Minnesota’s Tax Plans Make Modest Improvements
May 2, 2018
With just a few weeks left in Minnesota’s regular legislative session, all three players – Governor Dayton (DFL), House Republicans, and Senate Republicans – have released tax proposals. Governor Dayton’s proposal included some positive changes, but overall missed an opportunity for economic growth in the state. The House and Senate plans do overlap on many issues, but there are a few distinctions between the two.
All three plans change the starting point for calculating individual income tax liability from Federal Taxable Income to Federal Adjusted Gross Income. This change, in turn, limits one of the negative features of the federal tax changes. If the state continued to use Federal Taxable Income as its tax base, the state would be conformed to the 20 percent pass-through deduction. Under Federal AGI, however, it is not. The deduction is a carveout with few benefits and de-coupling is sound tax policy.
The House bill, which passed the House on Monday with a vote of 90-38, reduces the corporate income tax rate from 9.8 percent to 9.1 percent by 2020. It also reduces the 7.05 percent individual income tax rate to 6.75 percent by 2020. The current 7.05 percent bracket applies to earners making above $25,890. The bill also increases the state standard deduction amount to $7,000 for single filers and $14,000 for married joint filers.
The Senate bill incorporates Senator Chamberlain’s proposal to reduce the individual and corporate income tax rates by one percentage point through revenue triggers, and automatically reduces the bottom income tax rate from 5.35 to 5.1 percent. It also retains several deductions that were eliminated in the Tax Cuts and Jobs Act (TCJA). The Senate bill also increases the estate tax exemption level to $5 million.
Both bills effectively decouple from several international provisions, including Global Intangible Low Tax Income (GILTI) and Foreign Derived Intangible Income (FDII). The House bill 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. Both bills also conform to the increased section 179 federal expensing amounts, a pro-growth measure included in the TCJA.
For the ease of taxpayers when they file next year, It is positive that all three plans seek to conform to many new changes from TCJA, but the House and Senate proposals both go a step further by providing broader income tax relief rather than the targeted income tax breaks provided in Governor Dayton’s plan.
Errata: An earlier version of this post said that both the House and the Senate proposals include deemed repatriation income in the state’s tax base. However, the inclusion of deemed repatriation income in the Senate version was later changed through an amendment. The current version of the Senate bill does not include deemed repatriation income in the base.