Gov. Tim Walz proposed a tax package this week intended to help alleviate a headache confronting Minnesota businesses and families struggling to file their taxes in the wake of President Donald Trump’s federal tax cuts.
Republicans and their business allies, however, have quickly denounced the proposal, calling it yet another tax increase on businesses in a year when the DFL governor already has proposed to hike the gas tax, extend a tax on health care providers and raise the metro sales tax for transit.
On one point, both sides agree: They would like to give Minnesotans future relief from complications many are enduring this year as they file their taxes.
“Nightmare” is how Chris Wittich, a tax accountant at the firm Boyum Barenscheer, described it. “It’s been a struggle for businesses and families,” he said, adding that the problem stems from state and federal tax laws that are currently in an awkward marriage.
The state’s tax system is chained to federal tax rules because Minnesota uses “federal taxable income” to help determine residents’ tax bills. But the state’s tax system isn’t automatically updated every time the federal government changes its tax rules — most recently in 2017 when the GOP-controlled Congress passed a massive tax cut.
Absent any action by the Minnesota Legislature, analysts say the two tax systems resemble a blended family rife with dysfunction.
Walz’s proposal would divorce state and federal tax policy by ending the reliance on federal taxable income to determine Minnesota taxes. Backers say it also would create predictability and consistency for businesses using tax provisions such as depreciating assets.
“There’s a benefit to businesses from the simplicity,” said Minnesota Revenue Commissioner Cynthia Bauerly.
Families would gain some of the tax breaks that were taken out of the federal overhaul, including personal and dependent exemptions that are important to large households.
The Walz plan also would expand the working family tax credit, which is like the state version of the federal earned income tax credit. Bauerly said this would help low-income families hit hardest by Walz’s proposed 20-cents-per-gallon gas tax increase.
But to pay for those personal income tax breaks, the Walz plan would collect lots of tax from corporate foreign earnings. It also would take away many business deductions. Some of those state business tax breaks were removed in the federal overhaul as well when Congress cut the federal corporate rate by 40 percent.
Business groups are now girding for a tax fight with Walz.
Beth Kadoun, a tax lobbyist for the Minnesota Chamber of Commerce, said the Walz plan does nothing to address areas where Minnesota is an “outlier” and not competitive with other states. The tax increase on businesses, she said, would mostly wind up falling on consumers and workers.
The GOP-controlled Senate is likely to join the fight as well.
“We want to reduce burdens on business and family and jump-start the economy. The governor’s tax plan doesn’t do any of that,” said state Sen. Roger Chamberlain, R-Lino Lakes, who chairs the taxes committee.
He called tax increases a “nonstarter” and said his Republican colleagues in the Senate, including Majority Leader Paul Gazelka, share that viewpoint. “We take a lot from the citizens of this state,” he said.
Bauerly said the taxes will help pay for Walz priorities like education, health care, transportation and what the governor broadly calls “community prosperity.” That could include spending on broadband access, child care, housing and aid to counties and cities, all of which are in high demand in greater Minnesota.
“Those are investments we have to make in Minnesota,” Bauerly said. She argues that the new spending would cultivate a skilled workforce and build a transportation system that will move people and goods — both a must for Minnesota businesses.
Walz’s plan also would claw back tax cuts on commercial and industrial property, cigarettes, premium cigars and wealthy estates — all cuts that were signed in 2017 by former DFL Gov. Mark Dayton. Bauerly said those tax cuts contributed to fiscal instability in the state budget.
Tax preparers like Wittich, however, are urging the politicians to simplify the tax code and take action “to avoid this same nightmare next year.”