Gov. Mark Dayton took on a nearly impossible mission with his new tax proposal: Prevent a state tax increase for Minnesota families due to provisions in the federal tax overhaul that became law last year without busting the state budget. And keep it fairly simple so it doesn’t become a bonanza for accountants and tax lawyers.

The tax plan Dayton recently outlined would cut taxes for most income tax filers while raising them on many businesses. It seeks to achieve the two-term DFL governor’s long-standing policy goals of a more progressive tax system, one that puts more tax burden on wealthier taxpayers while providing sufficient revenue for a host of spending priorities such as education and health care.

The “number one priority,” Dayton said: “Minnesotans and their families.”

Republicans, particularly in the state Senate, have offered a blistering response: Dayton’s plan is too complex, and any tax increases are uncalled for in a state where businesses and families already face some of the highest taxes in the nation.

“Unless we do something to become more competitive with other states, we will continue to lose,” said Sen. Roger Chamberlain, R-Lino Lakes, chairman of the Senate Taxes Committee. Republican legislators are expected to release tax proposals of their own soon.

Dayton and the Legislature face some unhappy choices this legislative session as the result of the federal tax overhaul:

Do nothing, and taxes would go up for more than 300,000 Minnesota households an average of $200 per person, according to the Department of Revenue. And Minnesotans would be forced to navigate two different tax systems — state and federal — with radically different rules.

But if Minnesota were to adapt the state’s tax system to the new federal rules in full, more than 870,000 Minnesota households would see their taxes go up — by an average of $489. For instance, a couple earning $40,000 with two children would see an increase of $300 on their state taxes, according to House DFL research.

The problem Dayton and lawmakers face is that the state’s tax code is chained to the federal tax system because Minnesotans’ taxes are determined by their “federal taxable income,” which is calculated based on federal, not state, rules. Minnesota is one of just six states to operate this way. By doing so, the state’s tax system rests in the hands of the often unpredictable federal government, which last year passed the most sweeping tax overhaul since 1986, reducing rates on corporations and families but also eliminating and reducing a long list of deductions.

It’s like playing the public policy version of the game Jenga, but on a lopsided table.

“I’ll warn you in advance: This is complicated,” Dayton said at a recent news conference.

Itemized deductions swap

Dayton’s solution is to unchain the state from the federal system, giving Minnesota more autonomy over its tax code. And, in another show of independence, Minnesotans could take the simpler standard deduction on their federal tax return while taking itemized deductions like charitable donations on their state return, which they are currently prohibited from doing.

Then, Dayton’s plan would take many of the deductions Congress and President Donald Trump stripped out and put them in the state code, such as unreimbursed business expenses that fall on workers.

The plan also would create a new tax credit for those who make less than $140,000 — or $280,000 if married — cutting taxes an average $117 for more than 1.9 million Minnesotans.

For all the policy imperatives, Dayton’s plan also meets an important political objective in an election year in which both parties are desperate to grab the reins of state government: Wage earners would see no tax increase on their incomes. And, it would be paid for in large part by an easy political target: corporations with foreign income.

Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence, a nonpartisan research group, said Dayton is forgoing an opportunity to rethink the entire tax structure: “We’re taking the easy way out when we have a chance to simplify and streamline and make it easier to file,” he said. “We’re taking most of what the feds got rid of and putting in our system because it’s the easy political thing to do.”

Charlie Weaver, the executive director of the Minnesota Business Partnership, which is made up of the state’s largest companies, said the Dayton plan “punishes virtually every business in the state, both large and small.”

“We have a $329 million surplus,” Weaver said. “Why in the world would we talk about raising taxes on anybody?”

In the first year, taxes would remain mostly flat, but they would increase nearly $410 million in the second two years if the Dayton plan is implemented. That’s less than 1 percent of the current state budget.

Dayton would reinstate an automatic increase on cigarettes that the Legislature repealed last year, and which he signed. He would eliminate a tax cut — also passed and signed last year — for wealthy estates that would affect about 1,000 families per year.

But the bulk of the tax increases would come on businesses, including restoring an automatic increase in statewide commercial and industrial property taxes; continuing a major tax on health care providers that is set to expire at the end of 2019; limiting the interest costs businesses can deduct; and taxing foreign income that companies have been enticed to bring home by favorable treatment in the federal tax overhaul passed last year.

‘We have to do this’

The Dayton administration points to other features of the plan that would be favorable for business, including allowing companies to more quickly deduct the cost of equipment, saving them $100 million and encouraging them to buy new machines and hire the workers to run them. Another provision would simplify record-keeping and tax filing, saving businesses more money, according to the administration.

Dayton and his administration also say that given the sharp reduction in corporate taxes in the 2017 federal bill, business should help defray the cost of keeping taxes lower for families.

Dayton defenders also point to $1.5 billion in total tax cuts — affecting 2.3 million tax filers — that he’s signed into law since 2013, which doesn’t include the three tax cuts he wants to roll back. Republicans point to the new income tax on the wealthiest Minnesotans that Dayton signed, which they say is leading to an exodus of productive citizens.

Dayton’s latest plan fails to give the broad tax relief that Minnesotans need, said Chamberlain, the Senate Taxes chairman. “We need to go after tax rates. If we don’t go after rates, we’re not changing the dynamic.”

Rep. Greg Davids, R-Preston, chairman of the House Taxes Committee, dismissed Dayton’s calls to undo last year’s tax cuts on business property, cigarettes and wealthy estates, and he said a net tax increase is off the table. But he was optimistic that Dayton and Republicans can get something done. Davids was especially pleased that Dayton proposed divorcing the state tax system from the federal one by no longer basing state taxes on federal taxable income.

Davids, who said he’s spent hundreds of hours on the issue already, said there’s something else he and Dayton agree on: “We have to do this.”

 

Staff writer Jessie Van Berkel contributed to this report.