happy to point out as they crusade for full elimination. “That is something that both parties campaigned on,” said House Minority Leader Lisa Demuth, R-Cold Spring. “That is something that could be a priority. We should have already gotten this done.”
As he introduced the repeal bill in January at its Taxes Committee hearing, Putnam said “We’ve made promises.”
But support for the large tax cut is not limited to those five swing-seat Democrats. A handful of other DFLers — including Sens. Matt Klein of Mendota Heights, Bonnie Westlin of Plymouth, Nick Frentz of North Mankato, John Hoffman of Champlin and Erin Maye Quade of Apple Valley — have either sponsored a bill to fully repeal the tax or have publicly supported it. Even Rest, the Senate Taxes Committee chair, is in favor.
That 11-member contingent is a sizable portion of the 34 total Democrats in the state Senate, where the party holds just a one-vote majority. There are House DFLers who support the idea, too. One bill sponsored by Rep. Dave Lislegard, DFL-Aurora, has 11 Democratic cosponsors, including some in swing districts. But it has not received a hearing in the House, where leaders seem less keen on backing a full repeal. Democrats hold a 70-64 majority in the House.
Putnam said Tuesday that his support for the bill is partly about politics. It was not just a big issue in his campaign, but the top one, he said. People talked about it constantly, Putnam said.
The St. Cloud Democrat also said the tax is extremely complicated, and so the idea of raising an income threshold for who has to pay state, but not federal taxes, is difficult messaging for people who feel getting rid of it is a fairness issue.
Still, Putnam maintains eliminating the tax would show respect toward people, even the wealthy, who worked to gain Social Security benefits. “It’s more than a math problem,” he said. “It’s also about people who worked their whole lives and they want to feel like that work is respected.”
Walz on Monday confined his comments to the rich — and to Republicans. Last year, when the GOP held the Senate, Walz and House Democrats agreed to repeal Minnesota’s Social Security tax as part of a larger tax cut plan. But they never approved the deal, instead squabbling about other issues. The governor said Republicans walked away from the agreement in hopes of winning control of the Legislature, something the GOP has denied.
“That deal had a shelf life,” Walz said. “They chose to roll the dice, and they lost.”
But it’s Democrats that Walz will have to negotiate with on the issue at the Capitol in St. Paul. Walz spokeswoman Claire Lancaster said the governor wouldn’t veto a bill to repeal the Social Security tax if it reached his desk. But a bill reaching his desk without approval is an unlikely scenario since DFLers plan to hash out disagreements before passing any budget.
Putnam said it’s “tough to speculate” whether he would vote for a compromise tax plan in a deal struck by DFL leaders that doesn’t fully repeal Minnesota’s tax on Social Security benefits. “There would be lots of different variables I would have to consider like the size of the repeal, the other stuff that’s in the bill,” Putnam said.
5 DFL’ers campaigned on eliminating the SS tax but then voted against it having a hearing. Go figure.
My guess is that the more conservative Democrats will hold some other legislation hostage in order to get the SS tax eliminated. I think this is a foolish. These folks should be spending their time helping their constituents understand that the SS tax is only for wealthy Minnesotans who can easily afford it. This is a framing issue more than a policy issue, in my opinion.
Define wealthy. 2 people on 100,000 gross, who owe a mortgage and have to pay at least 4-500 per month for health care, not to mention paying federal tax on the 100,000 or 100, 100 is not wealthy to many. For a single person, it sounds like it is in the below 70,00o range for no ss tax on this plan, which again many given the cost of living is out of date. Many seniors owe rent or a mortgage, have limited funds and then have to pay increasing health costs. And they often make a bit too much to qualify for senior reduction on property taxes. Politicians tends to be woefully out of touch on cost of living numbers. I think this why dems are going to struggle in future elections. As a democrat, I agree with many of their proposals, but can’t afford to keep paying for them.
I am not against raising the limit or finding ways to deduct costs of living for lower-end earners if it means wealthier Minnesotans continue to pay taxes on social security income. My main gripe is that we have a tax system that does not ensure that rich people pay their fair share, and I believe using low-end examples obfuscates the fact that those on the high-end would also escape the tax if it is abolished. Just as another example, millionaires are already done paying social security taxes for the year because we put a cap on the percentage they pay. Doesn’t that seem outrageous? The situation of a 70K individual or 100K couple is not the same as a millionaire’s and the tax system should reflect that. https://cepr.net/wage-cap-allows-millionaires-to-stop-contributing-to-social-security-on-february-28-2023/
I think that defining “wealthy” is a big part of the issue for many aid programs. To be consistent, we should tie elimination of social security taxes to the income-related monthly adjusted amount (IRMAA) used to identify who should pay higher Medicare premiums.
For 2023, the IRMAA are $97,000 for a single person and $194,000 for a married couple. Going forward, the Modified Adjusted Income requirements continue to be adjusted by inflation (CPI).
Let’s just tie the tax elimination to IRMAA income limits and put this issue to bed.
The maximum social security benefit is $3800 a month or $45000 a year. That is not “rich” by any means, and that’s at the maximum benefit. No one is getting rich off of social security. Plus there’s the fact that in order to collect social security these folks had to have worked and paid into it, in a lot of cases they worked a job all their life and this is all they have to show for it. And since when do we consider someone making $100,000 a year “rich”.
If you are getting the maximum benefit, that means you earned a lot of money during your time working.
That means you probably have a large pension or 401(K).
About 90% of Social Security benefits receivers earn far less than $100,000. Most recipients don’t have anything else but those benefits to live on.
It’s a safety net. Those earning $100,000 or more in retirement don’t need a safety net.
Where is there an argument that justifies letting the wealthy pay no state taxes on their Social Security benefits? All I see in this discussion is some whinging, with a dollop of “Mommy, that’s not FAIR!” Along with basic mistakes about Social Security being a kind of retirement savings account, rather than a safety net for those most in need of help.
People who pay MN taxes on those benefits are comfortable. In fact, it seems they have nothing really worthwhile to complain about in society. Their anti-tax pleas are simply that, and a big embarrassment.
Social Security is not a “safety net” it is a retirement income program. The federal government takes 14% of your gross pay for the entire time you are working, and when you retire they pay you a small amount back. Benefits are capped at $3800 a month max so no one is getting weathly off of Social Security. I’m not embarrased to be asking to keep a little bit more of my hard earned money for myself, as I worked for it with my own labor for many years. (I could be persuaded that lowering the sales tax would be prefferable, but I haven’t seen anyone proposing that.)
A safety net tries to provide you enough money to have an inexpensive roof over your head and–maybe–eat for the entire month and pay for minimum healthcare.
And those who really need it don’t get the Social Security maximum benefit because they didn’t earn much money while they worked full time. You have to earn over $160,000 per year to pay in the maximum Social Security tax. Nobody ih the 90% of recipients earned anywhere near that much in their working years, and they probably didn’t have the discretionary money to fund a tax-deferred retirement account. Most of them lack any savings and many don’t own property.
i can’t believe people still think of Social Security as an IRA or a Roth or a 401(k)! Or that the elderly aren’t poor any more.
I concur, John: My net Social Security income (post Medicare) is $2204.00, and comprises 90% of my retirement income. Regardless of the impact on “the rich”, Minnesota needs to STOP taxing this critical income for those of us in the lower income strata. Much as I love this state, it is becoming increasingly evident that I may not be able to afford to remain here for my remaining years…
Lots of tax relief proposals but nobody is suggesting we lower our sales tax rate, which is one of the highest in the nation. Sales tax relief is both broad (everyone pays it) and targeted (poor people benefit the most) as well as helping local small businesses (lowers the cost of goods sold).
Nope – the DFL certainly isn’t doing that. This is just more proof that, while there are some moderate DFLers that know the state has too much money, most of the elected DFL is addicted to the money and just want to keep it. After all, look at all the permanent spending they want to do. They don’t pay for it, we do.
Maybe we should look at what our neighboring states are doing. Wisconsin, Iowa, North Dakota, South Dakota…. none of those states tax Social Security.
Why in the world would we want to be more like those states? What is even the point of this argument?
South Dakota makes up for it by sales taxing food at the grocery store.
After so many years of legislation, lobbying and campaign contributions, we have a body of laws and attitudes that favor the wealthy.
Social Security withholding doesn’t need a wage base limit, and it is the only withholding tax that has the maximum wage that’s subject to the tax for that year.
The wage base . For earnings in 2023, this base is $160,200.
Anyone who was mostly self-employed in their working years knows we paid both the employers and the employees share plus a Medicare withholding. It was much more difficult to pay than income taxes in those early years.
Nevertheless, one should not take their eyes off the many ways the wealthy avoid paying equitably, due to our history and their power over legislation.
Favoritism has its place. Lifting the base limit hurts no poor people or children, and it will stabilize SS and Medicare to allow the wealthy to pay the same percentage as the rest of us.
Correct but that’s a federal issue not a state issue.
Isn’t the real issue that in spite of over taxing its citizens by $19 billion , Democrats are not talking about any meaningful tax reductions …. or in the case of SS are back tracking on promises made to get elected.
Something that is barely mentioned is the Republican proposed 1% reduction in the tax rate on the first two levels of income. What’s the argument here ….. because the wealthy benefit too ?
The Democrats plan is to spend it all while proposing tax increases. They believe they need it more and know how to spend it better than you do.
You pay in for years and they give you your money back, that’s the deal. 37 states have figured out how to get along without taxing 65 year olds for their Social Security payments. Of course Minnesota is one of the 13 states that tax Social Security. Just another reason high earners are leaving the state.
Joe, your simplistic and naive calculation ignores the disability and survivor benefits. For you to make an accurate calculation, you need to factor in those benefits, and what you’d have paid for life and disability insurance policies from private insurance companies.
When I have calculated the life insurance needs of my wife and I, the first thing I have always done was to go to the SS website, and see what we could expect in the way of survivor payments the widow (or widower) and our children would receive. Typically, that has allowed us to buy policies with a payout about 50% less than otherwise. My $300k policy was a lot cheaper than the $600k policies I otherwise would have needed.
Frank, we are talking about taxing Social Security not what you can do with your social security. If Minnesota did not tax your SS money could you get the same policy?
I know that it won’t happen, but in order to repeal the state tax on Social Security it only takes one DFL Senator (along with all the GOP Senators who are on board) to get through the Senate. In the House it would only take seven DFL House members (and there are 11 co-sponsors for such a bill) along with all the GOP Representatives who are on board to get through the House. The Governor won’t veto such a bill and it is done. Won’t happen, but it wouldn’t be hard.
Funny thing about the wailing and gnashing of teeth that some rich people might get some benefit from not having to pay the tax. We’re fine giving their kids two free meals a day at school.
Majority leaders and committee chairs have a big say on whether or not bills even get to a vote.
Which is why I say that it won’t happen.
MinnPost is doing it’s readers a disservice by running another article that neglects to tell us just how the current law works. At what income level is SS taxable, for both married and single filers?
Also, is adjusted gross income the figure in question? AGI less SS payments?
Those filing as singles start paying tax–both federal and MN–on their Social Security benefits if they earn an AGI of more than $25,000, before any taxes. There are worksheets to figure this out.
Then, instead of 50% of benefits, your AGI includes 85% of benefits, and you pay tax on 85% of your SS benefits.
So, if your benefit filing single is $24,000 and you have any other income–a pension or 401(k), stock dividends and capital gains, annuities, bond interest, an IRA and a Roth IRA–you pay tax on 85% of that $24,000, or $20,400. If your AGI is in the six figures, as a single you’re paying a lot, both federal and state, in taxes on SS benefits, but how much depends on what percentage of your AGI that SS benefits represents.
But taxing that benefit is never going to break your fiscal bank, folks, if you’re up in the six figures. I can’t understand the resistance, except for pure anti-tax ideology.
People who have nothing more than the Social Security benefit in retirement income don’t pay anything on it in federal taxes although MN taxes them at 5.25%. In my view, that’s outrageous, and should be eliminated.
We should look out for those at the bottom of the income scale.
“People who have nothing more than the Social Security benefit in retirement income don’t pay anything on it in federal taxes although MN taxes them at 5.25%. In my view, that’s outrageous, and should be eliminated.”
The tax worksheets for SS benefits are mind numbing. I think you should check out the “Social Security Taxation Calculator”, at
https://www.house.mn.gov/hrd/socsectax.aspx
I put in several examples with zero income other than Social Security, including 80,000 for a married couple filing jointly, and still came up with zero tax.
The MN House Research “Taxation of Social Security Benefits in Minnesota ” at
https://www.house.mn.gov/hrd/issinfo/sstaxes.aspx?src=20
features a graph using an example of a married couple, $32,600 combined Social Security Benefits, tax year 2020.
According to their graph, no fed NOR STATE income tax on “provisional income” up to about 50-thousand.
Provisional income = “gross income, tax-free interest, and 50% of their social security benefits. ”
The “federal exclusion” flows through to the Minnesota calculation.
Me thinks your statement about ‘outrageous’ MN taxes is incorrect.
Tax accountants who live in that world, please comment.
From the Strib article “Minnesotans need a break, but not on Social Security”, Feb 26, 2022
“Under current law, a couple drawing $40,000 total in Social Security benefits could add $25,427 in other income before owing a single dollar of Minnesota income tax.”
“Most of one’s Social Security benefit is, in effect, a previously untaxed return on one’s contributions. There is, in short, no double taxation of Social Security.”
A state tax on social security benefits in MN just gives another reason for Minnesotans to retire and establish residency in states that don’t tax social security. Then MN also loses any tax on other income as well. Just saying…
Such a tired and old and unproven argument. If someone can afford to establish a second residence in Arizona or Florida, they certainly aren’t doing so because of the relatively minuscule amount (to them as they would have to be pretty wealthy to afford a second residence) of state tax they would be paying on social security.
The issue is always the fairness of why bears the tax burden. Our highest income households already benefited from low Social Security tax percentages. They pay no tax on non wage income, the tax is flat (indifferent to living expenses) and is capped. On total income, wealthy people may pay only 5-10% of the percent of only those with wage income only. The goal of many wealthy people is to avoid paying any
Income tax. Trump called it smart and many agree. Let others pay for our military, law enforcement, roads, product safety, prisons. We do not need to provide anymore assistance to the tax avoidance of the wealth. It is a matter of priority. We can chose to underinvest in poor children and struggling college students, or use tax dollars to enlarge the bank accounts of trust fund babies who whose’s future is guaranteed regardless of what kind of contribution they make. Not a hard choice.
Walz: “I don’t think those at the top of the line — millionaires and billionaires — are concerned about the Social Security tax,” Walz said, suggesting that he would support cutting the tax for 90 percent of Social Security recipients, but not for the top 10 percent of earners.“
Those commenting that under Walz’s plan couples earning over $100,000 will still be paying state tax on SS are incorrect. $100,000 is not even close to the top 10% of incomes in MN. Walz is literally talking about millionaires and billionaires paying state tax on SS benefits. In what universe does anyone believe millionaires and billionaires need the relatively minuscule (to them) SS tax relief?
Let’s set aside the ‘double taxed’ argument. SS is not a retirement savings account, it is a social safety net. If it was intended to be used as a mandatory personal savings system, it would have been a setup as such. In addition to a base level of retirement income for ex-workers it also covers those who’ve never worked, widows, disabled and dependents.
Over their lifetimes, most people get more from Social Security and Medicare (which is also partially funded by payroll tax contributions) than they pay in, according to analyses by the Urban Institute.
Further reducing taxes on SS income unfairly shifts the tax burden to younger workers. Why should a retired couple with $100K income from SS + untaxed savings pay less of a share in state income tax than a young working family with the same $100k income?
All income should be taxed the same whether its W2 income working multiple jobs, Cap gains income selling appreciated assets or SS/Retirement income. The tax burden should be shared fairly within income levels regardless of age.
Social Security income shouldn’t be taxed – it makes absolutely no sense that it is (nor does it make sense that tax refunds are….I mean, what???). But then, I think SS should be treated like a safety net, as originally intended, not a retirement plan. And there should be no maximum income on which to contribute to Social Security. I’m saying this as someone who #1, is increasingly unlikely to get a full SS distribution when I retire (or even live long enough to get SS) because the fund has been raided by the government in service of the Boomers, #2, has hit the max in the past (but probably won’t this year since they bumped up the max), and #3 might not qualify for SS if it were to be treated as a safety net because I hope to have a healthy 401k. That said, I don’t know what a safety net-only treatment of SS would look like, honestly, since treating SS as a safety net would require workers and employers to also contribute to a private retirement fund, as well. And frankly, the move toward 401k’s instead of pensions put a lot of risk on workers. I want to be clear that I do NOT think SS should be privatized. Especially in a climate with poor regulation, like now, where financial institutions are pretty much free to act only in their own best interests without any consequences (bank bailout, anyone???).