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Minnesota Legislature

Taxes committee is (predictably) divided on governor’s bill

A member of the public looks through documents as the House Taxes Committee reviews HF4385, the governor’s tax proposal, during Tuesday’s hearing. Photo by Paul Battaglia

As the 2017 tax season closes, legislators are working to align 2018 state taxes with the new federal tax code. A high-profile proposal from the governor’s office was the latest bill to come under the scrutiny of the House Taxes Committee.

Sponsored by Rep. Greg Davids (R-Preston), HF4385 would largely address federal tax conformity and family tax relief, while reforming corporate taxes and making updates to small business taxes and tobacco products.

Revenue Commissioner Cynthia Bauerly told the committee Tuesday that past proposals from Gov. Mark Dayton have made the state tax code more progressive over his eight-year tenure, and that this bill would be no different.

“Overall the governor’s tax proposals, with respect to responding to the federal bill, are very progressive … Minnesota’s tax code is slightly regressive, as is the case with most state tax systems,” Bauerly said.

The primary goal of the bill is to address tax federal conformity in response to the federal 2017 Tax Cut and Jobs Act. The bill would alter the base of Minnesota tax code calculations: federal taxable income, which naturally ties the state code to a number of federal tax provisions. The governor’s bill, however, would switch that starting point to adjusted gross income.

“This change will give Minnesota more control over our tax code moving forward and enable us to preserve the personal exemption at the state level, preventing a significant tax shift,” Bauerly said.

While the 2017 federal law repealed and reduced many itemized deductions in exchange for a higher standard deduction, Dayton’s proposal would preserve those deductions for state taxes while allowing Minnesotans to take the federal standard deduction.

The bill would also provide tax relief for small businesses, including full expensing conformity that would allow small businesses and farmers to deduct equipment expenses of up to $1 million, instead of the current $50,000.

In addition to tax conformity, the bill would address family tax relief by offering a personal and dependent tax credit for Minnesotans earning less than $140,000 annually and married tax filers earning less than $280,000 per year. The bill would also expand the working family credit by raising the maximum credit available at lower incomes.

Revenue Commissioner Cynthia Bauerly testifies about the governor’s tax proposal April 17 before the House Taxes Committee. Photo by Paul Battaglia

The bill also aims to standardize the tobacco industry by raising taxes on vapor products and moist snuff and restoring the $3.50 premium cigar tax rate.

Rep. Sarah Anderson (R-Plymouth) said the bill makes filing state income taxes unnecessarily complex by introducing a new system and not fully conforming to the federal code.

“I don’t see how this is making it more simple for individuals to file. In fact, it looks like it’s making it 10 times more challenging,” Anderson said.

Supporters argue that the complexity was brought on by the federal changes.

“Minnesota did not make our taxes more complicated. The president, the Republicans, Congress made the federal tax bill and made our taxes more complicated,” said Rep. Jennifer Schultz (DFL-Duluth). “To make sure we address the potential tax increases as a result of the federal tax bill, our commissioner and our Department of Revenue are trying to simplify and make less of a negative impact on the state of Minnesota.”

Regardless of approach, tax conformity is seen as a top priority by both sides of the Legislature. The failure to respond to federal changes would result in a $60 million increase in state income taxes for over 300,000 Minnesota families. If the state fully, or “mechanically,” conforms, taxes would increase $435 million for 870,000 Minnesotans.

 


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