The tax rebates expected this fall have gotten the most attention, but there is much more in the $3 billion worth of tax changes approved by Minnesota lawmakers in May and much of it is tailored to help low-income families.
Democratic-Farmer-Labor Party leaders say roughly $450 million annually of new and expanded tax credits for families with children should cut the state’s child poverty rate by one-third. More than 265,000 filers will benefit from the change.
Lawmakers also modified the renters credit by allowing taxpayers to claim it on income tax forms. The change is expect to increase the number of residents who claim it. It will send about $375 million a year to lower-income renters to help them better afford housing.
DFLers, who control both chambers of the state Legislature and the governor’s office, say they focused on these types of tax changes to try to address the growing income inequality in Minnesota that was made even more apparent during the coronavirus pandemic.
“We have a system that works really well for a small group of people and increasingly is leaving working and middle-class people behind,” said Rep. Aisha Gomez, DFL-Minneapolis, chair of the House Taxes Committee. “That’s why public policy intervention is necessary.”
Seniors also are getting a break. The Legislature agreed to increase the threshold for residents receiving Social Security so couples earning $100,000 or less and individuals making $78,000 or less will pay no state income tax on benefits.
Finally, there’s the one-time tax rebates of $260 per filer with an additional $260 per each dependent for a maximum of $1,300 per household. To get those checks this fall, couples have to earn less than $150,000 and individuals must be under $75,000.
All of this is part of the historic $71.5 billion two-year state budget passed by the DFL-controlled Legislature in May that took affect July 1. Much of the nearly $20 billion in new spending is driven by the $17.5 billion budget surplus that state leaders projected at the beginning of the year.
Republicans have characterized the tax bill as a missed opportunity to permanently cut tax rates for everyone. They wanted much less new spending with a lot more of the surplus going back to taxpayers.
Republicans also have criticized the billions in new taxes DFLers included in their budget. These hikes include higher rates on businesses and top earners as well as increased sales and payroll taxes.
Why not cut rates?
Instead of targeted credits, Minnesota Republicans have long fought for cuts to tax rates. They say lower state tax rates will translate into improved economic conditions that benefit everyone.
John Phelan, an economist with the conservative-leaning Center of the American Experiment, noted that despite taxpayers creating a historic budget surplus, few of them will see much in return outside the one-time rebates expected in the fall.
“Nobody else really got anything,” Phelan said, noting that roughly one-quarter of Minnesotans have no state income tax. Many of them will benefit from the new tax credits DFLers championed. “They are not tax cuts, but an expansion of welfare. It’s bad policy.”
Nan Madden, director of the Minnesota Budget Project, which advocates for policy to help lower-income residents, says overall rate cuts rarely help those who need it the most. She acknowledged that many low-income residents have little to no state income tax liability, but she noted that residents pay lots of other taxes as part of their day-to-day lives.
“When I look at the tax bill, there’s a lot in it that’s good for families,” Madden said.
Child tax credit
Paul Marquart, commissioner of the state Department of Revenue and former House tax committee chair, said one of Gov. Tim Walz’s top priorities for the budget surplus was making Minnesota the best place to raise a family.
A key part of making that happen, Marquart says, was replicating the success of the increased child tax credit that was part of the 2021 American Rescue Plan. That larger credit cut child poverty nationwide by 46 percent, largely by sending monthly checks to qualifying families.
But the federal program only lasted a year. Minnesota’s larger credit is designed to be permanent.
“We know the child tax credit works,” Marquart said. “It’s a game changer and we know it will get results.”
Under the new tax law, parents can receive a credit worth up to $1,750 for each qualifying child. Taxpayers with older dependents will get a smaller amount.
The credit begins to phase out at income levels of $35,000 for couples or $29,500 for singles. It tapers off slowly, with a family with four children earning $90,000 still eligible for a credit.
The credit is fully refundable, so if a taxpayer has a net income tax liability of zero, they’d still get the credit if they qualify. The state expects more than 265,000 tax filers to claim the credit at a total cost of nearly $900 million in the current two-year budget.
The Center on Poverty and Social Policy at Columbia University estimates the new child tax credit will reduce child poverty in Minnesota from nearly 7 percent to 4.6 percent.
The tax bill also directs Revenue Department officials to study whether Minnesota could deliver the child tax credit in monthly or quarterly checks like the federal credit was in 2021.
Credits for renters
Renters will soon be able to claim a credit on their state income taxes rather than having to wait until summer when property tax rebates are typically filed. The state Department of Revenue estimates 152,000 more renters will claim the credit under the new system.
The result will be about $375 million a year of renters credits, but the program is phased in and only impacts state revenues in 2025.
“We’ve wanted to do this for years, but we never had the money,” Sen. Ann Rest, DFL-New Hope, who leads the Senate tax committee. The historic budget surplus was the perfect opportunity to make the change, Rest added.
Aid to locals
Lawmakers also focused new, ongoing money to local governments in hopes it will reduce their need to hike property taxes to pay for things like road repairs or cops and firefighters.
Nevertheless, after much deliberation the tax bill included the authorization for about two-dozen Minnesota municipalities to seek increases in sales tax rates for specific projects.
The bill includes $300 million in one-time money for communities for public safety and permanent $80 million increases in state aid to counties and local governments.
After much debate, DFL leaders relented and agreed to include in the bill the legislative authorization more than two dozen communities need to put local sales tax increases before voters.
After this year, the Legislature will take a two-year break from hearing local tax requests, Rest said. Both Rest and Gomez said they want the state to do its part to make sure communities have the resources they need despite the size of their property tax base.
There are plenty of other tax increases included in the new $71.5 billion state budget. The tax bill alone raises about $500 million a year from higher taxes on corporations and high earners.
In addition, the Legislature approved a new universal paid sick-leave program that includes a 0.7 percent payroll tax to raise the $1.5 billion a year it needs to operate. Those taxes can be split between employers and workers and begin being collected in 2025.
Also, the housing and transportation budgets approved in May include a combined 1 percent sales tax increase in the seven-county Twin Cities metro area. The money will be used to fund transit and affordable housing projects.
Sales taxes are some of the most regressive taxes out there, but DFLers say the cost is worth it because the state needs ongoing sources of revenue to address inequities in housing and transit.