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Continued: Minnesotans face higher taxes with gap between state, federal codes

  • Article by: JENNIFER BROOKS , Star Tribune
  • Last update: September 23, 2013 - 4:41 PM

“One man’s loophole is another man’s livelihood,” Dayton said, quoting the late U.S. Sen. Russell Long. “For the person who’s been getting one or another of these exclusions that have been ongoing, it’s a tax increase. I haven’t found anybody who likes tax increases. … It’s hard to say yes to one and no to another.”

If there’s enough money in the budget once the Legislature finishes paying off the last of the money it borrowed from Minnesota schools, Dayton said he would urge legislators in 2014 to push for retroactive tax breaks for at least some of the Minnesotans pinched by tax conformity on their 2013 tax forms.

House Taxes Committee Chair Ann Lenczewski, DFL-Bloomington, favors across-the-board tax conformity, both to keep the tax process simple and to avoid unpleasant shocks like the one Scandin faces.

“Generally, Minnesota tries to conform, but sometimes that costs a lot of money,” said Lenczewski, who pushed a bill this session that would have brought the state in full compliance with the feds.

But tax breaks don’t come cheap. The state revenue department estimates that complying with every federal tax break of the past few years would cost the state $186 million in 2014 and $114 million in 2015.

Many of those tax breaks enjoy broad bipartisan support.

Minnesota families formerly got a tax break on money they received from their employers — up to $12,970 — to help offset adoption costs. Congress made those tax breaks permanent. Minnesota did not, so those families could owe the state hundreds of dollars on their 2013 taxes. The same goes for employees who get tuition assistance from their workplace and who now must pay additional state taxes for continuing their education.

“The [taxes] that hit average families, those are things we always look at,” said state Rep. Jenifer Loon, R-Eden Prairie, who said she would support the return of tax breaks for adoptive families. Republicans also want the state to do away with the so-called marriage penalty tax on married couples.

Legislative timing

Why didn’t conformity pass this year? By the time Congress passed its tax bill, it was January, days before the governor was about to release the state budget and his own tax proposals. At the Legislature, most of the attention was on the $2.1 billion package of tax increases under debate in St. Paul, not the changes that had just passed in Washington.

When the House took up debate on conformity, Republicans balked at the cost, sparking a bitter floor fight.

The small cluster of conformity provisions that did pass include one that preserved the right of Minnesota teachers to write off $250 worth of school supplies they buy for their classrooms, along with a few measures that will spare businesses from having to keep separate sets of books for their federal and state taxes.

Next year’s legislative session begins at the end of February, and by then, many Minnesotans already will be working on their 2013 tax returns. Companies that offer the soon-to-be-taxed benefits to their employees have begun breaking the bad news.

At General Mills, which offers employees both education and adoption assistance, workers are bracing for tax time. One employee, who recently adopted twins, received an $18,000 benefit from the company and now faces a hefty state tax bill.

“The tax on that $18,000 benefit was pretty substantial. To have it be applied retroactively only added to the sting,” said company spokeswoman Maerenn Jepsen. “General Mills has offered adoption benefits and educational assistance for years, so this has impacted our Minnesota-based employees. Most states choose to adopt and conform with federal changes when they occur.”

Restoring the tax exemption for adoption assistance from employers would have cost the state an estimated $400,000 in 2014. Allowing workers tax-free employer tuition assistance would cost $4.4 million.

Exempting homeowners who go through foreclosures or mortgage debt forgiveness from additional taxes would cost $7.2 million, but Dayton said: “I think that would be manageable for the state and would make a big difference for [Scandin] and others in that situation. The challenge then becomes: If you do this one, then why not another one and then why not another one?”

Eliminating the marriage penalty — a quirk of the tax code that can bump married couples with comparable incomes into a higher tax bracket — would cost the state a whopping $111.9 million in 2014.

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