Why does Minnesota tax Social Security benefits?
A few years ago, Carl Ojala's granddaughter asked if he could move to Minnesota to live closer to her.
Ojala, then living in Michigan, had long missed going to sports games and watching school plays — being there for all the special moments in his grandchildren's lives — because he was hundreds of miles away.
"If you have grandkids you'll see how important they are to an old guy's life," Ojala, 77, said.
So Ojala and his wife packed up their bags, sold their house and moved to the Twin Cities.
But when it came time to file taxes, Ojala learned there was a drawback to the North Star state.
"I found out I got hit by Minnesota for a fairly decent chunk of money because I get Social Security," said Ojala, a retired college professor. "And that didn't sit very well."
Ojala wanted to know why Minnesota taxes Social Security benefits and how many other states do the same? He was among several readers who submitted similar questions to Curious Minnesota, the Star Tribune's new community-driven reporting project.
Thirty-seven states don't tax Social Security benefits.
Minnesota is among a minority of states — 13 — that impose a state-level tax on Social Security benefits. Some states, like North Dakota, tax Social Security benefits at the same level as the federal government; others collect a lower tax than the feds, including Connecticut.
In Minnesota, up to 85 percent of Social Security benefits are fair game for the tax collector, depending on one's income. Low-income residents are exempted from the tax; middle-income earners pay taxes on a lower portion of benefits.
But why does Minnesota go after Social Security benefits in the first place? The answer can be traced back to the overall design of our state's income tax system.
Minnesota models its taxes based on the federal system, then makes "some minor adjustments," said Jerry Zhao, an associate professor at the University of Minnesota's Humphrey School of Public Affairs.
When the federal government started taxing Social Security benefits under President Ronald Reagan in 1984, Minnesota followed a year later.
Though Minnesota's tax long matched its federal counterpart, state lawmakers in 2017 lowered the burden for middle income earners, so the state now taxes a lower portion of benefits than the federal government.
The tax continues to be a recurring issue at the State Capitol.
The state forecasts to pull in around $400 million each year from taxing Social Security benefits, according to estimates by the Minnesota Department of Revenue.
Republicans have repeatedly pushed to eliminate the tax in recent years. Some Democrats have also supported reducing the tax, though they've stopped short of total overhaul.
This year, lawmakers have pushed for several bills reducing the state's tax by varying amounts; Gov. Tim Walz's two-year budget proposes cutting the tax by $22.9 million over the next two years.
Minnesota has some of the highest taxes in the country. Though there's no state tax on food, clothing and other necessities, the state ranks 5th highest for overall tax burden, according to a 2018 WalletHub analysis.
Brian Marum, treasurer of the Taxpayers League of Minnesota, said the state should work on phasing out the tax on Social Security benefits.
Marum said the tax places undue burden on Minnesotan's senior citizens, pointing out that Kiplinger financial magazine ranked Minnesota as the least tax friendly state for retirees.
"It's just a burden that we don't feel is necessary, particularly for those folks who have worked 40 years and eventually want to enjoy the remaining years of their lives," he said.
Others, including those who advocate for state's retirees, say a full removal would go too far.
"While a full repeal of the Social Security tax is really appealing, we know that it's also very costly," said Mary Jo George, associate state director of advocacy at Minnesota AARP. "We want to make sure the state has adequate revenue as well in order to preserve and fund the essential services that many Minnesota seniors and their families depend on."
Even though the state places low on affordability. AARP ranks Minnesota as the 11th best state to retire, citing the state's health care and quality of life.
Though Ojala doesn't like the state taking a cut of his benefits, he has no plans to move. "I'm losing money by living here," he said, "but my family is worth it."
Austen Macalus is a University of Minnesota student on assignment for the Star Tribune.
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