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Minnesota lawmakers say they have a deal on what would be largest tax cut in state history

The tax bill is a major part of a so-called “4-4-4” deal to spend $4 billion of Minnesota’s historic surplus over the next three years on tax cuts, $4 billion on new spending and leave $4 billion remaining in reserves.

DFL state Rep. Paul Marquart and Republican state Sen. Carla Nelson announced the deal at a joint news conference on Saturday.
DFL state Rep. Paul Marquart and Republican state Sen. Carla Nelson announced the deal at a joint news conference on Saturday.
MinnPost photo by Walker Orenstein

Minnesota lawmakers have agreed to what they say is the largest tax cut in state history.

But it may only happen if the Legislature can strike a deal on, well, dozens of other issues before they are set to adjourn at 11:59 p.m. on Sunday.

On Saturday, House and Senate leaders announced a final tax bill, a major plank in their so-called “4-4-4” deal to spend $4 billion of their historic surplus over the next three years on tax cuts, $4 billion on new spending and leave $4 billion remaining in reserves.

Negotiations are ongoing on the last of those “4s,” which includes roughly $1 billion for education, $1 billion for health and human services and $450 million for public safety. House Speaker Melissa Hortman has said she will not move the tax bill “until everything is done.” A special legislative session is uncertain if lawmakers miss the Sunday deadline.

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“We must not let this transforming, historic tax bill be held hostage by many of these other things,” said Sen. Carla Nelson, a Rochester Republican who chairs the Senate’s Taxes Committee, imploring lawmakers to reach deals. 

“All the parts of the agreement have to be completed,” said Rep. Paul Marquart, a Dilworth Democrat who chairs the House’s Tax Committee.

The final tax bill, for the record, is only about $3.88 billion.

The plan would eliminate a state tax on Social Security benefits, which has been a priority for the Republican-led Senate. It also expands and simplifies a credit for renters, which was a top priority of the DFL-majority House. And it expands a child tax credit, trims taxes on the first tier of income taxes and slashes property taxes.

Social Security tax eliminated

At a high level, the bill is made up almost entirely of income tax cuts. A smaller portion of the bill is property tax reductions.

The priciest item is the repeal of the state income tax on Social Security. It’s expected to reduce Minnesota tax collections in the current budget by $509.6 million and slash collections in the next two-year budget by another $1.12 billion.

Right now, Social Security benefits are taxed by the federal government depending on the overall income of a taxpayer. Only 13 states collect any taxes on Social Security, though Minnesota and many others do exempt people at lower income levels.

About 55 percent of the 400,000 people who receive Social Security in Minnesota don’t pay taxes on the benefits. Eliminating the state tax on benefits would mostly help taxpayers who have $100,000 or more in total income, the Senate has estimated.

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That Senate analysis says people with incomes between $50,000 and $75,000 each year would save each year an average of $733. People with income over $500,000 would save $2,397.

Republicans and some Democrats had pushed for the repeal of the state’s Social Security tax by saying it would help seniors and remove one of the reasons retirees flee Minnesota.

Nelson said Minnesota should join the majority of states that don’t tax the benefits. “Minnesota seniors are never again going to see their social security checks taxed,” she said.

For Republicans, the tax elimination — and other cuts in the bill — fulfilled a promise at the start of the year and their near-constant refrain for Minnesotans to get “permanent ongoing tax relief.”

Marquart, left, and Nelson, second from left, signing their conference committee report.
MinnPost photo by Walker Orenstein
Marquart, left, and Nelson, second from left, signing their conference committee report.
Many Democrats had opposed a full elimination of the Social Security tax, saying it benefited mostly wealthy retirees. The House’s budget plan had proposed raising the income threshold for when people receiving Social Security benefits would need to pay taxes for it. (At the DFL’s state convention in Rochester on Saturday, several delegates without knowledge of what was happening in St. Paul stood to urge the party to oppose the elimination of state taxes on Social Security income.)

Marquart played down that concern, saying other DFLers like Rep. Dave Lislegard of Aurora had pushed for the full repeal this legislative session. “That was always a priority,” Marquart said. “The matter was always cost.”

Also in the bill: renters credit, income tax cut, child credit

The second-biggest item in the tax bill is a DFL priority: expanding and simplifying a tax credit for renters.

Under the plan, lawmakers will create a refundable income tax credit for renters to replace the existing refund, which is part of property tax law. Currently, families with incomes of $68,000 or less can get a refund equal to 17 percent of their rent paid. But those taxpayers must fill out a separate application for a refund paid in August.

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The new version makes the credit part of the income tax filing. Marquart said that simplification will increase the number of people taking advantage of it — from 318,000 applicants to 438,000. By shifting to the income tax, a taxpayer’s adjusted gross income — their taxable income — will be used to determine eligibility, not total income as with the current separate refund filing. That will make more taxpayers eligible for the credit, as will the changes to Social Security taxation. The income changes will make another 36,000 taxpayers eligible.

All of those changes will cost the state about $670 million over the next three years, including roughly $372 million in the current budget.

The agreement also increases the homestead property tax refund and sends $60 million to all but the wealthiest school districts to buy down their school levies on a dollar for dollar basis. The same bill also addresses local government aid (LGA) and county program aid — a complex system of sending money to cities and counties for operating costs and to help keep property taxes lower. The LGA distribution will increase by $30 million, to $594 million, and the county program aid will also increase by $30 million, to $280 million.

Another measure celebrated by lawmakers is a reduction in the lowest income tax tier from 5.35 percent to 5.1 percent. That is expected to reduce state collections by $666 million over three years. It is far less than what Senate Republicans had initially proposed, a cut from 5.35 percent to 2.8 percent.

Legislators estimate the average family will get a tax cut of $103 per year, or roughly $4 a paycheck, but it will affect all tax filers.

Lawmakers also plan to approve a tax credit to help families with children and dependents. Families will receive a $2,000 refundable tax credit for each child age four or under. Refundable credits provide that money to taxpayers regardless of whether they have state tax liability. 

The bill also includes an expanded K-12 education tax credit, extends the historic preservation tax credit and, perhaps more importantly for the preservation community, removes a sunset provision on the state program used to help pay for the reuse of historic structures.

In all, Nelson said it was legislators’ duty — amid high gas prices, “staggering” inflation and rising food costs — “to get these resources back into the hands of Minnesotans to help them better afford their lives.”

Marquart said the bill is “going to positively impact in a real and meaningful way families and senior citizens and businesses across the state.”

Lawmakers did fund one-time rebate checks as proposed by Gov. Tim Walz.

“Crunch time” for lawmakers

Marquart and Nelson announced the deal at a joint news conference Saturday, and they started that event by signing a copy of the tax bill. But they also noted their signatures on a desk in the basement of the Capitol aren’t enough to get the bill to Walz’s desk.

And though House and Senate leaders have struck deals on some smaller bills dealing on issues like higher education, many others issues remain at an impasse.

One bill particularly at risk of failure is on education, where a tense committee meeting on Sunday ended with Republican Sen. Roger Chamberlain gavelling out the session while his counterpart in negotiations, DFL Rep. Jim Davnie, was still talking.

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“We don’t have days and days we hardly have hours,” Chamberlain said. The GOP wants to use most of the $1 billion agreed to reimburse districts for special education costs that most districts currently pay for with general education dollars. The House wants to use more of the cash on other priorities like mental health grants. “We will not take another dime from special ed,” Chamberlain said.

Senate Majority Leader Jeremy Miller, R-Winona, said earlier Saturday he thinks all the remaining bills “are within reach,” and said he’s still optimistic. He said he doesn’t want an extension from the governor and hadn’t heard anything indicating Walz would be open to calling a special session, anyway. 

Senate Majority Leader Jeremy Miller confirmed the basics of the tax deal and said the remaining bills are “within reach.”
MinnPost photo by Walker Orenstein
Senate Majority Leader Jeremy Miller confirmed the basics of the tax deal and said the remaining bills are “within reach.”
“It’s crunch time right now,” Miller said. “Time is short. If this is going to get done it has to get done as quickly as possible.”