Individual Income Insights: Minnesotans get Ready to Rumble over Tax Reform

Minnesota State Capitol

The 2017 federal tax act (Pub. L. No. 115-97) has sent state legislatures into a tizzy. Some have responded with tax cuts to return the added revenue to taxpayers (including Georgia and Iowa). Other states have cast federal tax reform not only as a giveaway to the rich, but also as an economic missile intended to harm the economies of high tax states (such as New York and Connecticut), and have sought instead to protect residents from a federal tax increase. Still another group of states are deadlocked: states in which one party controls the governor’s office and another controls either one or both houses of the legislature. Minnesota now counts itself among this third group, with Minnesota Gov. Mark Dayton (DFL) facing off against a hostile legislature controlled by the GOP. Disagreements within the legislature have complicated this standoff, and at the time this blog is published three separate tax proposals are each in play, creating a headache for those trying to bring all sides together. At issue are classic conservative/liberal ideological differences: who should pay how much tax, and how to spend the revenue collected. 

In the Blue Corner: Dayton’s Proposal

Dayton’s proposal focuses on tax credits, selective conformity, and aggressive tax increases on wealthy businesses and individuals. The proposal would preserve the federal exemption in the form of a state tax credit, move from federal taxable income to federal adjusted gross income for determining Minnesota tax liability, expand the Working Family Tax Credit, conform to the full I.R.C §179 asset expense deduction, and protect some traditional itemized deductions, such as the mortgage and tuition payments deduction. But what the governor giveth, he also taketh away: wealthy and out-of-state businesses and individuals will see a tax increase through a reduction in the estate tax exemption, an end to tax breaks for tobacco companies, and a reduction to big business property tax breaks and the debt interest deduction. 

Dayton has not forgotten the result of last year’s tax reform fight with legislators, parts of which his proposal now labels as mistakes (hint: it is the ones that benefit the wealthy). The governor frets about the sustainability of tax cuts which, according to him, could cost the state more than $1.5 billion and threaten the stability of state finances. Critics point to a tax incidence analysis prepared by the Minnesota Department of Revenue claiming that the governor’s proposal, paired with an extension of the MinnesotaCare 2 percent provider tax, would increase the tax burden for all Minnesotans. Further, critics claim that the governor makes Minnesota less competitive by increasing taxes on businesses, stifling investment in a state lagging behind economic growth across the nation. 

In the Red Corner: The Undercard?

Although united in opposition to the governor’s proposal, Republicans in the Legislature have only barely been able to agree on their vision of Minnesota tax reform. The Legislature passed a reconciliation of the two houses’ plan, H.F. 4385, on May 16. The bill passed in the Senate by only one vote, and the governor has already vetoed the omnibus legislation claiming the need for more “equity,” as reported in the Daily Tax Report: State. With only a one seat Republican majority in the Senate, the governor does not fear an override and appears willing to fight with Republicans over repatriation, school funding, and taxes on the wealthy. 

The Republican legislation is a conglomeration of separate proposals advanced by each house. The bill keeps the Senate’s proposal to reduce income tax rates slowly through revenue triggers, instead of a larger one-time cut. The legislation also decouples from federal global intangible low tax income (GILTI) provisions, a frustrating part of the debate for the governor, who claims that school funding can be solved by amending this single provision. 

A Way Forward?

Republicans and the governor agree on some issues: the move to federal adjusted gross income, §179 expensing, and small business accounting methods. The agreement has been overshadowed by a list of legislative sticking points. With the spring legislative session having ended on May 21, government officials may need a special session to accomplish their lofty tax reform goals. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is accepting imperfect tax reform preferable to gridlock? 

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

Tune in for Bloomberg’s tax reform webinar on Wednesday, May 30, 2018, from 2 pm to 3 pm. “Federal Tax Reform: State Impact and Responses” will give you a snapshot of state responses to federal tax reform and let you know what to expect during the remainder of the year. Register for this webinar here

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.