Minnesota’s Economic News — W/E 5/26/23
State and local taxes and spending Minnesota Reformer: A breakdown of tax increases, cuts Minnesota lawmakers intend to pass WCCO: Lawmakers reach deal on rebate checks for Minnesotans Duluth News…
The Republicans in Washington D.C. have passed the biggest overhaul of the federal tax code since Huey Lewis and the News were top of the Billboard Hot 100 with Stuck with You. What might this mean for Minnesotans?
Initially, the effect will be felt in people’s pay packets, perhaps as early as February. Figure 1 shows how different provisions in the tax code might affect different people. A fuller analysis by The Tax Foundation can be found here.
Figure 1: Single filer
Source: MPR News
Figure 2: Married (filing jointly)
Source: MPR News
The tax bill will also impact Minnesota by its changes to deductions.
Early drafts of the bill eliminated the State and Local Tax (SALT) deduction, something I wrote about a little while back. Put briefly, the SALT deduction allows high tax states to pass some of that tax burden on to the federal government. In effect, their higher taxes are part paid for by tax payers in lower taxed states.
The final bill didn’t eliminate the deduction but limited it to a maximum deduction of $10,000 for income, sales, and property taxes (except as they are related to business activity). This will have a similar effect as abolition, albeit to a lesser degree. It will internalize the cost of Minnesota’s high tax rates to Minnesotans themselves. If it is correct, as some argue, that paying high taxes is a good thing and high tax rates don’t affect people’s decisions over where to live, then there is nothing to worry about. If, however, this is not the case, then Minnesota, and other high tax states, might have to look again at their tax rates.
Again, early talk had been about the abolition of the federal estate tax. In the end, the bill doubled the exemption from $5.6 million to $11.2 million, with this set to expire on December 31, 2025. The exemption will increase with inflation.
This could put pressure on Minnesota, which taxes estates more heavily than most, to repeal its estate tax or raise its exemption threshold closer to the pending, higher federal level. At present, our state is one of only fourteen states plus the District of Columbia to levy an estate tax. The state employs a “zero bracket” to exempt estates under $2.1 million. Eight of those fourteen states and the District of Columbia have a higher exemption. The state is currently phasing in an increase in the exemption, ultimately scheduled to reach $3 million in 2020. Above this, Minnesota imposes a six-bracket estate tax. The state’s starting rate of estate taxation – 12 percent – is higher than any of the other jurisdictions that levy one and equal to the top rate in both Connecticut and Maine. Its top rate is 16 percent. Only the state of Washington has a higher top rate. (See Figure 3 and Figure 4)
Figure 3 – Estate tax exemptions (in millions)
Source: The Tax Foundation
Figure 4 – Estate tax highest and lowest rates
John Phelan is an economist at Center of the American Experiment.
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