The state Senate passed a bill Thursday that would reduce the state’s lowest-tier income tax rate and prevent 99 percent of Minnesotans from getting hit with a state tax increase as a result of the new federal tax rules that took effect this year.
“We have to get this done,” said Sen. Roger Chamberlain, R-Lino Lakes, chairman of the Taxes Committee and author of the bill, which passed 34-32 on a party-line vote.
Lawmakers from the Republican-controlled House and Senate now must compromise on their different plans and then win the approval of DFL Gov. Mark Dayton — and do it before the Legislature adjourns for the year May 21.
If the Legislature takes no action, Minnesotans could face a complex task next year filing their state taxes because of the changes at the federal level passed by Congress and signed by President Donald Trump. Minnesota uses federal taxable income to arrive at state taxes; without legislative action, taxpayers would have to use the old federal rules, leading to confusion for taxpayers and complexity for the Minnesota Department of Revenue. And because of the loss of some federal deductions, 300,000 Minnesotans would face a state tax increase.
The Senate plan would use $176 million from the state budget surplus to make it possible to lower the bottom tax rate from 5.35 percent to 5.1 percent beginning this year. It would also keep in the state tax code deductions that were eliminated by the federal government such as personal and dependent exemptions; reduce estate taxes for wealthy heirs; and enact automatic triggers to cut taxes if the state has a surplus and economic growth.
The House plan would lower individual income taxes for 2.1 million Minnesota filers by increasing the amount of tax-free money that married filers can earn by $1,000, as well as lowering the second-lowest income tax rate from 7.05 percent to 6.75 percent for incomes earned in the 2020 tax year. But because the plan eliminates a number of deductions, about 148,000 Minnesotans would see a tax increase.
Dayton would also retain the deductions, like the Senate, but his plan would raise taxes on businesses to give a small income tax cut to about 2 million Minnesotans.
All three plans would sever the state’s income tax system from the federal government’s, giving Minnesota more autonomy in the future.
The debate in the Senate largely mirrored past conflicts between the DFL governor and GOP Legislature. Dayton and DFL lawmakers point to a record of fiscal stability and strong measures of quality of life such as schools and life expectancy. Republicans counter that Minnesota must lessen the burden of government or get left behind.
“We all know people who have moved across the border,” Chamberlain said, referring to Minnesotans who have left the state in search of lower taxes. “If we give people an opportunity, they will create, innovate, outperform, outproduce everybody.”
Senate Minority Leader Tom Bakk, DFL-Cook, made an impassioned speech that drew on his years in the Legislature when lawmakers faced chronic budget deficits. He also attacked the bill as giving short shrift to the working and middle class: “I was hoping I could vote for safe schools or working families today,” Bakk said. “Instead, the Minnesota Senate spent it all on millionaire families’ estates and big corporations.’’
Chamberlain shot back: “You can believe the Earth is flat or the moon is made of green cheese, but this gives to the people.”
DFL senators offered a series of amendments to expand the Working Family Credit, a state version of the Earned Income Tax Credit that benefits the working poor; restore an inflationary increase on cigarette taxes; and tax corporations. All of the amendments were voted down.