Minnesota House DFLers have taken a two-pronged political position on taxes: that wealthy individuals and corporations don’t pay their fair share and that any tax relief be aimed only at those at the lowest incomes.
The House tax bill released Monday put both positions into print. Tax cuts and credits worth $3 billion in the budget period that begins July 1 phase out at middle-income levels. Meanwhile, the bill would impose two significant tax hikes on high-income residents.
Both strategies are based on the DFL’s view of how the COVID-19 pandemic affected people.
“The pandemic was not felt evenly and the economic recovery has not been felt evenly,” DFL House Speaker Melissa Hortman said Monday. That is, lower-income residents were more likely to have been unemployed or to work in jobs that couldn’t be done from home. And the fact that the pandemic recession was so short and the recovery more rapid than expected is because of the number of people who could keep working from home.
“We have accepted an economy that works exceptionally well for very few and leaves most of us behind,” said House Taxes Committee chair Aisha Gomez, DFL-Minneapolis. “These aren’t just any tax cuts. The cuts in this bill are targeted at those who need it the most.”
The House bill therefore reduces Gov. Tim Walz’s proposal for rebate checks from $2,000 for a married couple to $550. Single people would get $275 with another $275 for up to three children. And it would end any rebates once a couple’s income reaches $150,000. It treats taxation of Social Security in a similar way, with caps on income eligibility.
It also makes changes to the earned income tax credit for low-income residents, which would be called the Child and Working Family Tax Credit.
Tax hikes with a $17.5 billion surplus?
The tax increases come as the state has a surplus of $17.5 billion, a figure that accounts for expectations for inflation in future years, on a base budget of $52 billion over two years.
But DFLers frequently cite another number as a way to reduce the scope of that record surplus and provide reasoning for increasing taxes. While much of the $17.5 billion exists for the two-year budget that begins in July, only $5.36 billion of it is available in the next budget that begins July 1, 2025. Therefore, one-time uses of the surplus in both the spending and taxation side are common. The tax rebates, which would cost $1.25 billion in the next budget, are an example.
That said, a $5.36 billion surplus would itself be a record, at least before the COVID pandemic struck and $73 billion in federal aid flowed into Minnesota, making accurate economic forecasting nearly impossible. Prior to November of 2021 when the surplus reached $7.75 billion, the largest surplus since 2008 was the $1.67 billion surplus in February of 2021 and $1.65 billion in February of 2017.
The two major tax hikes are both intended to fall on high-income residents and corporations. The first is a 5th income tax tier of 10.85% would kick in 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.
The second tax hike is a change in how corporate income is calculated that would include income held in other countries. Taken together, the two hikes equal nearly $1 billion over the two years beginning July 1.
Minnesota is considered to have one of the most-progressive tax systems in the U.S., meaning it taxes the wealthy at higher rates and higher amounts than lower income residents. The progressive Institute on Taxation and Economic Policy places Minnesota among the six most progressive with California, Delaware, New Jersey, Vermont and the District of Columbia.
Two other tax increases are not in the taxes bill. Purchases made in the seven-county metro region would be subject to a new 0.25% sales tax hike under the housing omnibus bill to support affordable housing, and a new 0.75% sales tax hike in the transportation omnibus bill to boost transit. That transportation bill also includes hikes in motor vehicle tabs fees and the motor vehicle sales tax. And, at least in the House, it includes a new 75-cent delivery fee on most deliveries such as those from Amazon, GrubHub and restaurants. The Senate has eliminated the delivery fee.
The taxes bill makes another change that’s expected to cost the state $190 million a year: Instead of requiring renters to send in a tax credit application in August, the legislation would make it part of income tax filings. The Department of Revenue estimates 100,000 tenants who don’t claim the credit now would claim it with the change. The same provision also makes more retirees eligible for the credit by changing which income sources are included.
The DFL has what is termed a trifecta — partisan control over both houses of the Legislature and the governor’s office. That means it is less likely to need to accommodate GOP sentiments. But the House proposal exposes some divides within the DFL itself. Walz, for example, wants larger rebate checks of $2,000 for couples and $1,000 for individuals — though with the same income caps as the House proposal. Still, when Walz agreed with House and Senate leaders that tax cuts would only total $3 billion, he knew his original $4 billion proposal for rebate checks was unattainable.
His wealth tax pathway was to put a surcharge on capital gains taxes, say when someone sells stocks or bonds. That is not in the House taxes bill.
Walz said he was pleased that some form of rebate checks is in the House plan, even if at lower levels.
“We’re not going to be in perfect alignment on everything, but the goal is still to make life more affordable for Minnesotans and that they get money back in their pockets and we invest in the things they care about,” Walz said.
How Senate DFLers, Republicans are responding
The Senate, with a narrower majority than the House DFL, is expected to produce its taxes plan later in the week. Senate Taxes Committee Chair Ann Rest, DFL-New Hope, has been less supportive of tax hikes and more sympathetic to a larger reduction in social security income taxation. It was in her committee that the delivery fee died and the metro area transportation sales tax was cut from 0.75% to 0.50%.
Republicans on Monday sharply criticized both the House DFL tax plan and the general scope of potential tax hikes that Democrats in both legislative chambers have either proposed or entertained, such as their paid family leave plan and the transportation sales tax. The GOP tally was more than $9 billion — over the next four years, not two years — though at least some, and probably much, of what they cite is unlikely to become law.
Senate Minority Leader Mark Johnson, R-East Grand Forks, told reporters at a news conference that the DFL was focused on “figuring out very innovative ways to raise your taxes,” and their budget would result in “emptying every Minnesotans’ pocketbook to support their out-of-control spending.”
House Minority Leader Lisa Demuth, R-Cold Spring, again said some Democrats had campaigned on fully eliminating a tax on Social Security benefits and would be breaking that promise in a budget plan that only rolls back the tax for some taxpayers.
And Sen. Bill Weber, R-Luverne, called on Senate DFLers to stand up to tax hikes. “If you don’t wish to see your seniors, your families, placed under an additional tax burden of this magnitude, there are 33 Republicans that stand ready to vote with you to defeat these taxes and bring some common sense to the tax policy of Minnesota,” he said.
[image_credit]MinnPost photo by Walker Orenstein[/image_credit][image_caption]House Minority Leader Lisa Demuth said some Democrats had campaigned on fully eliminating a tax on Social Security benefits and would be breaking that promise in a budget plan that only rolls back the tax for some taxpayers. [/image_caption]House DFLers cut, but don’t eliminate Social Security tax
Under the House DFL plan, fewer people would pay the state’s tax on Social Security benefits. But it would not be fully eliminated.
State projections expect that in 2024, about 877,800 households in Minnesota will have some Social Security income. A slim majority, 52%, will pay some Minnesota tax on those benefits without a change in law. (In 2019, about 46% paid at least some Minnesota tax.)
To fully eliminate the state tax, it would cost about $1.26 billion in the current two-year budget and another $1.5 billion in the next biennium. The House DFL plan instead would cost roughly a third of that: $409 million. Married joint filers with an adjusted gross income of $100,000 or less would pay no state taxes, and the same would be true for single taxpayers making $78,000 or less. The tax cut would then be phased out over the next $20,000 of income.
“That means 76% of seniors will pay no tax at all on these benefits,” Gomez said.
The Social Security tax has been a political flashpoint at the Legislature. Republicans support fully repealing the state tax, as do a significant chunk of DFLers, including some in political swing districts that handed Democrats control of the Minnesota Senate in the election last year.
House Democrats also agreed to fully eliminate the tax last year as part of a deal with Republicans who controlled the state Senate at the time. But that deal fell apart amid other disagreements at the Legislature and has not been revived with DFLers in full control.
Although the Senate DFL’s tax plan hasn’t been released, Sen. Aric Putnam, DFL-St. Cloud, said earlier this year he was promised a full elimination would be part of their chamber’s proposal.
“I believe that (full elimination) will pass the Senate,” said Sen. Carla Nelson, R-Rochester, on Monday. “I certainly hope it does.”
Still, it could be a difficult political lift. Nelson said she feared the House DFL would block a full elimination.
[image_credit]MinnPost photo by Tom Olmscheid[/image_credit][image_caption]State Sen. Carla Nelson speaking at Monday's press conference. Behind her, from left: state Sen. Steve Drazkowski, Senate Minority Leader Mark Johnson and state Sen. Bill Weber.[/image_caption]
Child tax credit, but not child care credit in tax plan
The House DFL also booked $728 million in this biennium for a “Child and Working Family Tax Credit,” which is aimed at replacing a lapsed federal tax credit meant to reduce childhood poverty.
The amount of the credit depends on income and the number of children someone has. 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.
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“It’s targeted at lower income Minnesotans,” Gomez said. “For most family arrangements … it’s fully phased out in the $50-to-$65-to-$70,000 range, depending again on how many kids you have.”
One idea the House DFL did consider was a tax credit primarily meant to help shoulder the cost of child care. That one would benefit more people in the middle class — Walz’s plan would begin to phase out at a total household income level of $200,000. The governor had banked nearly $540 million for that credit in his budget plan, which would offer families $4,000 a year for every child under the age of 5 for child care expenses, up to a maximum of $10,500.
But in the end, the House DFL jettisoned the idea, opting instead for the child tax credit helping lower-income households.
“It’s not because we don’t believe it’s necessary and worthy,” Gomez said. “Within our budget reality we made choices and we chose to go with this sort of expanded child tax credit that would cut child poverty by almost one quarter.”
Local Government Aid would get a boost
Elsewhere in the taxes bill, the House DFL would boost both yearly payments under Local Government Aid and County Program Aid by $100 million and tie the programs to inflation so they will rise over time. The subsidies help local officials with the costs of basic services, and supporters of the program say LGA and CPA also help stave off increased property taxes. That amount is less than some advocates had pushed for.
If the budget plan is a winner in some of the more liberal DFL districts, what about in more conservative swing districts? The tax bill is only a slice of the overall state spending. It has less than what some rural Democrats wanted for LGA, and it does not fully eliminate the state’s Social Security tax. The DFL plan also raises taxes at a time when the state is more flush with cash than it has ever been and may ever be.
Rep. Dave Lislegard of Aurora — the last Iron Range DFLer in the House — leads property tax policy for Democrats and appeared at a news conference Monday in support of the tax plan.
He told reporters the bill was a fair, pragmatic and reasonable compromise. “Maybe it doesn’t seem like the right time” to raise taxes like the corporate income measure, Lislegard said. “But it’s exactly the right moment.”
Correction: The House transportation budget contains a 0.75% metro area sales tax for transit. This article initially misstated the tax rate as 0.50%. The Senate version of the budget has a 0.50% sales tax.
The purpose of taxation is to pay for the cost of government. The democrats’ philosophy is that its real purpose is social engineering. “From each according to his ability to each according to his needs.” These Marxists used to masquerade as “democrats.” But with their monopoly on state government, they don’t even have to wear those masks anymore. Thank god for federalism.
actually, name calling isn’t helpful. if you feel that life on the Rez is better than the life we live in urban or rural Minnesota, then for sure — you should relocate to the Rez or any other community for that matter that best suits you. the overarching principle in this Legislative session is to bring forward bills that were introduced 10-20-25 years ago and have been stalled by obstruction in the GOP majorities. it’s the party of No. the DFL is making all Minnesotans front and center in its legislation this year — FINALLY. the appropriations in the DFL majority bills are there because of so many shortfalls in decades past. housing has suffered; children have suffered; education has suffered. the GOP does not and will not address the needs of Minnesotans. we’ve made enormous progress in the 93rd Legislative Session. you either support taxation and services, or you support defunding and a slower economy and ability to attract and retain business and employees to this great state. If you’re a fisherman or hunter, you support everything the DFL-led DNR can do under these provisions. you decide.
It’s always a good idea not to look too carefully at the legislative sausage-making. Plenty of compromises in this plan, some of which I like, some not so much, but it appears that the bulk of the benefits would go to the lower half of the income spectrum – the “hardworking Minnesotans” that modern Republicans and others who like to call themselves “conservative” keep falsely claiming they serve – and I view that as a good thing. Social Security is useful (it pays for my Medicare Part D), but my retirement income comes from a quasi-private plan, so doesn’t depend on it (unlike many other SS recipients), and I don’t receive enough for it to be taxable anyway. Keeping some form of taxation on SS income doesn’t strike me as unreasonable, but it’s not my ox that’s being gored in this context.
Howls of protest from the right about the unfairness of raising the tax rate for the top income bracket can be – and should be – taken as the childish whining of the privileged. Paying an extra $9,000 on an income of more than a million (usually several million) dollars is more or less pocket change for people who can supplement state, county and local services with their own contract versions, since they’re not as fiscally dependent upon the infrastructure and services the rest of us rely on.
The surplus that Minnesota has currently is there for only one reason, 10’s of Billions from Federal Government. Putting in programs that will need to be funded in perpetuity by Minnesota taxpayers because of a 2023 surplus is irresponsible. So 9.8% is not enough for high earners to pay in Minnesota? There will come a time when high earners will say enough and leave the state. All of these programs will need to funded in the future and more taxes will be needed. Social Security should not be taxed, I think a dozen states tax it, MN is one of those.
Going to leave Joe? Where to, the Dakotas, Missouri or other red states where the quality of life stinks ? People who have it like quality. You do not get that in your low tax, fringe-level service states. Oh sure, you can move into a gated community with like cheapskates; but you are still sequestered in a backward-thinking environment. But, maybe that’s what cheapskates like.
According to an IRS study (2019-2020), they’re moving to Florida, Texas, Arizona, North Carolina and South Carolina (all with climates just just aren’t warmer for taxpayers, coincidentally ;o)).
Joe, the 10.85% tax rate only applies to the income that exceeds $600,000.00/yr (single filers).
The first $599,999.99 is taxed at a much lower rate(s).
The high earners are earning this money from jobs in Minnesota.
There are rare instances of high earners working remotely, but in most cases they wouldn’t be able to move to a hellhole low-tax state and still maintain a salary of $600,000/year.
Those jobs simply do not exist in South Dakota, as they can’t even come close to drawing Fortune 500 Companies the way Minnesota does.
Fully eliminate the Social Security tax, as we do not want to means test Social Security. The problem is federal – that it favors investors over wage earners. Trrribly regressive. A higher tax bracket for the top 1%, with an average cost of under $10,000 is a better idea. Pocket change for the top 1%.
Want to claim you are leaving Minnesota for that reason. Silly, given how expensive moving is if you have lots of material goods. Many wealthy people seem to have the attitude of Trump, who considers paying income tax foolish. He was rewarded for his bankruptcies and bad business decisions by paying no federal income tax for many years.
My sympathies lie with children growing up in poverty so trust fund babies get bigger estate bequests.
So what happens when the tax increases and new fees still aren’t enough? Hard to believe with two reported on the story, neither asked this important question. Granted, they may be worried about being banned from the Capitol for their impertinence.
Ah, fear and conspiracy Clarence, trite Republican defaults.
After $73 billion in federal aid and a $19 billion surplus , can we finally stop using Covid as the reason to increase taxes ?
The reason there is no tax relief is because Democrats want to spend more and create programs that will require increased taxes to pay for them.
Increases in income , corporate , property , payroll , transit , housing , city sales taxes and several user fees are all on the table now ….. something they didn’t have the courage or integrity to campaign on.
Insane!!!
The state has a massive surplus and is one of the highest taxed states in the nation. (Fifth highest income tax, eighth highest state-local tax burden). And House Democrats have a economic plan that includes tax increases!
Creating new programs and benefits will inevitably increase losses of well-intentioned tax spending. It’s human nature. A majority of intended beneficiaries may receive some help, but there always will be scammers (witness the millions in the Covid food program fraud). New programs also increase a growing base for future taxpayer-supported state budgets – and the severity of inevitable economic downturns.
Use the surplus for one-time spending — infrastructure, added aid to local governments (high state taxes were “justified” originally as a way to reduce local property taxes). And some lowering of tax rates.
Hopefully Senate Democrats have a better grasp of finance. And Democrats are making as great case for divided state government – checks and balances work when politicians don’t turn it into a contest of partisan wills (e.g. last legislative session).
Overall I think this seems balanced and reasonable. I like the boost to child tax credit and one time refunds to lower and middle income taxpayers. I think retaining the SS income tax for couples with greater than 125k/year income seems reasonable, as does reducing it for those between 100 and 125, and eliminating it for those below 100k. I think the tax hike for those earning over $1MM/year is just fine. It should raise about $ 225MM/year, and a less than 10k increase on an income of $1 million would hardly be noticed. Same with corporate tax increase.
I also really like the concept of folding the property tax rebate for renters into the income tax system. It’s not intuitive that the property tax rebate is something that one would need to do, folding it into something everyone does anyway seems like a win.
Increasing LGA is also good. Property taxes can be harder to pay than income taxes…property doesn’t necessarily mean income…and this is a nice One Minnesota move, with rural areas benefiting disproportionately…especially with the cash disproportionately coming from higher income Minnesotans, which means from more from the MSP metro.
“Top earners and corportations” don’t pay the extra 1% sales tax, everyone does.
I’m retiring in 7 years and it will be somewhere else than Minnesota.
Maybe the Black Hills, maybe Nashville, and possible western Wisconsin, all depending on family decisions.
Good. One fewer elderly person putting a strain on our nursing home resources.
Haha! Once you retire, income taxes won’t matter to you.
Property taxes WILL matter to you, and you’ll find Wisconsin’s are high.
Tennessee’s crime rates are REALLY bad (compare Nashville to Minneapolis and Chattanooga to St Paul for an eye-opener)
As far as the Black Hills? It’s nice to visit every 5 years or so, but I certainly wouldn’t want to live there.
+19 billion dollar surplus and I may get $275. Priceless.
Did the DFL run for election on these policies?
I’m not conservative, but the 78000 limit is out of step. Many seniors still owe on a home, usually over 1,000, more like 1500-2000 per month, have to pay for medical(around 500 per month), then there are the property taxes, transportation, home repairs, etc.. It makes no sense for those trying to stay afloat to pay for people on the lower end. I would like to see a focus on higher wages and helping people get into better paying jobs.
$275 and $550 after all of the COVID issues, inflation, etc. should help pay a quarter of a month’s rent. Except that it will be needed for the various fees and tax increases. But it is the perfect time because this kind of spending won’t happen in two years.
I honestly think their strategy is to get republican voters and qualified GOP political candidates to leave. Seriously. My rez in South Dakota is giving me free land to relocate there. As if I needed any more incentive.
South Dakota huh ? You will love Governor Kristi Noem. She is a gun nut ( she recently said her two year old daughter already has a rifle and a handgun); She was one of the speakers at last week’s NRA convention; she loves to tax peoples’ necessities ( she kept the sales tax on all groceries); she is priming herself for Trump’s next cabinet by constantly flying around red state country on speaking engagements; Ok, but don’t let the screen door…well you know Dennis.
So paying a 5 percent income tax up to about 40 grand and over 7% income tax on every dollar a couple makes over that combined with a 6.8 sales tax except on groceries in Minnesota is suppose to somehow be a less tax burden then Noem with her brutal 4.5 % sales tax that is only paid when a purchase is made?
Already made one move from Highland Park/Ramsey county to avoid that mess. The next is out of state. A lot of work, but worth it.
I am not a huge fan of increasing sales taxes because they tend to disproportionately increases costs for lower-income individuals, but at least they are relatively modest. I also think it is important to expand some streams of tax revenue, especially for continued investment in housing and transportation. Everything else looks great. More taxes on the wealthy is a good start, child credits are a good investment, and keeping the SS tax but raising the threshold is a great middle ground. Obviously, I wish some of these things went farther, but this seems like some great progress for Minnesota, which is a much more moderate state than most people will admit or realize.
This is a train wreck waiting to happen. Long term unfunded spending, broke pension funds, etc. We are already one of the most heavily taxed states, we are shooting for the moon.
Get ready for the “Cut” word when the DFL cannot keep up with inflation and spending increases.
Of course – – they could just raise taxes on the poor and middle class again and again and again and again…..
We got rid of Train Wreck Pawlenty a LONG time ago!
(Yes, we also handily rebuffed a repeat performance in the most recent election)
Regardless of whether or not it is the correct course of action, raising taxes with a $17.5B budget surplus does not seem like good politics.
I would bet that you could find the same doomsaying comments back when Dayton raised the top tier tax rate. Everyone was going to leave, programs won’t be funded, etc., etc. Wasn’t that after a slew of “user fees” from T-Paw?
We’ll see where the legislation ends up; that said, as a progressive making less than $100K a year, I do wish/hope for a bigger tax rebate of some sort, which would help negate rising property taxes. I think you should avoid raising any sales taxes, given how they disproportionally hurt those on lower and fixed incomes. I think SS income shouldn’t be taxed. I’m not 100% sure the DFL can’t get most of what they’re calling for without another tax bracket.
I’m also a realist and know that there’s costs to investments in “promoting the general welfare” and improving people’s lives. At the end of the day, we’ve seen the outcomes in states that don’t make investments in health care, infrastructure, education, and the like, and why, after decades of that, their outcomes haven’t changed much.