Can Minnesota afford to end its tax on Social Security?

Steve Ingram, a retired construction superintendent, says that Social Security makes up a substantial part of the fixed income he lives on with his wife, Rita, a former self-employed hair stylist.

The Cottage Grove couple raised seven kids in the home they still share, and though they love Minnesota, in recent years they've started to seriously consider moving to another state that doesn't tax their benefits.

"Costs keep going up and we're not capable of staying here anymore," said Ingram, who has lived in Cottage Grove most of his 66 years. "It's not like I'm asking for a handout, but we paid taxes for a long time."

To Republicans who hold a majority in the Minnesota Senate, Ingram is a case study for their proposal to end state taxes on Social Security income. It's the centerpiece of their 2020 tax agenda this spring and likely of their election platform in the fall.

But to Democrats who control the House, the GOP proposal ignores the reality that many seniors, including those living in the lowest income brackets, are already exempt from most if not all state taxes on Social Security. Ending the tax across the board, they argue, would mainly benefit the wealthy while creating a gaping hole in the state budget that could undercut services for the state's growing senior population.

Minnesota is one of only 13 states that now tax at least some Social Security benefits paid to seniors. That's a data point that has given force for Senate Republicans' argument for using part of the state's projected $1 billion surplus to eliminate state tax on federal income received by hundreds of thousands of Minnesota retirees. GOP leaders say the proposal is a top request from constituents, especially those at or approaching retirement age. A full rollback, they argue, will make the state more affordable and appealing to older residents.

"Let's once and for all agree that we should fully exempt Social Security income," said Senate Majority Leader Paul Gazelka, R-East Gull Lake. "I think the average Minnesota senior thinks, let's exempt that."

"It's a big tax cut and it's one that grows over time as we have more and more seniors," said Nan Madden, director of the Minnesota Budget Project. "We really need to ask the question: Should we prioritize making a tax cut just for one age group of people that leaves out the folks who are struggling most and undermine our ability to find the types of services that seniors count on?"

Lawmakers backing the full cut downplay those concerns. At a February news conference, Senate Taxes Committee Chairman Roger Chamberlain said eliminating the "punishing tax" on seniors who have already paid into the system will help the economy.

"We will balance the budget as we go forward, the numbers sing and dance all you want," the Lino Lakes Republican said. "But the bottom line is: You reduce taxes, you drive a better economy."

A full fiscal analysis of the latest tax proposal is not yet available. But revenue estimates show that a full exemption would impact about 377,000 returns in a state that's home to more than 800,000 residents over 65. Senate Republicans say their proposal would help Minnesota seniors who make more than $60,000. Some independent experts, meanwhile, say that because of the way the tax is structured, the impact will be greatest on couples making more than $100,000.

Minnesota lawmakers have made several changes aimed at lowering the tax burden for seniors in recent years. One measure, passed in 2017, raised the threshold for taxing benefits and decreased rates for married couples making up to $77,000. That change exempted an estimated 75,000 Minnesotans from having their Social Security benefits taxed and provided cuts to more than 200,000 seniors. The Legislature went a step further last year, increasing deductions connected to Social Security taxes for married couples making up to $78,000 and individuals making $61,000.

George acknowledged that full repeal would be popular with many AARP members. But she said the organization shares Democrats' concerns that "full exemption of the Social Security tax would be very costly for the state." Demands for state-funded services for seniors are expected to grow, as the number of Minnesota residents over 65 surpasses the school-age population this year.

"What we have done is really urged lawmakers to take a balanced approach to the Social Security tax to ensure we have adequate funding for other programs that seniors rely on," she said.

Supporters of the full cut say that, even with the existing exemptions and deductions, Minnesota remains a national leader in taxing retirees. They argue that the status quo will drive seniors like the Ingrams out of the state, reducing the overall tax base.

"More and more seniors are leaving Minnesota, and that is one of the factors that they look at," Gazelka said.

Some Minnesota seniors say they're seeing more friends take that path, or considering it themselves. But older residents move for a variety of reasons, including health, family and weather. And available data do not show widespread relocation. The U.S. Census' most recent American Community Survey estimates that just 1% of the people age 65 and older in Minnesota moved out of the state, a lower rate than for younger residents. Seniors leave nearby Illinois, Iowa, Michigan and Wisconsin — all states that do not tax Social Security benefits — at similar rates.

"We have to do that in a responsible way that allows you to cut taxes for senior citizens, but still allows you to maintain the resources to provide for important services — health care, housing and security for senior citizens," the Dilworth DFLer said.

If there's a deal to be had, it will likely emerge late in the legislative session amid negotiations over a tax bill — if there is one this year. Competing proposals from Democrats and Republicans over the budget surplus have been clouded by the economic turmoil caused by the coronavirus outbreak. Marquart said "everything has to be re-evaluated" given the situation. Still, Gazelka said Thursday that the Social Security tax cut remains a priority even amid fiscal uncertainty.

The Ingrams, who also draw from Steve Ingram's pension, said recent reductions approved by lawmakers helped. The couple, who retired early due to physical and health issues, got a refund for the first time, instead of owing money. Still, they're holding out hope that lawmakers take more action.

"Having to sell our home that we raised our children in including ourselves and moving to another statew is overwhelming after all that we've been through," said Rita Ingram, who turns 66 later this month. "Some financial breathing room would be wonderful."