Governor Dayton Vetoes Minnesota’s Conformity Bill

May 17, 2018

On Thursday, Gov Mark Dayton (D) followed through on his veto warning earlier in the week by rejecting a tax bill that had cleared the Minnesota Legislature. Dayton has said he won’t sign a bill or even participate in negotiations until the legislature can come to an agreement on emergency school aid. The governor has requested $138 million in additional school funding. Speaker Daudt and Senate Majority Leader Gazelka sent a letter to the Governor after the veto asking to meet to negotiate the bill.

While Governor Dayton’s plan varied considerably with the original tax plans released by the House and Senate, the original House and Senate plans were relatively similar. The final version sent to – and vetoed by – Governor Dayton primarily included conformity measures and some modest rate reductions.

The conference committee version reduces the 5.35 and 7.05 percent individual income tax brackets to 5.3 and 6.95 percent immediately, then to 5.25 percent and 6.85 percent in 2020. It also reduces the corporate income tax rate from 9.8 percent to 9.65 immediately, then to 9.1 percent in 2020, as well as repeals the corporate alternative minimum tax. It also conforms to the increased Section 179 federal expensing amounts, a pro-growth measure included in the Tax Cuts and Jobs Act.

Both bills effectively decouple from several international provisions, including Global Intangible Low Tax Income (GILTI) and Foreign Derived Intangible Income (FDII). It does, however, include deemed repatriated income in the state tax base, but allows for a federal deduction that taxes the net amount, not the gross amount. If the state does choose to move forward with this, policymakers should keep in mind that this should be treated as one-time money, not revenue to be built into the budget indefinitely.

Conforming to the federal tax code is important for a number of reasons, including reducing compliance costs for taxpayers. Without a conformity bill this session, Minnesota taxpayers can’t rely on consistent definitions between their state and federal income tax returns, and businesses will essentially be forced to keep two sets of books. Complying with the tax code is already complicated—Minnesota shouldn’t make it more difficult for taxpayers in the state by refusing to conform to even the most basic changes to the federal tax code.

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