The Senate GOP’s tax bill is another small step in the right direction

Yesterday, I wrote that

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.

So, how should we respond to the federal changes? There will be three proposals, the Governor’s, the House’s, and the Senate’s.

We’ve had the Governor’s, which proposes a tax hike on all Minnesotans with the least well off being the hardest hit. on Monday, we got the House’s, which proposes a modest tax cut for many Minnesotans and raises for some. And, yesterday, the Senate’s Republicans delivered their bill.

The plan cuts the lowest rate of state income tax

Echoing a point we made in our recent report, The State of Minnesota’s Economy: 2017, Senate Majority leader Paul Gazelka says that Minnesota’s “lowest tax rate is higher than the highest tax rate in 23 states”. To tackle this, the bill plans to use $176 million in money from the state’s projected budgeted surplus to reduce the lowest-tier income tax rate from 5.35% to 5.1% beginning this year. This would drop taxes on the first $26,000 of income for all single taxpayers. According to Senate Taxes Committee Chair Sen. Roger Chamberlain, it means that 82% percent of Minnesotans would see a tax cut of $1 to $150. Deductions for charitable donations, mortgage interest, and property taxes would remain, as would the state standard deduction of $13,000. The state personal and dependent exemption would also be preserved. In addition, the plan would also establish triggers that would automatically reduce the income tax rate and corporate rate when there’s an adequate budget surplus.

According to MPR News,

GOP lawmakers say the tax conformity measure they rolled out Tuesday would protect all but 2,500 Minnesotans from tax increases, following last year’s massive overhaul of the federal tax code.

Sen. Roger Chamberlain, R-Lino Lakes, the chair of the Senate tax committee, said his bill would protect 99.8 percent of state tax filers. He said an estimated 2.1 million would see tax cuts of up to $150, and 470,000 would see no change up or down.

There is still a way to go

It ought to be stressed that these tax cuts are modest, to say the least. That is not to say that the money won’t be appreciated by folks on low incomes. But even if this plan is passed, Minnesota’s lowest state income tax rate will still be higher than the top income tax rate in 22 states, according to Tax Foundation data. Like the House bill, it does nothing about Minnesota’s top rate of income tax, the fourth highest in the country. And, like the House bill, it retains the estate tax which, as we show in our report The Cost of Minnesota’s Estate Tax, likely costs the state government revenue.

Even so, like the House bill, it represents a step in the right direction. “Who cannot like a bill that lowers taxes?” Sen. Ann Rest, DFL-New Hope, said of the plan. Who indeed?

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