Minnesota Gov. Dayton Vetoes Omnibus Tax Overhaul Bill

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By Michael J. Bologna

As promised, Minnesota Gov. Mark Dayton (DFL) vetoed omnibus tax reform and conformity legislation May 17, pointing to the measure’s “misguided priorities” benefiting corporations and wealthy taxpayers.

Dayton used his veto pen to crush House File 4385, compromise tax overhaul legislation harmonizing competing bills drafted by Republicans in the House and Senate. Dayton reiterated his demand for a more equitable tax proposal ahead of a May 21 deadline for the spring legislative session. He also demanded passage of his plan to provide $138 million in emergency funding to school districts across the state.

“I am vetoing this bill because of its misguided priorities for corporations and the wealthy over the education of our children,” Dayton said in a veto message sent to House Speaker Kurt Daudt (R). “Yet, I remain hopeful that we can come to an agreement in the final days of the Session to fund Emergency School Aid and provide tax cuts that better serve our Minnesota families.”

Dayton’s decision to kill H.F. 4385 raises questions about Minnesota’s ability to conform its state tax code to several new features of the Internal Revenue Code, including the 2017 federal tax act ( Pub. L. No. 115-97), this year.

Under a state constitutional quirk, the Legislature is forbidden from meeting in regular session after the first Monday following the third Saturday in May in any year. By this yardstick, lawmakers have only four days to revise and pass a new tax proposal.

Waiting Until 2019?

Senate Majority Leader Paul Gazelka (R) has said the omnibus tax bill might have to wait until 2019. The comments came on May 16 after his chamber passed H.F. 4385 by a vote of 34-33.

“The Legislature did its job today and passed a good tax bill to make tax filing simpler, cut taxes for middle-income Minnesotans, and keep our economy humming,” he said in a statement. “I hoped the governor would be willing to find middle ground to get this done, but if not, January is not too late to pass tax conformity in time for next year’s tax filing season.”

H.F. 4385 includes many features supported by both Dayton and Republican leaders in the House and Senate. Among other things, the bill includes conformity to Internal Revenue Code Section 179 expensing, shifting the baseline for individual income tax calculations from federal taxable income to federal adjusted gross income, and simplification of small business accounting methods.

But Dayton objected to several provisions that cut tax rates and benefit corporate taxpayers, even in areas where the new federal tax bill takes them to task. He said H.F. 4385 largely holds corporations harmless with regard to deemed repatriation of foreign income, and conformity with the federal provisions for global intangible low-taxed income and foreign derived intangible Income.

“This bill would shield those companies from $200 million in state taxes on the profits they have sheltered overseas, cut the corporate tax at the cost of $60 million a year, and eliminate the corporate Alternative Minimum Tax, which would cost $15 million a year,” he said in the veto message. “These tax benefits and protections for corporations grow in the next biennium (FY 2021) to $482 million.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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