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Much of the debate at the Capitol this session has been about how Minnesota’s tax system should be altered in response to the federal tax bill passed in December.
In essence, the federal bill raised the standard deduction and lowered rates but eliminated a number of deductions. What the government gives with one hand, it takes away with the other, even when it is your money. As things stand, this would present 300,000 Minnesota taxpayers with a hefty rise in their taxes. Fully conforming to the federal changes would mean even more Minnesotans would see a tax hike.
How should Minnesota respond to federal tax changes?
So, how should we respond to the federal changes? There will be three proposals, the Governor’s, the House’s, and the Senate’s.
In his proposed budget, Governor Mark Dayton proposed redirecting much of the new tax revenue into new and expanded tax credits for Minnesota families, while leaving some businesses with a larger bill. But the Governor’s bill will actually increase taxes on all Minnesotans and by the most on the least well off. Gov. Dayton attacked those who pointed this out, but they were using figures produced by his own Department of Revenue.
A different approach emerged from the House on Monday after a 90-38 vote, with 13 Democrats joining Republicans in approving a bill.
Rather than using tax credits to allow Minnesotans to keep their money, the House bill looks to lower tax rates. It will cut taxes for 2.1 million Minnesota residents by gradually lowering income taxes for Minnesota residents in the second tax bracket — for a single earner making $26,000 to $85,000 a year — from the current rate of 7.05% to 6.75% by 2020. This is the the first income tax rate cut since 2000. Standard deductions would also increase in Minnesota from $13,000 for a married couple to $14,000. The bill would also provide a deduction of up to $30,000 for property taxes. The state personal and dependent exemption would remain. And the corporate franchise tax rate will be reduced in stages from 9.8% to 9.1%.
But about 148,000 tax filers would see an increase. To offset the breaks, certain tax deductions on work-related expenses, union dues, charitable deductions, and property loss expenses from fires and some other natural disasters, will be eliminated.
Running faster to stay still
Though it has problems, the House bill is an improvement on the Governor’s tax hike. But for all the talk of tax cuts, this is really only proposing to keep the tax burden on Minnesotans at about the current level. As we wrote in our recent report, The State of Minnesota’s Economy: 2017, our state is one of the most heavily taxed in the country. Even after the proposed rate cuts, that will still be the case. To improve our state’s lackluster economic performance, our policymakers will need to take bolder steps to reduce the tax burden on Minnesotans.
John Phelan is an economist at the Center of the American Experiment.