Washington – The tax code overhaul that President Donald Trump and congressional Republicans rolled out last week would affect many Minnesota households, eliminating two widely used deductions that help tens of thousands of residents reduce the bottom-line impact of federal taxes.
The GOP plan would do away with the popular federal deduction for state and local taxes. While advocates say other tax cuts would offset those lost deductions, they have been a valuable perk for many Minnesotans because the state has the fourth-highest income tax rate in the country. In addition, high rates of homeownership in the state would leave property taxpayers without another valuable deduction.
“The federal government will basically be forcing taxpayers that make up the backbone of our economy to pay taxes a second time on the same income,” said Burnsville Mayor Elizabeth Kautz. She and the mayors of Rochester, Eden Prairie and Brooklyn Center all signed a letter sent to members of Congress last week in opposition to ending the deductions known by the acronym SALT.
The elimination of those deductions is only one part of a broader proposed reworking of the federal tax code, an initiative that’s risen to the top of the Republican agenda in Washington following the collapse of the Affordable Care Act repeal. Minnesota’s three Republicans in Congress are at least initially on board. But the plan to do away with the SALT deductions is sparking angst among middle-class taxpayers and public officials across the country, even some GOP Congress members in high-tax states like New York and New Jersey.
The Government Finance Officers Association, a coalition of the country’s most prestigious groups of state and local politicians and administrators, maintains that killing SALT deductions will adversely affect “almost 30 percent of taxpayers, including individuals in every state and in all income brackets.”
One in three tax filers in Minnesota deducted state and local taxes from their 2015 federal tax returns, according to records from the Internal Revenue Service. The average SALT deduction was $12,954.
In Burnsville, population 61,000, a full 43 percent of people filing a federal tax return claimed a SALT deduction in 2015. Kautz, a Republican, said she planned to voice her opposition to Republican Rep. Jason Lewis; Burnsville is the largest city in the Second Congressional District, which he represents.
Lewis said other aspects of the broader GOP proposal would make up for any blow struck by eliminating SALT deductions. The plan calls for doubling the standard deduction, cutting the statutory corporate tax rate to 20 percent, creating a path to a 25 percent tax rate for some small businesses, consolidating individual tax brackets to cut taxes for the nation’s wealthiest residents and the middle class, and cutting the tax bill for trillions of dollars in profits booked outside the country by U.S. corporations.
“Doubling the standard deduction to $24,000 and compressing the tax rates (including eliminating the bottom rate) reduces the need to itemize in the first place — a key component of tax fairness and simplification,” Lewis said. “That saves you time and money in preparing your returns, thus providing significant tax relief.”
Lewis added: “By reducing small business tax rates 40 percent, this plan brings much-needed economic growth, and as a result, rising incomes which will benefit everybody.”
Ann Etter, a CPA with Northfield-based Goodney & Associates, is skeptical of cutting the deduction. Etter said she likes to use tax savings from the deduction to increase her charitable donations; she said she sees many married couples who make between $120,000 and $130,000 a year reaping a savings of $1,500 by writing off their state taxes.
“A lot of [clients] use the money to help grow their businesses,” Etter said. “I see a lot of people working to send kids to college. … There are a lot of things you can do with $1,500.”
Wiping out SALT deductions could make it hard for the state and local governments to raise existing taxes or create new ones to pay for public services, said Dale Busacker, a tax specialist at the Grant Thornton accounting firm in Minneapolis. That could threaten their ability to respond to federal funding cuts that analysts say are likely to accompany tax cuts, which are estimated to add $2.2 trillion to the federal deficit over a decade.
Proportionally, the highest number of beneficiaries of SALT deductions live in the state’s three Republican-represented congressional districts, where in recent years at least 40 percent of filers collectively saved millions by deducting state and local taxes from federal returns.
It’s not clear how many of these people would see overall tax liability rise by losing SALT deductions, since some affected taxpayers would likely benefit in other ways. But even doubling of the standard deduction could hurt, some critics contend. It could impact everything from home buying to charitable giving, because people who take the standard deduction can’t deduct home mortgage interest or philanthropic donations.
Ingrid Christensen is among the small business owners whose tax rate would be cut substantially under the GOP proposal. She is sole owner of INGCO International, a language translation business in Minneapolis. In her 11 years in business, Christensen has been paying the corporate tax rate of 35 percent on her profits. Then she’s taxed a second time on those same profits on her personal taxes.
“I’m being penalized. It’s a strange loophole that’s been around forever and doesn’t make sense,” said Christensen, who said she’d gladly sacrifice the SALT deductions for a lower business tax rate.
That’s not the case for everyone. In the Third Congressional District in parts of suburban Hennepin and Carver counties, nearly half of tax filers used SALT deductions to drive down 2015 federal tax bills, said Kim Rueben, a senior fellow at the Tax Policy Center, a Washington think tank that compiles IRS data. The average write-off was more than $17,500 per tax filer, which reduced federal taxable incomes by an average of nearly 8 percent.
Without SALT deductions, Rueben said, some upper-middle-class households in the district could see federal tax liabilities rise.
In July, a report by the Government Finance Officers Association laid out how that could happen. In one, the association claimed a couple in Chaska with an income of $150,000 who once deducted $10,000 in Minnesota state taxes and $4,750 in local property taxes from their federal return would see taxes rise $4,130 without SALT deductions.
Third District Republican Erik Paulsen emphasized that details of tax reform have not been worked out.
“This plan is clearly dedicated to helping middle-class families by lowering rates and doubling the standard deduction so earners keep more of their first dollars earned,” said Paulsen, who serves on the tax-writing House Ways and Means Committee. “We will be working to fill in additional details, and no final decisions have been made.”
In Minnesota’s Sixth District, where 40 percent of tax filers took SALT deductions in 2015, Republican Rep. Tom Emmer echoed that by calling the GOP proposal “our jumping-off point.”
Congressional Democrats were not as generous in their praise for the plan.
“Minnesota is already a donor state to the federal government,” said Democratic Rep. Betty McCollum of St. Paul. “It’s appalling that President Trump and the Republicans want to tax our state more to subsidize negligent Republican-run states that refuse to responsibly tax their citizens to provide basic services.”