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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. liability from Federal Taxable IncomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. to Federal Adjusted Gross IncomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” . 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 baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , 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 taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual 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 deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. 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 exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. 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 repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. 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.
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