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A full repeal of Minnesota’s Social Security tax now unlikely after Senate DFL concedes to a partial cut

DFL Senate leaders say they are mostly aligned with DFL House leaders on the size of the Social Security tax cut.

State Sen. Ann Rest
State Sen. Ann Rest, who chairs the Senate’s Taxes Committee, said Wednesday that Gov. Tim Walz and top legislative leaders in the House and Senate struck a private deal to exempt more — but not all — seniors from the Social Security tax.
MinnPost photo by Peter Callaghan

For months, it seemed that Democrats who control the Minnesota Legislature were headed toward a political standoff over whether to eliminate the state tax on Social Security benefits.

But the question that could have paralyzed the party appears to have been quietly resolved — perhaps earlier in the legislative session than anticipated. Senate DFLers on Tuesday released a plan for tax cuts and credits that would exempt more seniors from paying the Minnesota Social Security tax, but it would not repeal that tax altogether. 

As it stands, the proposal represents a remarkable concession for a small but significant bloc of Democrats who wanted to fully eliminate the tax, including several lawmakers who campaigned on the issue in key swing districts that gave the DFL a Senate majority. Some of those legislators publicly clashed with Gov. Tim Walz on the issue earlier in the year, siding with Republicans who widely support a full repeal.

“I’ve got to admit that I wanted it,” said Sen. Aric Putnam, DFL-St. Cloud, of his bill to eliminate the Social Security tax. “But it’s the nature of politics to try and do the best, we don’t do perfect.”

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The idea of ending the tax was opposed by Walz and other DFL leaders like House Speaker Melissa Hortman. The more liberal wing of the party viewed it as an unnecessary giveaway to the wealthy. 

State Sen. Aric Putnam
State Sen. Aric Putnam
Based on the plans released by the House and Senate, the Social Security tax is likely to be rolled back further than what Walz had originally proposed, making it a compromise between the DFL factions. 

In all, the cut to Social Security taxes is just one chunk of a Senate tax bill that includes $1.1 billion in rebate checks and expands a child tax credit for low-income families. It would raise taxes on certain corporations to bring in an extra $1.17 billion in revenue over the next four years. 

The Senate plan does have some key differences from the House bill, teeing up what could still be tense negotiations over a final package of tax cuts, tax credits and tax increases. And the GOP still hopes to change DFL plans and win a full repeal of the Social Security tax.

But Democratic lawmakers might have cleared the biggest political hurdle over the state’s finances among Democrats, easing their path to writing a two-year budget plan.

A political flash point

The Social Security issue had been simmering for months, even before the Legislature convened in January. And it seemed to be the biggest obstacle to a final budget deal given Democrats agree on most other major issues.

That’s why the Senate tax bill was much anticipated this week, because it could have escalated the political fight over Social Security if a full repeal had been included. And lawmakers in that chamber were always perceived to be more friendly to the idea.

The Legislature is set to adjourn May 22.

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A group of Senate DFLers repeatedly called for eliminating the tax even as Walz trashed the idea over and over in speeches and remarks to reporters.

But Sen. Ann Rest, a New Hope Democrat who chairs the Senate’s Taxes Committee, said Wednesday that Walz and top legislative leaders in the House and Senate struck a private deal to exempt more — but not all — seniors from the Social Security tax. That was not announced when the DFL released in March a set of budget “targets” to broadly guide their tax and spending proposals, and Rest did not say why legislative leaders waited until now to announce the alignment on Social Security.

That deal is why the Senate plan for reducing the tax closely follows a House one unveiled last week, Rest said.

What the DFL plan would do

Under the DFL proposals from the House and Senate, married filers earning up to $100,000 and individuals with up to $78,000 in adjusted gross income would pay no state tax on Social Security benefits. Legislative leaders say a little more than two-thirds of Minnesotans with Social Security income would pay no state taxes on that money, but the plan does not alter the federal tax on those benefits. 

The Minnesota Department of Revenue expects that about 877,800 households in Minnesota will have some Social Security income in 2024. A narrow majority, 52%, would have paid at least some Minnesota tax on those benefits in 2024 without a change in law. In 2019, about 46% paid some Minnesota tax.

There are a few details in how the cut is implemented that result in different estimates for how much the DFL plan would cost the state, but Senate budget documents project a price tag of nearly $500 million in the next two-year budget that begins July 1. Fully eliminating the state tax would cost roughly $1.26 billion in the same time span.

For House DFL leaders, full exemption would have crossed their ideological approach of benefits mainly for low-income people and tax increases on wealthier residents. Senate Democrats and Republicans on the tax committee expressed some disappointment about the smaller proposal. But DFLers said the cuts would be paired with other credits for families and cash for local governments to use on public safety.

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How did vulnerable DFLers respond?

In March, Putnam told MinnPost that Rest had promised his bill to fully repeal the tax would be in the Senate’s budget plan. The Democrat had campaigned on elimination in his closely divided St. Cloud district, and he believed getting rid of the tax was an issue of fairness for seniors, even if it included a benefit for the wealthy.

On Wednesday, however, Putnam told MinnPost that his hopes had run aground because of the state’s financial picture and competing priorities.

Putnam said repealing the tax is expensive for the state in the long-term.  It would have cut into the Legislature’s ability to spend money on other priorities, like improving the long-term care system. 

And while the Legislature has a $17.5 billion surplus, financial projections show a smaller but still historically massive portion of that — $5.36 billion — will be available in the next budget that begins July 1, 2025.

“When you think of how many nursing homes are about to close in the state of Minnesota right now, it’s not in the interest of seniors or in the interest of Minnesotans generally to kind of go ‘all in’ in one area,” Putnam said.

Hermantown Sen. Grant Hauschild, another DFLer who pledged to get rid of the Social Security tax, said during the Taxes hearing that he came into the Legislature with “wide eyes and big priorities” like child care, Social Security cuts and public safety spending.

“Those big priorities cost a lot of money, you learn very quickly,” he said. “All of them are included in this bill … at enormous levels, historic levels.”

Still, Republicans balked at the Social Security provisions and the corporate tax increase. Sen. Bill Weber, R-Luverne, said the GOP would agree to a bonding bill — which finances infrastructure projects — to free up cash for a Social Security tax repeal.

It’s an offer based on the complicated politics and funding mechanisms for construction work in Minnesota.

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Borrowing for many of those projects requires a 60% supermajority in the House and Senate, giving the GOP some leverage to deny the majority party and negotiate on other issues.

Earlier this year, Senate Republicans blocked a bonding bill to angle for big tax cuts. As a result, a DFL party flush with cash pledged to use general fund money instead. That option doesn’t need a supermajority, so the DFL can go it alone. And it’s available only because of Minnesota’s massive surplus.

Weber wants to borrow money for construction instead now, and use the leftover cash for Social Security tax cuts.

“There are ways to provide additional revenues to cover the Social Security tax cost,” Weber said. “I just want you to know, if it truly is a priority of members of your caucus, we can help make that happen.”

Democrats were not receptive to the idea, saying in part that the money would only be good for one-time uses, not ongoing costs like repealing taxes. But it’s something to keep an eye on in the waning days of the legislative session.

Editor’s note: This story has been updated after Senate staff clarified that the Senate and House Social Security tax bills contain slightly different language, leading to different estimates on how much it would cost the state.