DFL tax plans split over taxing Minnesota’s wealthy but agree on some cuts and rebates

As House and Senate tax chairs start to negotiate what is often the final bill of any legislative session, they can take comfort that for the first time in a decade, both are from the same party. But that doesn’t mean they agree on how to allocate a $3 billion pot of money for tax cuts.

When Senate Taxes Committee Chair Ann Rest released her plan Wednesday it had differences from what her House counterpart came up with 10 days ago. One difference was big — the House plan by Rep. Aisha Gomez contained a new higher income tax rate on high earners that would raise $530 million over two years. Rest’s bill does not.

“We, on purpose, do not have any tax increases on individual Minnesotans,” Rest said. “We give relief to local governments. We give relief to individuals and individual families.” When leadership gave Rest the numbers and she saw increased revenue was needed, she looked for hikes “the furthest away from individuals.”

One item that will be cleared from the to-do list when a taxes negotiating session begins is how to tax Social Security benefits.

“We ought to be able to go in on the very first day of a conference committee on the very first day and adopt the Social Security provision,” the New Hope DFLer said.

While Gov. Tim Walz took different positions on tax cuts, his revenue commissioner supported Rest’s plan Wednesday.

“You will not have to twist my arm to have the governors and my support today,” said Paul Marquart, the former House taxes committee chairman who now runs the Department of Revenue.

Here are where agreements exist and disagreements remain:

Rebate checks — Gov. Tim Walz has made tax rebate checks a centerpiece of his tax cut plan, arguing that it would put money into residents’ pockets quickly to help cover the effects of inflation. He has stuck with his plan through GOP opposition and DFL indifference. With DFLers controlling all three legislative power levers, Walz’s insistence has paid off but with smaller checks than he’d wanted.

His $2,000 for a married couple fell to $550 in the House plan and $552 in the Senate. Singles would have gotten $1,000 in Walz proposal, $275 in the House and $279 in the Senate. The other difference is that the House and Senate offer additional checks on behalf of dependent children — $275 per child up to three children in the House plan, $56 per child in the Senate plan.

All three end payments to married taxpayers with more than $150,000 in adjusted gross income and $75,000 for single filers. Many of the eligible taxpayers will get checks sent early based on their 2021 income. Others can take advantage on their tax filings next year.

Local sales taxes — State law permits cities to ask their voters for sales tax hikes to cover the costs of special projects — ice rinks, for example, or libraries. Cities must get permission from voters and then authorization from the Legislature. The latter OK is usually perfunctory and there are usually a few dozen in each tax bill.

This year, however, House Taxes Committee Chair Aisha Gomez blocked the approvals and created a task force to study the process and the impacts on taxpayers. Gomez, DFL-Minneapolis, argues that sales taxes are regressive taxes with a disproportionate impact falling on lower-income residents.

Senate Taxes Committee Chair Ann Rest, however, has all of this year’s requests in her bill.

“She wouldn’t hear any of them because she doesn’t like them,” Rest said of Gomez. “Well, the law does like them.” 

5th tier tax bracket — Gomez’s bill contains a new 5th income tax tier for high earners. That was not something Walz requested and it is not in the Senate bill.

The proposed 5th tier would assess a 10.85% tax rate on incomes of $1 million for married couples and $600,000 for individuals. The current top rate is 9.85%. The new tier would affect 24,200 taxpayers, or about 0.8% of all filers, with an  average increase of $9,231 a year. That higher rate would only apply to the dollar amount of income above $1 million. That is, a married couple with income of $1,000,001 would only pay that rate on one dollar.

But Rest said Senate DFLers were determined not to raise taxes on any individual taxpayer, even high earners. 

Worldwide combined reporting — This is another tax provision that Walz did not ask for but is in both the House and Senate tax bills. It changes state tax law to say that so-called unitary corporations — those with parent and subsidiary companies linked together — must include overseas subsidiaries in their tax reporting. Currently, those companies must look at any income gathered within the U.S. and then calculate how much is “fairly apportioned” to its activities within the state. State corporate taxes are then assessed on that share of income.

Using state Department of Revenue estimates, the taxes chairs say the change will raise $1.2 billion over the next four. After hearing multiple questions raised by accountants he queried, Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence wrote: “Answers to these questions would never be addressed in statute but do provide a sense of the immense size of the administrative rule-making, revenue notice, and litigation sandbox that would be constructed.”

Could the tax be implemented and collected soon enough to provide revenue for this next budget? Rest said she has been assured by the state Department of Revenue that it could be.

Renter credit — Minnesota has long allowed middle- and low-income renters to claim tax credit for rent payments. But it required a cumbersome process with property owners providing rent payment certificates and renters having to file a special application in August.

The House bill would shift the way the tax is claimed to annual income tax filings, a process more familiar to renters who claim other credits on those forms. Because the credit would be claimed by more people because of this simplification, the Department of Revenue estimated it would be claimed by 100,000 more renters and reduce state tax collections by $190 million. In addition, the credit would be refundable, which means taxpayers with no tax liability would get the value of the credit returned to them in a refund.

The change is not in the Senate tax bill.

Capital gains tax — Walz wanted to add income tax surcharges on profits earned from the sale of assets like stock. He wanted a law to charge a surcharge of 1.5% on capital gains between $500,000 and $1 million and a surcharge of 4% on capital gains in excess of $1 million. It would have collected $661 million over two years, but the provision is not in either the House or Senate tax bills.

Social Security — The House and Senate bills would exempt more Minnesotans from paying a state tax on their Social Security benefits. Under the plans released by the DFL, married filers earning up to $100,000 and individuals 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. State officials estimate about 877,000 households in Minnesota will have some Social Security income in 2024, and a narrow majority of 52% would pay at least some Minnesota tax on those benefits without a change.

While the two plans are similar, the Senate DFL plan does exempt more people from paying some amount of state taxes over the $100,000 income threshold. That plan costs about $500 million in the two-year budget, and the House one has a price tag of $409 million. Walz proposed a smaller cut to Social Security taxes that would cost $219 million in the upcoming two-year budget. 

Child tax credit — The House and Senate both include money for a tax credit aimed at reducing childhood poverty. Known as the “Child and Working Family Tax Credit,” it would grant money to families depending on income and the number of children.

The House plan is larger. An eligible family could get $1,175 per child with no cap on the number of children. Another component of the credit would grant 4% of the first 12,500 of earned income up to a maximum credit of $500. The combined amount would be phased down starting at $35,000 of earned income or adjusted gross income — whichever is greater — for married couples, and $28,000 for others.

The proposal would cost more than $728 million in the two-year budget.

In the Senate, DFLers proposed a smaller but similar credit.  The credit would offer $620 per child for up to three children or dependents with disabilities. The credit begins to phase out for taxpayers with adjusted gross income above $50,000 for married joint filers and above $33,000 for unmarried filers. The plan would cost about $649 million in the two-year budget.

Child and dependent care credit — The proposal to expand a child and dependent care credit has a confusingly similar name to the child tax credit. It’s also aimed at families with kids. But the main difference is it’s primarily meant to reduce the cost of child care, and it has a higher income threshold. Walz proposed a big credit worth more than $538 million in the two-year budget, but the House did not include one in its taxes bill.

The Senate booked about $450 million over the next two years for the credit in its plan. The amount depends on the number of children, the age of those kids, and child care expenses. For instance, families with kids under 5 get more money under the Senate’s plan. A parent making up to $160,000 could get up to $12,500. Couples earning up to $200,000 can get at least a partial credit. 

Public safety — The Senate tax bill revived a proposal made by Walz that seemed dead: money for local governments to use on public safety efforts like police funding. Walz had pushed for $300 million for the idea initially, and then boosted his budget plan to $550 million.

But the spending was nowhere to be found in the proposals made by House DFL. The Senate tax bill includes $325 million based on a proposal by Sen. Heather Gustafson, DFL-Vadnais Heights.

Rest, the New Hope DFLer who chairs the Senate’s Taxes Committee, highlighted that difference when talking to reporters on Wednesday. “Three hundred and twenty five million versus zero from what is in the House right now in funding to bolster public safety in every single community,” Rest said.

Local Government Aid and County Program Aid — The Senate tax plan would boost two state subsidies — Local Government Aid and County Program Aid — that help city and county governments pay for basic services and offset property taxes. The extra cash would amount to an extra $40 million a year. For context, the state spends $564 million every year on LGA and $265 million on CPA.

That $40 million plan is less than what House DFLers booked at $100 million for each program. And both are less than what many local officials wanted. LGA primarily benefits Greater Minnesota.

The Coalition of Greater Minnesota Cities and others preferred more in LGA rather than the public safety aid included in the Senate’s tax bill. That’s because LGA continues on into the future while the public safety cash would be a one-time pot of money. That one-time money wouldn’t necessarily allow cities to, say, hire a police officer or fund other ongoing needs, because the money would run out.

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But lawmakers have said there is less state cash available to cover long-term costs compared to the one-time money that makes up a large portion of the $17.5 billion surplus.