Four simple measures to improve Minnesota’s tax system — and ease the burden
What to do with Minnesota’s historic surplus of $9.3 billion? That is the question dominating the Legislature.
Some are advocating for tax relief through permanent rate cuts, and our state needs to do this. Minnesota’s residents are some of the most heavily taxed in the United States. We have the sixth highest top rate of state personal income tax and our state’s lowest personal income tax rate is higher than the top rate in 24 states. Minnesota’s businesses, too, face the joint third highest corporate income tax rate in the United States. Largely because of this, Minnesota ranks a lowly 45th on the Tax Foundation’s 2022 State Business Tax Climate Index. This is a factor in Minnesota’s below-average GDP growth and “lack of in-migration from other states.”
But a state’s tax burden isn’t simply a function of its tax rates, it is also a function of the regime’s complexity. Here, too, Minnesota has room for improvement. There are four simple measures — two for individual taxes and two for business taxes — which would reduce our state’s tax burden and help us move up those rankings.
Minnesota is one of just five states imposing an Alternative Minimum Tax (AMT) for individuals.
AMTs exist to prevent taxpayers from reducing their tax burden below a certain limit. They do this by requiring certain individuals to calculate their taxes twice and to pay the higher amount. The 2017 Tax Cuts and Jobs Act increased the federal AMT’s exemption amounts and phased out thresholds through 2025, so fewer taxpayers will be required to calculate and pay the federal AMT in the future, but Minnesota’s individual AMT does not conform exactly to the federal provision. So filers will have to calculate a state AMT even if they are no longer subject to a federal AMT.
The individual AMT should be abolished. The original goal of the AMT can be better achieved by simplifying the existing tax structure.
Minnesota is one of 15 states to have a “marriage tax penalty” built into its tax code.
These exist when a state’s standard deduction and tax brackets for married taxpayers filing jointly are less than double those for single filers.
Our state’s marriage tax penalty should be abolished.
It is not only discriminatory by penalizing marriage, but it imposes economic costs. Owners of pass-through businesses pay taxes on their business income under the individual income tax system. With a marriage tax penalty in place, married business owners are subject to higher effective tax rates on their business income than they would be otherwise. This is a real problem given that married couples dominate the top-earning 20 percent of taxpayers — they account for 85 percent of that category — and that that same top-earning 20 percent also has the highest concentration of business owners. Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses.
Setting the joint bracket to equal double the single bracket and repealing the credit would be revenue-neutral.
Minnesota is one of 13 states that doesn’t fully conform to the federal system for the deduction for depletion.
This works like depreciation but applies to natural resources. By imposing our own schedule, we make our tax system unnecessarily complex. Conforming to the federal schedule would help this.
Our state is one of only five to impose an AMT for corporations.
Like individual AMTs, these exist to prevent corporations from reducing their corporate income tax liability beyond a certain level but, again like individual AMTs, they are an inefficient means of doing so. As well as imposing the cost of calculating your tax liability twice, they undermine structural elements of the tax code, such as net-operating-loss provisions and deductions for business expenses.
Minnesota’s corporate AMT should be abolished.
The Minnesota Center for Fiscal Excellence notes that: “… the last time (Minnesota Department of Revenue) published a corporate income tax bulletin (about a decade ago) the corporate AMT constituted about 1% of state corporate income tax collections. Given the current circumstances, that’s not worth retaining.”
Together, these measures would lift Minnesota from 45th to 39th on the Tax Foundation’s rankings at little – if any – revenue loss.
To be sure, they are no substitute for tax rate cuts, but they have a better chance of garnering cross-party support and are undeniably steps in the right direction.
This op ed originally appeared in the Pioneer Press on March 17, 2022.