Who pays, who saves under the three tax plans being proposed at the Minnesota Legislature

Office of the Governor
Gov. Mark Dayton held a press conference on April 19 to discuss his proposed tax plan.

Then there were three.

With only a few weeks left in the 2018 legislative session in Minnesota, the governor and the House and Senate have all finally unveiled their plans to tackle the issue of tax conformity this year. The final piece of the puzzle came Tuesday morning, with the rollout of the Senate tax proposal, and both chambers are expected to pass their tax bills off the floor by the end of the week.

It’s taken months to get here. In December, Congress and President Donald Trump passed the biggest overhaul to the nation’s tax code since the 1980s, making major cuts to corporate tax rates while doubling the standard deduction for individuals and families and limiting personal and dependent exemptions. Unfortunately, those changes don’t line up neatly with Minnesota’s tax code, and the usually simple task of syncing the two has become one of the most complex tax conundrums state lawmakers have dealt with in years.

There’s a lot at stake: If lawmakers don’t conform some of state and federal tax code provisions, Minnesotans will be faced with massively complicated tax forms next year. If they do conform all of the state and federal provisions, hundreds of thousands of Minnesotans will be faced with a substantial tax increase.

In shaping their plans, DFL Gov. Mark Dayton and Republican leaders in control of the Legislature have applied their own political philosophies on who should pay more or less in taxes, resulting in dramatically different plans. Ideally, all three sides want to come together and pass a single plan by May 21, the Legislature’s constitutional deadline to adjourn. Here’s a breakdown of all three tax plans; who will see tax increases and tax cuts under each; and what pieces could get bipartisan support. 

THE DAYTON PLAN

The big picture: Since his first campaign for governor, Dayton has been talking about putting more of a tax burden on the state’s wealthiest residents. Now in his final year in office, his tax conformity plan continues that philosophy. His proposal would establish a new tax credit for Minnesotans who make less than $140,000 per year, or $280,000 for married filers. It would also apply a working family tax credit to more people. His plan pays for that credit by proposing a number of changes that would mostly impact businesses and corporations. Dayton also proposes delinking Minnesota’s tax system from the federal government by using federal gross adjusted income as a starting point to calculate deducations instead of the current system, which uses federal taxable income. 

Winners: According to estimates from the Department of Revenue, Dayton’s new tax credit would cut taxes an average $117 for more than 1.9 million Minnesotans, and the expansion  of the working family credit would mean $160 more for 329,000 others.

Losers: Mostly businesses and wealthier residents. About 1,000 individuals would be impacted by a proposal from Dayton to reinstate a cut to the estate tax he signed last year, and he also wants to reinstate an automatic inflator on business property taxes that was eliminated last year. Dayton’s proposal would also hit companies that have stored their profits in foreign subsidiaries with a one-time tax. 

What critics are saying: Republicans argue Dayton’s plan is too complicated and would actually raises taxes on all Minnesotans because next year he wants to continue a tax on health care providers that would have otherwise sunsetted. Dayton has said that analysis is “dishonest.”

THE HOUSE REPUBLICAN PLAN

The big picture: House Republicans said they took a simpler route to conforming state and federal tax code. Like Dayton’s plan, the proposal moves the state to a gross adjusted income system and lets Minnesota set its own rates and exemptions. But from there, bill author Rep. Greg Davids included an income tax cut for the second tier of individuals and families, lowering the rate from 7.05 percent to 6.75 percent over a two-year period. If passed, the proposal would mean the first rate cut in the state since 2000.

Winners: Those two provisions would provide a tax cut to about 2.1 million Minnesotans, Davids said. Corporate rates would also go down under the House plan from 9.8 to 9.06 over the next two years.

State Rep. Greg Davids is author of the House Republican tax plan.
MinnPost photo by Briana Bierschbach
State Rep. Greg Davids is the author of the House Republican tax plan.

Losers: About 148,000 Minnesotans would see an increase in their taxes under the proposal, Davids said, particularly those in the so-called “shock losses” category: people who experience a sudden disaster at home, like a fire, but don’t have homeowners insurance, or someone dealing with a sudden and major health issue without insurance. Previously, Minnesotans could write that off on their taxes, but those deductions were eliminated in the federal tax bill, and the House bill conforms to the change.

What critics are saying: During a debate on the House floor this week, Democrats argued that the cuts in his bill are tilted toward wealthier residents and corporations, and Dayton has said he’s worried about the fiscal impact in future budgets.

THE SENATE REPUBLICAN PLAN

The big picture: The third and final piece of the tax debate came down Tuesday morning with the Senate proposal. The key features of the bill include an income tax cut for the lowest-income families and individuals in the state, reducing the first tier rate from 5.35 percent down to 5.1 percent. The bill would also require the state to cut the state’s income tax rate and corporate tax rates by one-tenth of 1 percent if the November budget forecast show a surplus of more than $127 million and other indicators show economic growth in the state. The Senate bill, like the House and the governor, also would move the state toward the federal gross adjusted income system.

Winners: According to Senate Republicans, the proposal means 2.1 million Minnesotans would get a tax cut next year of up to $150.

State Sen. Roger Chamberlain
MinnPost photo by Briana Bierschbach
State Sen. Roger Chamberlain speaking on behalf of the Senate Republican tax plan at a press conference on Tuesday.

Losers: About 470,000 Minnesotans would see no change in their tax returns at all, according to senators, but roughly 2,500 Minnesotans would see a tax increase under the bill of up to $150. 

What critics are saying: Some testifiers, including the Dayton administration, have criticized the automatic tax reduction piece of the proposal, particularly in terms of the long-term stability of the budget. They say automatic income tax cuts could reduce the amount of money in the state budget for things like education or health care.

Comments (7)

  1. Submitted by Max Hailperin on 05/02/2018 - 09:59 am.

    But what is the overall revenue impact?

    Thanks very much for putting together this helpful summary. However, it is missing one key piece of information we ought to have about each proposal: what the net impact would be on the total state revenue. There are lots of important things for the state to do that it apparently already has inadequate revenue to do.We need to look beyond specific winners and losers at any tax proposal that isn’t revenue neutral.

  2. Submitted by Joel Stegner on 05/02/2018 - 10:55 am.

    Revenue impact

    The federal plan substantially reduced tax revenues. The federal government can run deficit, the State of Minnesota cannot, unless one runs Pawlenty style shell games such as ignoring road maintenance, “borrowing” money from school and stealing the tobacco settlement fund.

    How likely is it that Dayton more careful about preserving the rainy day fund, at a time when the stock market is wavering and interest rates are going? Does federal conformity mean estate taxes for billionaires are chopped? With Republican proposals what to do you think? If Republican don’t temper their plans, I sense a veto coming.

  3. Submitted by Ray Schoch on 05/02/2018 - 11:00 am.

    I’m inclined

    …to agree with Max Hailperin. All three parties to Minnesota tax revision are going to suggest, at the very least, that their plan is “better” than the others, but Minnesota is not going to be transformed from a high-tax state to one where there are no state income taxes. There ain’t no free lunch. It’s still going to be a high-tax state, and my primary interest, in line with Mr. Hailperin, is the overall effect on **state** finances from each plan if it were to be implemented as written. My guess is that Briana has not skipped over that little data tidbit. More likely is that it’s information not yet available from all three parties, and it’s conceivable that they themselves don’t have all the details fleshed out.

    Minnesota already suffers from underfunded roads and bridges, and chronically-underfunded public schools and colleges, so while I’m understandably not enthused about leaving things as they are if it’s going to be a nearly-$500 hit on an already-high tax bill, I’m also not much interested in a tax cut that might net me $150 – hardly life-changing, even for a fixed-income retiree – while schools and roads and other state services are starved for funds.

  4. Submitted by Patrick Tice on 05/02/2018 - 11:43 am.

    Dayton’s Plan

    …is reviewed per the Department of Revenue. Not so the two GOP plans, which are glowingly described by their authors. This is a consequence of the legislature once again fiddling around with things like punishing poor people for needing M.A. instead of getting their act together and doing the budgeting from day one. This, coupled with the same inept lawmaking of Congress in the new tax bill, leaves everyone scrambling to figure things out and virtually guarantees yet another special session.

  5. Submitted by John Ferman on 05/02/2018 - 12:43 pm.

    Conformance Performance

    The problem to be solved is so simple it is surprising the ‘Lege’ didn’t see it. All they had to do is restore the exemptions and deductiobs the Feds took away. Just make a State Schedule A – Deductions. Instead the Lege has just been tinkering away at the edges. Renember Feb – May next November.

  6. Submitted by Bill Willy on 05/02/2018 - 07:33 pm.

    This is not a fairy tale

    Paul Ryan:

    “Simplifying the tax code has been the goal from the beginning of this extensive process, which began as early as 2011 when House Republicans started to work on legislation that would replace our broken code.”

    https://paulryan.house.gov/issues/issue/?IssueID=12228

    “Think about that sense of dread you feel around tax season. Really think about it. The long complicated forms. The endless deductions. The seven different tax brackets. The uncertainty. The IRS.

    “Now imagine filing your taxes on a form the size of a postcard. Imagine fewer, more simple deductions. And imagine three brackets instead of seven.

    “This is not the stuff of fairy tales. This will be the reality if we finally reform our broken tax code.”

    Here’s what Paul Ryan, the president and Republicans said our new “Simple, Fair Postcard Filing Form” will consist of:

    1) Wage and compensation income ________

    2) Subtract contribution to specified savings plans ________

    3) Subtract standard deduction OR

    4) — Subtract mortgage interest deduction ________

    5) — Subtract real property tax deduction ________

    6) — Subtract charitable contribution deduction ________

    7) Taxable Income ________

    8) Preliminary tax (from tax table) ________

    9) Add tax on investment income ________

    10) Subtract family and child credits ________

    11) Subtract earned income credit ________

    12) Subtract higher education credit ________

    13) Total tax ________

    14) Subtract taxes withheld ________

    15) Refund due / taxes owed ________

    https://www.speaker.gov/general/file-your-taxes-form-size-postcard

    With something so simple being passed into law it’s hard to understand why it has taken all year for MN House and Senate Republicans (and, it seems, everyone else in the state) to figure out how their new, improved and, above all, SIMPLE, tax plan works.

    How could it be possible we’re just three weeks from the end of session and still have “three dramatically different plans”?

    1) Tax credit for those making less than $140,000 per year, $280,000 for married filers? Delink MN’s tax system from the federal government? Average cut of $117 for 1.9 million Minnesotans, $160 more for 329,000 others? Republicans think that’s too complicated?

    2) The “simpler route”: Set our own rates and exemptions? Cut second tier from 7.05 percent to 6.75 percent? Corporate rates go down but “shock losses”? Tilted toward wealthier residents and corporations? Worrisome fiscal impact? First rate cut since 2000 (the biennium just before MN entered a 12 year flaming nose-dive into the Pawlenty Swamp of Endless ($4.5 to $6.2 BILLION) Deficits, exploding year-on-year property taxes, heavy borrowing from MN kid’s educations, reserve and all other available accounts raided and emptied, imposition of non-tax “fees,” etc.)?

    3) Reduce first tier from 5.35 percent to 5.1 percent? Automatic cuts to income tax and corporate rates by one-tenth of 1 percent if November forecast shows a $127 million surplus? (One tenth of one percent? Really? What IS that? And it would be “automatic”? Eye yi yi.)

    And there we have it: Three weeks to go and that’s what we “informed voters” have to work with when it comes to figuring out how all that MIGHT impact our taxes. Three weeks to let our elected representatives know what we’d like them to do, based on how we figure the “Fair, Simple and Passed Into Law” Ryan / Republi tax bill will dovetail (“Like smokin’ hot butta”) with some hard fought, wee hours, end of session blowout blend of options 1), 2) and 3) or maybe none with a veto.

    And, as mentioned, for all that, no idea how any, some, all or none of the above (plus P Ryan’s life’s work product) might impact future state finances (with the Master of Trade Wars and Bankruptcy at the helm).

    It’s like being forced to watch an old, bad episode of “Let’s Make a Deal” (that doesn’t end and you can’t turn off!) on an ancient television with bad reception.

    How oh how did such a beautiful work of Fair Simplicity “become one of the most complex tax conundrums state lawmakers have dealt with in years” and how could it be possible that Minnesotans could be “faced with massively complicated tax forms next year”?

    Where oh where is the Minnesota version of the “Fair, Simple Postcard Filing Form”?

    What oh what is wrong with Republicans?

    Why or why can’t they understand or deal with their own plan?

    Could this be a graphic example of what Paul Udstrand’s always saying about incoherence?

    “This is not the stuff of fairy tales. This will be the reality if we finally reform our broken tax code.”

    No . . . This is not a fairy tale. It has become reality because Republicans have finally reformed our broken code!

  7. Submitted by John Ferman on 05/06/2018 - 10:59 am.

    Why three complicated tax bills

    The problem was simple: Restore That Which Congress Took Away. Put back personnal exemptions – that $4000+ means everyone gets hit twice Fed & State level. Restricted deductions – put back. All they had to do was take IRS Shedule A and turn it into a State deductions form. The three monstrosities are just that – produced by elected fools.

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