What you need to know about state leaders plan to conform to the Federal Tax bill.
The second year of the Minnesota’s legislative biennium is traditionally reserved for passing a bonding bill to help aging infrastructure and state assets. This year is turning out to be anything but a traditional year.
After the federal government passed the Tax Cuts and Jobs Act (TCJA) in late December, the Minnesota Legislature has been wrestling with how to conform with those changes while keeping tax filing simple. Because Minnesota is a high conforming state (which means there usually aren’t a lot of differences between state and federal) this is an unusual place for leaders to find themselves. If the Legislature and Governor can’t agree on a bill, the state would generate more than $450 million in new revenue from tax increases on many individuals and some businesses. In addition to the increase in revenue, if nothing is done our simple tax filing system will be extremely complicated for everyone. Governor Dayton and leaders in the House and Senate all agreed their proposals would be revenue neutral. The three plans differences will need to be passed into law prior to the legislature’s adjournment on May 21st.
Governor Dayton’s proposal begins with moving individual taxpayers starting point to Federal Adjusted Gross Income, so you would use the same amount of income on your state taxes as you do with your federal taxes. He also conforms to many provisions of the TCJA including taxing of foreign earnings and uses those increased revenues to increase the Working Family Credit and creating a dependent care credit. The proposal also removes the sunset of the provider tax, reinstates the statewide general levy inflator on commercial industrial property, doesn’t conform to pass-through income deduction, conforms to Sec. 179 and bonus depreciation, and includes corporate tax reforms. Governor Dayton stated his proposal will help Minnesota’s lowest earners. Republican leaders shot back that the bill increases taxes on the working poor, small businesses, and farmers.
The House tax proposal also changes the starting point to Federal Adjusted Gross Income, conforms to Sec. 179 and bonus depreciation, and repeals the Corporate AMT. By conforming to many provisions of the TCJA, the House chose to redirect increased revenues by lowering the individual second tier tax rate from 7.05% to 6.75% as well as the corporate tax rate from 9.8% to 9.06%. The bill doesn’t conform to pass-through income nor many deductions allowed prior to TCJA. House Tax Committee Chair Greg Davids (R-Preston) stated he tried to keep tax relief corresponding to revenue increases. Only about 150,000 Minnesotans would see a tax increase.
Under Senate Tax Committee Chair Roger Chamberlain’s (R-Lino Lakes) plan, 99.8% of Minnesota taxpayers would be held harmless with 82% seeing a decrease. This is largely due to lowering the individual income tax rate on the first tier from 5.35% to 5.1%. Like the House and Governor Dayton, his proposal changes the starting point for Minnesota taxes to Federal Adjusted Gross Income and conforms to Sec. 179 and bonus depreciation. He raises the estate tax exemption to $5M and includes an automatic trigger mechanism to lower the individual and corporate rates during economic surpluses. Only 2,500 Minnesota taxpayers would see an increase.
With less than two weeks remaining in the session, legislative leaders and the Governor will continue to meet to try and find a compromise. There were rumblings in the past month that some feel waiting until next session is an option, which many leaders have now rebuked publicly. It is clear that the pressure is building to pass something into law this session. What that bill looks like will be hotly debated in the coming days. Now is the time to contact your legislators and the Governor to let them know how their proposals will impact your business.