May 3, 2023
State Policy Analyst
May 3, 2023
Minnesota’s House, Senate and Governor’s office have each proposed their own vision as to how the state should maximize its $17.5 billion surplus and raise new revenue, and these tax plans make one thing clear: Minnesota lawmakers are serious about using tax policy to advance tax equity and improve the lives of Minnesotans.
While the competing plans largely agree on the types of policies to implement, the details and underlying design differ. But each proposal contains targeted cuts via refundable tax credits, exemptions and rebates while also raising new revenue from Minnesota’s highest income earners, large corporations, and in some cases both.
The progressive revenue raisers in all three plans demonstrate that Minnesota lawmakers want to ensure that the wealthy pay their fair share while helping Minnesota families have what they need to succeed in today’s economy.
This contrasts with states like West Virginia, Kentucky, and North Dakota that pushed through permanent tax cuts this year that disproportionately benefit their wealthiest residents while leaving important policies for all residents either under- or unfunded. Given the temporary nature of the state surpluses, Minnesota lawmakers are wise to pair one-time rebates and targeted tax cuts with new tax increases to ensure long-term stability. The combination is a bold fix to Minnesota’s tax system.
Gov. Walz’s Tax Plan
Gov. Tim Walz set the tone for this session with a proposed 1.5 percent surcharge on capital gains over $500,000 and a 4 percent surcharge on gains over $1 million, both well-targeted toward wealthy investors. He proposed a payroll tax to join 11 other states in offering paid family and medical leave. His plan includes expanding the Working Family Credit (Minnesota’s EITC), expanding the Child and Dependent Care Credit, and creating a new Child Tax Credit (CTC). The proposed CTC would provide $1,000 per child for up to 3 children and phase down after $50,000 of income for married households and $33,000 for heads of household.
Gov. Walz’s proposal for one-time refundable tax rebates would provide $1,000 checks for single filers with incomes under $75,000 and $2,000 for married filers making under $150,000. He would cut taxes on Social Security income by providing a $10,000 Social Security subtraction for married households under $120,000.
House Tax Plan – HF 1938
The House plan is also innovative and well-targeted, raising nearly $1 billion in new revenue over the next two years from wealthy families and large corporations. The bill would create a fifth income tax bracket of 10.85 percent on income over $1 million for married filers and $600,000 for single filers. It would also enact worldwide combined reporting to prevent large corporations operating in Minnesota from using other countries to shelter taxable income. The House plan expands and revamps the existing Working Family Credit, including by allowing families – including those with an ITIN – to qualify for $1,275 per child as part of a new Child and Working Family Credit. This change would reduce child poverty in the state by an estimated 23 percent. Moreover, the plan includes a big focus on low-income homeowners and renters, making the state’s existing renter’s credit available to claimants on the state’s income tax form – a move to increase accessibility and take-up. Like Gov. Walz’ plan, students would receive a larger, now refundable, student loan credit of $1,000.
The plan provides one-time refundable rebate checks of $275 for single filers with incomes under $75,000 and of $550 for married households making under $150,000 plus $275 per child (three child maximum). The House plan also expands the Social Security tax break to households making $100,000 (married) and $78,000 (single) but phases out the policy over the next $20,000 of income.
Senate Tax Plan – SF 1811
The Senate plan proposes a slightly larger rebate than the House and is the only plan that does not raise taxes on high-income Minnesotans. Instead, revenue would be raised through worldwide combined reporting and 36 proposed local sales tax requests which would allow municipalities to vote on new sales tax increases. Other key components of the plan include a refundable Child Tax Credit of $620 per child with a three-child limit that phases down after $50,000 of income for married filers and $33,000 for heads of household, and an expansion of the size and eligibility of the Child and Dependent Care Credit to households making up to $160,000 before phasing down. Notably, the House and Senate proposals contain similar expansions of the Social Security exemption – with the Senate plan having a slower phase-down – but do not fully eliminate taxes on Social Security income. Fully exempting Social Security – a core issue for Republicans and some Democrats – would almost exclusively benefit high-income seniors. Like the House and Governor’s plans, many homeowners would see a tax cut.
While the details differ, this year’s tax policy discussions in Minnesota demonstrate a commitment to not only socio-economic equity, but also racial equity. For example, all three tax plans would extend the state’s Working Family Credit and homestead status to ITIN filers. Minnesota is often known for progressive policies and a high quality of life, but disaggregated data shows that white Minnesotans are faring much better than their Black, Latinx, and American Indian neighbors. Further disaggregated data show disparities within the Asian community with Cambodian, Hmong and Lao Minnesotans not joining in the overall high incomes that other Asian communities in the state see.
The targeted, refundable tax credits in each package boost the incomes of low-income Minnesotans, setting those families and their children up for better and brighter futures. And key state investments will be sustainable long-term due to new revenue that prioritizes having Minnesota’s wealthiest residents and corporations pay their fair share. Here’s hoping that the most progressive and innovative policies make their way into law.
The gumption demonstrated by Minnesota lawmakers is what we need to see more of in state legislatures across the country. These bold tax policies will ensure Minnesota’s wealthiest households and corporations are paying their fair share and make meaningful changes in the lives of low-income communities, immigrant communities and rural communities of all races. This is guaranteed to strengthen the North Star state.