Minnesotans who suffered through a confusing and anxious tax filing season this year will get some relief in 2020 after the Legislature passed a bill that simplifies taxes — and reduces tax bills for many households and businesses.
The kitchen-sink-style tax bill came together as a compromise among the DFL-controlled House, the Republican-held Senate and Gov. Tim Walz, who signed it into law Thursday. It will reduce the second-lowest income tax tier by 0.25 percentage points, cut property taxes for businesses, increase the amount of money Minnesotans can earn without paying any tax at all and provide cash to workers at the bottom rungs of the income ladder, among dozens of other provisions spread out over more than 300 pages.
Its most important provision in dollar terms will continue a tax on health care — albeit at a reduced rate of 1.8% — which had been scheduled to expire at the end of the year. The tax will raise $872 million during the next two years to support health programs, including insurance for the impoverished and people with disabilities.
In a rare bit of agreement, both Republicans and Democrats praised the outcome.
"It's movement in the right direction for the state of Minnesota," said Sen. Roger Chamberlain, R-Lino Lakes.
Cynthia Bauerly, who is Walz's commissioner of the Department of Revenue, said, "The primary takeaway is that the tax bill focuses on lower- and middle-income taxpayers as a priority."
Here are some key provisions:
• The second income tax bracket will go from 7.05 to 6.8%, affecting married couples filing jointly who earn at least $38,771. Bauerly said 1.4 million Minnesotans will get an average tax cut of $100, with a maximum cut of $280.
• The working-family tax credit gets another $60 million, so a family of four making $35,000 in income will see a tax benefit of $500, which will come as cash if they don't pay income tax.
• The majority of taxpayers use the simplest tax return and claim the standard deduction, which equals the amount of money you can make before paying a penny in state income tax. Under the new law, it will double to match the federal standard deduction of $24,000 for a married couple.
• After eliminating an automatic increase tied to inflation in 2017, the Legislature cut the commercial and industrial and cabin tax another $50 million this year.
• School construction levies have failed in greater Minnesota in recent years because farmers have often argued against them, saying they wind up paying too much of the bill; the new law expands a program to lighten their load.
• When cities and counties want voters to approve a local sales tax, they'll have to come to the Legislature to get approval before the referendum.
A welcome alignment
The bill should also simplify the filing process that was a cumbersome mess for many households and businesses this year. Minnesotans' head-on-desk frustration during the 2019 tax filing season followed a major federal tax overhaul in 2017 that had messy implications for Minnesota taxes, requiring a close accounting of income, expenses and deductions with two very different sets of rules.
Christopher Wittich, a CPA with Boyum Barenscheer, said for "the majority of households, it will be easier" to file and cheaper if they pay a tax preparer.
Because the Legislature didn't change state tax law in 2018 to conform with changes Congress made to federal law in 2017, the state Department of Revenue created new forms to calculate income and deductions it previously relied on federal forms to capture.
That led to some peculiarities. On its form for itemized deductions, Minnesota included a line for the previous year's state income taxes, even though the state doesn't allow deductions for its own income taxes.
It needed the line to calculate a deduction formula affecting high-income individuals that was on the U.S. form for more than two decades but was eliminated in the 2017 federal tax changes.
Such absurdities should now smooth out for Minnesota taxpayers and the accountants, lawyers and software developers who assist them.
For tax nerds, the new law accomplishes two things at once. It aligns many of the state's tax provisions with the massive tax overhaul passed by Congress in 2017, which prevents households and especially businesses from having to abide by two sets of radically different tax systems. But the new law also means Minnesota will not base income on "federal taxable income," which in the past has required the Legislature to do an annual scramble to update the Minnesota tax code any time Congress changed tax law.
The new law is not without detractors.
Nan Madden, director of the progressive-leaning Minnesota Budget Project, said the bill forgoes too much potential corporate revenue, while giving a tax cut that doesn't adequately help the working and middle class. She's also concerned that the bill doesn't raise any money, with Walz and lawmakers instead dipping into state budget reserves to make their deal work.
"The point of the budget reserve is to be our rainy-day fund so when there's economic downturn, and the state has fewer resources and more people need help, the money is there," she said. "It's probably going to be a rainy day sometime in the next two to three years. We should be getting ready for that situation and not weakening our position."