Minnesota Tax Conformity Bill Goes to Conference Committee

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By Michael J. Bologna

Members of the Minnesota House and Senate began the task of harmonizing two versions of tax overhaul and conformity legislation, hoping to beat a May 21 deadline for the spring legislative session.

The tax conference committee met for the first time May 9, seeking to iron out differences in House and Senate versions of House File 4385, the omnibus tax bill. The two versions conform the state tax code to several new features of the Internal Revenue Code, including the 2017 federal tax act ( Pub. L. No. 115-97). In addition, the two proposals use different strategies to provide tax relief to corporate taxpayers and more than 2 million individual taxpayers.

House Tax Committee Chair Greg Davids (R) said the 10-person tax conference committee would draft a single proposal for consideration in the two legislative chambers. Davids said the conference process could take several days.

Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence (MCFE), told Bloomberg Tax he expects a fairly smooth negotiation process. While there are several notable differences between the House and Senate versions, both were crafted by Republican majorities in each chamber with similar views on conformity and tax reform.

Gov. Mark Dayton (DFL) represents “the biggest hurdle,” Haveman said.

Dayton has floated his own conformity and reform proposal, which includes targeted relief for low- and middle-income taxpayers through the use of credits. Dayton called for the creation of a new nonrefundable personal and dependent tax credit for married filers earning less than $280,000 and an expansion of the working family tax credit.

In addition, Dayton has proposed the repeal of several tax breaks supported by Republicans in the 2017 budget and revenue bill. Those breaks included relief aimed at tobacco companies, cuts on property taxes paid by corporations, and a softer approach to estate taxes paid by high-income Minnesotans.

“The big question is the governor,” Haveman said. “This is just the House and the Senate, and the governor has said he doesn’t want to partake in three-way negotiations. Behind the scenes there may be some communications, but if you take him at his word, he’s not stepping in for negotiations until the House and Senate hash things out, which could take several days.”

Points of Agreement

Haveman noted there are several issues on which the House, the Senate and Dayton have already expressed agreement. For instance, all three parties support 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, simplifying small business accounting methods, and establishing dependent/personal exemptions to adjust taxable income for family size.

But there are several noticeable differences. The MCFE recently released an analysis outlining key difference between the House and Senate versions of the omnibus tax legislation:

  •  Neither the House or Senate seek to tax foreign derived intangible income (FDII) or global intangible low-tax income (GILTI), but Dayton’s scheme raises revenue through a GILTI minimum tax on overseas income to pay for his proposed tax credits.
  •  The House would raise revenue through deemed repatriation income, while the Senate ignores this revenue opportunity.
  •  The House reduces the corporate tax rate from 9.8 percent to 9.64 percent for tax years 2018 and 2019 and then drops the rate to 9.06 percent for tax year 2020 and beyond. The House plan also eliminates the alternative minimum tax. The Senate proposed no such changes.
  •  The House lowers the second bracket of the individual income tax by shifting the 7.05 percent rate to 6.95 percent for 2018, 6.9 percent for 2019, and 6.75 percent for following tax years. The Senate simply drops the lowest income tax bracket to 5.1 percent from 5.35 percent.
  •  The House increases the standard deduction for married joint filers from $13,000 to $14,000, while the Senate makes no such changes.
  •  The House adopts Minnesota itemized deductions for property taxes paid up to $30,000, charitable contributions up to 60 percent of adjusted gross income (AGI), home equity interest up to $750,000, medical expenses exceeding 7.5 percent of AGI, and casualty losses above 10 percent of AGI. The Senate version generally follows the lighter menu of deductions under the federal law, but allows a state deduction for medical expenses exceeding 7.5 percent of AGI.

Potential Confrontation?

Haveman predicted a relatively smooth path toward a single tax bill over the next 11 days, but he pointed to a potential confrontation between the Republican-controlled Legislature and Dayton. Several features of the governor’s plan are philosophically inconsistent with the emerging legislative approach, he said.

“Dayton is banking on a lot of money coming from business conformity with federal business taxation than Republicans in the Senate, and less so the House, are willing to abide by,” Haveman said. “He has a lot of spending and redistributional interests he’s put on the table and there is very little money to do that without taking money from the corporate income tax and moving it to the individual side.”

Farm Machinery

Meanwhile, a bill introduced on Section 179 conformity with regard to farm machinery is dead for the session. S.F. 3494 remains in the Senate Revenue Committee. The bill has only one sponsor and has never received a hearing.

Currently, taxpayers claiming federal Section 179 expensing that exceeds Minnesota’s limits must add back 80 percent of the difference on their state return. Taxpayers are permitted to recover that amount over the next five years through an income subtraction of 20 percent per year. S.F. 3494 specifies that the new federal provisions do not apply to deductions of expenses paid or incurred for farm machinery.

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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