House Republicans at the Minnesota Legislature released a plan Saturday to cut the second-lowest income tax bracket from 7.05 percent to 6.75 percent by tax year 2020, which if passed into law would be the first income tax rate reduction in Minnesota since 2000.
The House GOP tax plan — which also includes a higher standard deduction for more tax-free income and an increase in the allowable property tax deduction — comes in response to the federal tax overhaul passed last year that will have a significant impact on Minnesotans unless the Legislature acts.
Minnesotans' state taxes are linked to the federal system. Due to the federal tax overhaul, Minnesota has to update its tax code or tax filers would be forced to use the old federal rules to determine their state taxes, which would create a complex headache for both filing and administration.
But simply adopting the new federal rules in full would take some key deductions away from Minnesotans on their state tax return, resulting in a tax increase for an estimated 870,000 Minnesota households, by an average of $489, according to the state Department of Revenue.
"Federal tax reform presented a significant opportunity to simplify our state tax code," Rep. Greg Davids, R-Preston, said in a Saturday news release. "House Republicans' goal from the onset was holding as many Minnesotans harmless as possible and preventing headaches for filers next year."
The House Taxes Committee, which Davids chairs, will hear the bill this week. Senate Republicans are expected to present their own plan soon. The Legislature is scheduled to adjourn for the year on May 21.
Matt Swenson, a spokesman for Gov. Mark Dayton, said the governor is reviewing the House Republicans' plan.
Dayton offered his own tax plan earlier this year. It features a small income tax cut for about 2 million Minnesotans, but it would keep in place a health care tax — which funds a health insurance program for the working poor called MinnesotaCare — that is scheduled by law to sunset in 2019.
Republicans attacked Dayton's plan last week as an unnecessary tax increase in a time of government surpluses. In response, Dayton said they were mischaracterizing his plan.
Because both the House GOP and Dayton would divorce the state's tax system from the federal rules, Davids said in his statement that there is potential for compromise.