Gov. Dayton’s veto is to blame for tax filing complexity, not federal tax cuts

“Gov. Tim Walz proposed a tax package this week intended to help alleviate a headache confronting Minnesota businesses and families struggling to file their taxes in the wake of President Donald Trump’s federal tax cuts.”

So reported the Star Tribune last week. it went on,

“Nightmare” is how Chris Wittich, a tax accountant at the firm Boyum Barenscheer, described it. “It’s been a struggle for businesses and families,” he said, adding that the problem stems from state and federal tax laws that are currently in an awkward marriage.

The state’s tax system is chained to federal tax rules because Minnesota uses “federal taxable income” to help determine residents’ tax bills. But the state’s tax system isn’t automatically updated every time the federal government changes its tax rules — most recently in 2017 when the GOP-controlled Congress passed a massive tax cut.

The Star Tribune is right that this tax filing season has been unusually complex for Minnesotans. But it is dead wrong in trying to pin the blame on federal tax cuts. Other states aren’t having these problems. Minnesotans are suffering because the bill passed by legislators in Saint Paul last year to bring state and federal taxes into alignment was vetoed in a parting shot at the state’s citizens by former Governor Mark Dayton.

As I wrote at the time,

The federal Tax Cuts and Jobs Act passed in December was the largest reform of the federal tax code since 1986. In what has become known as ‘tax conformity,’ Minnesota’s legislators worked this session to pass a bill which would bring the state tax code into line with the new federal one.

And then Gov. Mark Dayton vetoed it, leaving Minnesotans to wonder where they and their families stand on their taxes for next year.

How will ordinary Minnesotan’s be impacted by Dayton’s veto?

Next year, Minnesota’s taxpayers will have to fill out a 2018 federal income tax form, a Minnesota-only tax form based on the old federal tax code, and a Minnesota tax form. Economist John Spry explains the situation would become so complex that “the Minnesota Department of Revenue has not yet counted how many lines would be added to our tax forms.” An estimated 800,000 Minnesotans would end up paying $850 million in extra taxes. 

Why did Dayton veto the tax bill? Dayton’s office said the bill “put powerful special interests, multinational corporations, and the rich ahead of Minnesota schoolkids and families.” But a look at the tax bill doesn’t support this at all.

On the corporate side, the bill reduces the corporate income tax rate from 9.8 percent to 9.65 immediately, then to 9.1 percent in 2020. Minnesota would go from having the third highest rate of corporate income tax in the United States to having the sixth highest.

It also repeals the corporate alternative minimum tax. Minnesota is one of only eight states to have this and it does little apart from adding unnecessary complexity to the tax code. When the Department of Revenue last published a corporate income tax bulletin about a decade ago, it estimated that the corporate AMT brought in just 1 percent of state corporate income tax revenue. Indeed, this sensible measure was originally proposed by a DFL senator, Ann Rest.

The bill also conforms Minnesota’s tax code to the increased Section 179 federal expensing amounts. This allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year from their gross income, reducing their tax liability. It incentivizes businesses to invest. This raises capital per worker, worker productivity, and wages.

On the individual side, the bill reduces the two lowest state income tax rates — 5.35 and 7.05 percent — to 5.3 and 6.95 percent immediately and to 5.25 percent and 6.85 percent in 2020. After these cuts, Minnesota’s lowest rate of income tax — which is currently higher than the top rate in 23 states’ — will be higher than the top rate in 22 states. The bill leaves the top rate of income tax, which is the fourth highest in America, completely untouched.

How can Dayton have concluded that this bill puts “powerful special interests, multinational corporations, and the rich ahead of Minnesota schoolkids and families”? It simply does not include the handouts to corporate fat cats and “the rich” Dayton claims it does. 

For whatever reason, Dayton is willing to impose the chaos and cost of no tax conformity on ordinary Minnesotans. Remember that next tax season when you’re filling out more forms to pay more tax. Of course, by then, Dayton will be gone.

This tax season didn’t need to be so taxing for Minnesotans. Our former governor chose to make it so.

John Phelan is an economist at the Center of the American Experiment.