The House Taxes Committee took the first step in removing the “Sword of Damocles” that’s been dangling above taxpayer’s heads for the past five months.
That sword is a potential $60 million increase in state income taxes for more than 300,000 families if the Legislature fails to align the state’s tax code with federal changes included in the Tax Cut and Jobs Act of 2017.
The omnibus tax bill approved by the House Taxes Committee Tuesday, however, would prevent those stark increases in tax rates and filing complexity spurred by non-conformity.
Sponsored by Rep. Greg Davids (R-Preston), the amended delete-all amendment to HF4385 would address tax conformity by making numerous changes to the state tax code. The bill also contains proposed individual income, corporate and estate tax provisions unrelated to tax conformity.
The bill, as amended, is scheduled to be heard before the House Ways and Means Committee Wednesday, and is expected to be on the House Floor next week. The Senate has yet to unveil its tax package.
The guiding principle behind the bill is to ensure that individual income tax revenue would be spent on programs benefiting individuals and that corporate tax revenue benefit corporations. Davids said a perfect balance was not achieved, resulting in a potential tax increase for about 178,000 Minnesotans.
However, the first individual income tax rate reduction since 2000 is called for in the bill.
It would cut the second-lowest income tax tier from 7.05 percent to 6.75 percent by Fiscal Year 2020, resulting in a $336 million tax reduction from the General Fund in Fiscal Years 2020-21. Similarly, corporate tax rates would drop from 9.8 percent to 9.1 percent by Fiscal Year 2020. The corporate alternative minimum tax would be repealed and the standard deduction for married joint filers would increase from $13,000 to $14,000 and from $6,500 to $7,000 for individuals.
Changes to the sales and use taxes are projected to result in a $14.6 million tax revenue reduction for the General Fund in the 2020-21 biennium.
In addressing conformity, the bill would alter the base Minnesota tax code calculations from federal taxable income, which naturally ties the state code to a number of federal tax provisions, to adjusted gross income. This provision was also found in Gov. Mark Dayton’s tax proposal, which he claims would cut taxes for 2 million Minnesotans.
However, Republicans note a recent Department of Revenue report shows taxes would actually increase for all Minnesotans under the governor’s plan due to an extension of a health care provider tax that is set to expire Jan. 1, 2020.
Overall, the omnibus tax bill would result in a $104.8 million tax revenue reduction for the General Fund in the 2018-19 biennium, and a $33.7 million reduction in the 2020-21 biennium.
Other provisions included in HF4285 would:
Property tax division report
Notably, the amendment does not include the division report’s most controversial provision: a reduction in aid to cities or counties that appropriate money to provide legal services to “illegal immigrants” and eliminate aid to sanctuary cities.
Provisions included from the division report would: