Julie Kolbow has spent hours building spreadsheets to figure out how the tax overhaul under debate in Washington would affect her family of five in Chanhassen. She and her husband own small businesses and have two children in college, and she worries that the legislation could lower the amount of taxes they can deduct.
Columbia Heights resident Mark Kowal, who owns a small medical device company, is counting on savings from a lowered tax rate to offset a medical device tax that will go back into effect next year unless a proposal to extend a moratorium on its collection passes Congress soon.
The fast-changing, complex negotiations now underway will alter the tax picture for most Minnesotans, from individuals to families and businesses of all types. The state's businesses stand to get large tax cuts, while limits on deductions for state and local taxes could pinch individuals and families who itemize.
Kolbow is concerned that the overhaul will end up being one more burden on the middle class. "It seems like everything is constantly against us, between college expenses and health care and now this tax [bill]," she said. "We're trying to make it as small business owners … [and] the people we have in office are trying to give corporations these huge tax breaks."
The largest revision of the tax code since 1986 is moving rapidly as the U.S. Senate and House try to pass legislation this week and have President Donald Trump sign it into law by year's end. Voting could start as soon as Tuesday.
Under the proposal, businesses whose owners pay taxes based on their individual tax rates will get a break from reductions in individual rates and tax brackets and a plan that lets them write off 20 percent of their business income. The tax bill will temporarily cut individual tax rates by 1 to 3 percentage points, change tax brackets and increase child tax credits, all moves that will decrease many Americans' tax bills until those benefits expire at the end of 2025.
Kowal noted that his wife used to work for Medtronic, which moved its corporate headquarters from Minnesota to Ireland in part to take advantage of Ireland's low tax rate. He's hopeful that the tax proposal would bring such corporations back home and get them to invest more here.
"I'm not a Republican or a Democrat," Kowal said. "I'm an independent. People [say] 'Oh, those corporations are getting all these breaks.' When was the last time a poor person ever offered you a job?"
Supporters of the tax bill, including the Chamber of Commerce and Financial Services Roundtable, a trade group run by former Minnesota Gov. Tim Pawlenty, say the tax cut will drive economic growth by making American businesses more competitive.
"Tax reform will help deliver expanded opportunity for individuals and American businesses of all sizes," Pawlenty said in a statement. "Congress should quickly move tax reform over the finish line and enable America to go on economic offense."
Analyses by Congress' Joint Committee on Taxation, the Congressional Budget Office and a host of nonpartisan economic think tanks say that the tax plan will give much higher benefits to corporations than individuals and much higher benefits to the nation's richest individuals in comparison to the middle class.
Without unprecedented growth, most economists believe the tax plan will inflate the national deficit significantly over the next decade.
The speed with which tax reform is taking place has generated concern among some Minnesotans that the bill's effect will be lost on the people most affected.
"We're in a difficult position right now," said Chris Galler, CEO of Minnesota Realtors, a trade association fighting to keep mortgage interest deductible on primary residences and second homes. "Homeowners have a basic lack of understanding of how tax policy works."
For instance, many Minnesotans could see their state income tax bills increase if lawmakers pass a law designed to decrease federal taxes, said Dale Busacker, a state and local tax specialist in the Grant Thornton accounting firm's Minneapolis office. This twist turns on a plan to raise the federal standard deduction from $12,000 to $24,000 for a couple filing jointly, but simultaneously end personal exemptions worth $4,100 for each person living in a household.
"On Minnesota tax returns, if you lose personal exemptions, your taxes could go up," Busacker explained.
Patrick Ness of Minneapolis is concerned that the legal mandate to balance tax cuts and revenue in 2027 will eventually lead to cuts in programs such as Medicaid, Medicare and Social Security. Even if the legislation lowers taxes for Ness and his wife, both working professionals, Ness believes there is reason to oppose a tax plan that could significantly increase the national deficit.
Moving too fast
"This makes an enormous change to our federal tax process, and we can't keep up with it," Ness said. "I wish they would slow down the process and engage in more of a national discussion."
Upper middle class and wealthy Minnesotans who itemize are particularly vulnerable to capping the amount of state and local income tax payments, property tax payments and sales tax payments that can be deducted from federal tax returns. Minnesotans who pay more than $10,000 a year for those levies could pay dearly, Busacker said.
Internal Revenue Service figures show that statewide, the average itemized deduction for state and local income, property and sales taxes was $14,556 per filer in 2015. That included averages of $19,636 in Hennepin County; $17,896 in the small northern manufacturing hotbed of Roseau County; and $17,579 in metro-area Carver County.
Federal tax reform aims to simplify the U.S. code and push more people to take a standard deduction by increasing its value and discouraging people from itemizing by killing or capping many deductions, said Kim Rueben of the Tax Policy Center, a nonpartisan Washington think tank.
Yet without some federal tax relief, allowing no more than a $10,000 federal deduction by combining state and local income taxes with property taxes or sales taxes "could affect the ability of states and localities to raise money" for such things as schools, Rueben said.
Supporters of the limit say it will make state and local governments more accountable, reducing what they see as a federal subsidy for lavish spending. Opponents call it a form of double taxation wherein residents pay once when they write checks to their state and local governments and again when they can no longer drive down their federal taxable incomes by writing off those payments.
Health insurance mandate
The tax bill's plan to end the federal mandate on purchasing health insurance could also become a problem for Minnesota hospital and health care providers, hospital administrators say. Ending the requirement, which is part of the Affordable Care Act, will relieve the federal government of subsidy payments to help with the care of some low-income people who bought insurance.
But as health care providers point out, those people will still get sick and the health system will still have to treat them. "More bad debt and uncompensated care just hurts everybody," said Wendy Burt, an executive with the Minnesota Hospital Association.
Another part of tax reform could drive down the value of homeownership, according to Rueben. Limiting mortgage interest deductions to loans of $750,000 or less for newly acquired residences and one secondary residence preserves mortgage interest for almost everyone, but killing other deductions may not make it worthwhile to itemize.
Galler believes providing fewer deductions could hurt Minnesota by reducing the incentive to own a home. "Go to any city council and ask what happens if you go to more rental properties than owner-occupied properties," he said.
Rueben says cutting back on itemized deductions may also hurt charitable giving, because people taking the standard deduction cannot deduct contributions. "If you can't deduct your contributions," she said, "they may go down."
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