With record budget surplus, Minnesota lawmakers disagree on how to cut taxes

Christopher Magan, Pioneer Press
·4 min read
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A rate cut, more tax credits, even “Walz checks” — Minnesota’s politically divided Legislature has lots of different ideas on how to return some of the state’s record $9.25 billion budget surplus.

With just two weeks left in the legislative session, there are still three competing, and vastly different, tax plans at the Capitol. Democratic Gov. Tim Walz, the Republican-led Senate and the DFL-controlled House hope to find common ground.

It will be tough. Bipartisan deals are always a challenge and this is an election year, so the politics are ratcheted up more than usual. All those involved will face an increasingly hard-to-predict electorate in November.

But there’s hope. Lawmakers have already found a deal on some big items, including extending a program that keeps health insurance rates down by helping insurers cover their sickest patients. They’ve also agreed to send frontline workers $500 billion in “hero pay” and replenish the $2.7 billion spent from the unemployment insurance trust fund.

That means there’s a chance the three sides could find a way to meet in the middle on tax changes. Here’s a look at the key points of each plan:

‘WALZ CHECKS,’ CREDITS

The centerpiece of Gov. Walz’s tax plan is rebates for taxpayers he’s calling “Walz checks.” Individuals would get $500 and couples $1,000.

The rebates would be limited to individuals making less than $164,400 and couples who earn less than $273,470. About 2.8 million Minnesota households would receive a rebate check.

Those checks alone would cost a little more than $2 billion. It is one-time money, so there’s not an ongoing impact on revenue.

Walz is also proposing increasing certain tax credits for middle-income families for things like education and child care. His changes would also limit some taxes on construction projects for governments and non-profit organizations.

Altogether, Walz’s plan would have an impact of about $2.3 billion on the current state budget that expires in June 2023, according to the Minnesota Department of Revenue. In coming years, there would also be an estimated $254 million annual decline in revenue.

GOP RATE CUT

The focus of Senate Republicans is to cut tax rates permanently.

They want to lower the state’s first tax bracket from 5.35 percent to 2.8 percent. Doing so would cost about $2.8 billion next year and tax revenue would fall by roughly $2 billion a year after that.

The first tier tax rate, currently 5.35 percent, hits a worker’s first $20,525 of income and a family’s first $41,050. The state Department of Revenue estimates about 2.4 million households would save an average of about $759 a year.

The GOP has also proposed eliminating state taxes on Social Security income. The change would cost $510 million next year and reduce revenue by about $550 million a year going forward.

Revenue department estimates say about 407,000 tax returns would be impacted by the change with an average savings of $1,253.

The Senate plan would cost a total of about $3.4 billion in the current budget year and revenues would drop by an estimated $2.5 billion annually, according to a state analysis.

DFL TARGETED CREDITS

Democratic-Farmer-Labor Party members who control the Minnesota House want to increase a mix of tax rebates and credits that largely benefit middle- and lower-income families.

There are dozens of changes to credits in the DFLers’ plans. One of the biggest is increasing the child care credit to $3,000 for kids under 5 with a $7,500 cap. Doing so would cost $183 million next year and about $188 million annually in coming years.

Roughly 186,000 households would be eligible and save an average of about $1,282.

There are also changes and an expansion of the renters’ credit at a cost of $373 million next year and about $150 million a year after that. House fiscal analysts estimate 156,000 more renters would be eligible after the changes.

The DFL plan has improved credits for education expenses, a one-time child tax credit rebate and write-offs for those who received unemployment. It expands property tax refunds for some homeowners.

Finally, the proposal lowers taxes on Social Security income by increasing how much taxpayers can write off. Doing so costs $114 million next year and revenue would drop about $132 million annually.

The revenue department estimates changes to Social Security taxes would impact about 244,000 tax returns and save an average of $467.

In all, the House plan would cost about $1.6 billion next year and revenue would drop by about $800 million a year going forward, according to the House fiscal analysis.

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