Taxes committee begins taking up conformity

To conform or not to conform: That was the question before the House Taxes Committee as it began a two-day briefing from the nonpartisan House Research Department staff Tuesday.

The federal Tax Cuts and Jobs Act was signed into law in 2017, and Minnesota legislators are confronted with decisions about whether to adjust how the state collects taxes … or if the status quo is a better option. Over the course of the session, the committee is expected to hammer out the details of “tax conformity.” Members of both parties expressed optimism it will get done.

At Tuesday’s hearing, nonpartisan House Research Department tax analysts explained that the “starting point” for calculating taxes is key. Minnesota is one of five states that currently uses federal taxable income as the starting point for calculating what individuals owe in taxes, while 28 states use federal adjusted gross income, a larger number that doesn’t subtract deductions or exemptions. During the last session, Gov. Mark Dayton and legislators agreed to move to adjusted gross income, but it didn’t become law.

The federal tax bill repealed personal and dependent exemptions, and increased the standard deduction. For those itemizing deductions, it made multiple changes, from the size of the home mortgage interest deduction to charitable contributions to medical expense deductions. House Researcher Sean Williams said that, under the federal act, the number of Minnesota taxpayers using the standard deduction is expected to increase to 88 percent of filers. The current number is 64 percent.

If the state retains federal taxable income as a starting point, it would adopt the federal act’s itemized and standard deduction changes. If it shifts to adjusted gross income, it could set its own deduction rules. In either case, the state will need to adopt a family size adjustment because the federal act suspends the federal dependent exemption. That adjustment could mean replicating the dependent exemption under old law or establishing a state child tax credit.

Much more complex are the federal act’s business provisions, including changing deduction levels for certain types of income and losses, and depreciation of property. There are also provisions for foreign earnings that could become subject to Minnesota taxes.

Rep. Paul Marquart (DFL-Dilworth), the committee chair, noted there will be some tax increases as a result of the federal act, particularly for “pass-through” businesses that don’t pay income taxes at the corporate level. “If the goal of the committee is to try to hold everyone harmless,” he said, “that may be a goal unattainable.”

The committee’s Republican lead, Rep. Greg Davids (R-Preston), is optimistic a solution can be reached. “We took care of this all last year in a bill that was vetoed by the governor. But that’s the past. Mr. Chairman, I pledge to you that, when it comes to conformity issues, as history has shown, both parties do work together. This is a lot more complex conformity than we’re used to … but conformity does benefit all Minnesotans.”