Minnesota Senate Republicans are proposing a reduction in the state's lowest income tax rate, as part of a proposal unveiled Tuesday that they say is intended to prevent any tax increase on 99.8 percent of Minnesotans.
The Senate GOP released its plan a day after the House passed its own tax cut plan on Monday. Senate Republicans want to use $176 million in money from the state's projected budgeted surplus to reduce the lowest-tier income tax rate from 5.35 percent to 5.1 percent beginning this year.
"The current system is abusive and punishes hard work," said Sen. Roger Chamberlain, R-Lino Lakes, the Taxes Committee chairman.
Sen. Ann Rest, DFL-New Hope, said details of the plan need to be scrutinized. "Who cannot like a bill that lowers taxes? But you have to look at who is getting those tax breaks," said Rest, the lead DFL senator on the taxes panel.
Unless the Legislature responds to the federal tax overhaul passed by Congress last year and signed by President Donald Trump, 300,000 Minnesotans could face tax increases, and the state tax code would be come a confusing maze for both taxpayers and the Minnesota Department of Revenue. Lawmakers and DFL Gov. Mark Dayton have until the Legislature's May 21 adjournment deadline to rework the state tax code.
Minnesota is one of just a few states that bases state taxes on an income figure plucked from the federal filing called federal taxable income, which then becomes the starting point for determining Minnesotans' taxable income.
Every year, the Legislature has to change the law to bring the state tax system into alignment with federal law, an annual exercise known around the Capitol as "conformity."
This year, after the biggest federal tax overhaul in three decades, the Legislature must act, or the Department of Revenue would have to administer the state's tax system based on the old federal law, leaving a filing headache for both tax collectors and taxpayers using two different systems.
If Minnesota adopts the federal rules in full, however, about 870,000 Minnesotans would face a state tax increase averaging $489, according to the Department of Revenue, because of the loss of deductions such as the personal and dependent exemptions.
House bill differs
The House bill that passed Monday would lower the second-lowest income tax bracket as well as the corporate rate, reducing income taxes on 2.1 million Minnesotans. About 148,000 taxpayers would pay more under the House plan, because they would lose major deductions.
In addition to lowering the bottom income tax rate, the Senate GOP plan would retain many of the deductions that are eliminated in the federal tax overhaul such as the personal and dependent exemptions. Like plans from both the House and the governor, Senate Republicans' plan would separate Minnesota from the federal tax system by using a new way to calculate income.
But Senate Majority Leader Paul Gazelka, R-Nisswa, distinguished the Senate GOP proposal from Dayton's and even the plan from his fellow Republicans in the House.
"This is the only tax plan that protects the wages of 99.9 percent of Minnesota taxpayers, and 82 percent of families will actually receive a tax break," Gazelka said.
Rest said Senate DFLers are concerned with a provision that would decrease the estate tax by increasing the tax-free amount from $3 million to $5 million.
The break for wealthy heirs contrasts, Rest said, with the lack of any new money for the Minnesota Working Family Credit, which is the state's version of the federal Earned Income Tax Credit, aimed at helping the working poor.
In addition to addressing the immediate problem of tax conformity, Chamberlain's bill also seeks to alter the state's long-term fiscal posture, instituting automatic triggers that would reduce taxes if the economy is growing and the budget is in surplus.
Dayton, who introduced his own tax plan earlier this year, said Tuesday he is reviewing the Senate GOP proposal.
Rest warned her GOP colleagues that Dayton's views should be considered. "He's a major player here, and he's not going to just sign some bill sent to him by a Republican Legislature," she said.