‘Exactly the right moment.’ House DFL wants tax on top earners, corporations amid budget surplus

Minnesota House DFLers have taken a two-pronged political position on taxes: that wealthy individuals and corporations don’t pay their fair share and that any tax relief be aimed only at those with the lowest incomes.

The House tax bill released Monday put both positions into print. Tax cuts and credits worth $3 billion in the budget period that begins July 1 phase out at middle-income levels. Meanwhile, the bill would impose two significant tax hikes on high-income residents.

Both strategies are based on the DFL’s view of how the COVID-19 pandemic affected people.

“The pandemic was not felt evenly and the economic recovery has not been felt evenly,” DFL House Speaker Melissa Hortman said Monday. That is, lower-income residents were more likely to have been unemployed or to work in jobs that couldn’t be done from home. And the fact that the pandemic recession was so short and the recovery more rapid than expected is because of the number of people who could keep working from home.

“We have accepted an economy that works exceptionally well for very few and leaves most of us behind,” said House Taxes Committee chair Aisha Gomez, DFL-Minneapolis. “These aren’t just any tax cuts. The cuts in this bill are targeted at those who need it the most.”

The House bill, therefore, reduces Gov. Tim Walz’s proposal for rebate checks from $2,000 for a married couple to $550. Single people would get $275, with another $275 for up to three children. And it would end any rebates once a couple’s income reaches $150,000. It treats taxation of Social Security in a similar way, with caps on income eligibility.

It also makes changes to the earned income tax credit for low-income residents, which would be called the Child and Working Family Tax Credit.

Tax hikes with a $17.5 billion surplus?

The tax increases come as the state has a surplus of $17.5 billion, a figure that accounts for expectations for inflation in future years,  on a base budget of $52 billion over two years. 

But DFLers frequently cite another number as a way to reduce the scope of that record surplus and provide reasoning for increasing taxes. While much of the $17.5 billion exists for the two-year budget that begins in July, only $5.36 billion of it is available in the next budget that begins July 1, 2025. Therefore, one-time uses of the surplus in both the spending and taxation side are common. The tax rebates, which would cost $1.25 billion in the next budget, are an example.

That said, a $5.36 billion surplus would itself be a record, at least before the COVID-19 pandemic struck and $73 billion in federal aid flowed into Minnesota, making accurate economic forecasting nearly impossible. Prior to November 2021, when the surplus reached $7.75 billion, the largest surplus since 2008 was the $1.67 billion surplus in February 2021 and $1.65 billion in February 2017.

The two major tax hikes are both intended to fall on high-income residents and corporations. The first is a 5th income tax tier of 10.85% would kick in on incomes of $1 million for married couples and $600,000 for individuals. The current top rate is 9.85%. The new tier would affect 24,200 taxpayers, or about 0.8% of all filers, with an average increase of $9,231 a year. 

The second tax hike is a change in how corporate income is calculated that would include income held in other countries. Taken together, the two hikes equal nearly $1 billion over the two years beginning July 1.

Minnesota is considered to have one of the most progressive tax systems in the U.S., meaning it taxes the wealthy at higher rates and higher amounts than lower-income residents. The progressive Institute on Taxation and Economic Policy places Minnesota among the six most progressive, with California, Delaware, New Jersey, Vermont and the District of Columbia. 

Two other tax increases are not in the taxes bill. Purchases made in the seven-county metro region would be subject to a new  0.25% sales tax hike under the housing omnibus bill to support affordable housing and a new 0.75% sales tax hike in the transportation omnibus bill to boost transit. That transportation bill also includes hikes in motor vehicle tabs fees and the motor vehicle sales tax. And, at least in the House, it includes a new 75-cent delivery fee on most deliveries, such as those from Amazon, GrubHub and restaurants. The Senate has eliminated the delivery fee.

The taxes bill makes another change that’s expected to cost the state $190 million a year: Instead of requiring renters to send in a tax credit application in August, the legislation would make it part of income tax filings. The Department of Revenue estimates 100,000 tenants who don’t claim the credit now would claim it with the change. The same provision also makes more retirees eligible for the credit by changing which income sources are included.

The DFL has what is termed a trifecta — partisan control over both houses of the Legislature and the governor’s office. That means it is less likely to need to accommodate GOP sentiments. But the House proposal exposes some divides within the DFL itself. Walz, for example, wants larger rebate checks of $2,000 for couples and $1,000 for individuals — though with the same income caps as the House proposal. Still, when Walz agreed with House and Senate leaders that tax cuts would only total $3 billion, he knew his original $4 billion proposal for rebate checks was unattainable.

His wealth tax pathway was to put a surcharge on capital gains taxes, say when someone sells stocks or bonds. That is not in the House taxes bill.

Walz said he was pleased that some form of rebate checks is in the House plan, even if at lower levels.

“We’re not going to be in perfect alignment on everything, but the goal is still to make life more affordable for Minnesotans and that they get money back in their pockets and we invest in the things they care about,” Walz said.

How Senate DFLers, Republicans are responding

The Senate, with a narrower majority than the House DFL, is expected to produce its taxes plan later in the week. Senate Taxes Committee Chair Ann Rest, DFL-New Hope, has been less supportive of tax hikes and more sympathetic to a larger reduction in social security income taxation. It was in her committee that the delivery fee died, and the metro area transportation sales tax was cut from 0.75% to 0.50%.

Republicans on Monday sharply criticized both the House DFL tax plan and the general scope of potential tax hikes that Democrats in both legislative chambers have either proposed or entertained, such as their paid family leave plan and the transportation sales tax. The GOP tally was more than $9 billion — over the next four years, not two years — though at least some, and probably much, of what they cite is unlikely to become law.

Senate Minority Leader Mark Johnson, R-East Grand Forks, told reporters at a news conference that the DFL was focused on “figuring out very innovative ways to raise your taxes,” and their budget would result in “emptying every Minnesotans’ pocketbook to support their out-of-control spending.”

House Minority Leader Lisa Demuth, R-Cold Spring, again said some Democrats had campaigned on fully eliminating a tax on Social Security benefits and would be breaking that promise in a budget plan that only rolls back the tax for some taxpayers. 

And Sen. Bill Weber, R-Luverne, called on Senate DFLers to stand up to tax hikes. “If you don’t wish to see your seniors, your families, placed under an additional tax burden of this magnitude, there are 33 Republicans that stand ready to vote with you to defeat these taxes and bring some common sense to the tax policy of Minnesota,” he said.

House DFLers cut, but don’t eliminate Social Security tax

Under the House DFL plan, fewer people would pay the state’s tax on Social Security benefits. But it would not be fully eliminated.

State projections expect that in 2024, about 877,800 households in Minnesota will have some Social Security income. A slim majority, 52%, will pay some Minnesota tax on those benefits without a change in the law. (In 2019, about 46% paid at least some Minnesota tax.)

To fully eliminate the state tax, it would cost about $1.26 billion in the current two-year budget and another $1.5 billion in the next biennium. The House DFL plan instead would cost roughly a third of that: $409 million. Married joint filers with an adjusted gross income of $100,000 or less would pay no state taxes, and the same would be true for single taxpayers making $78,000 or less. The tax cut would then be phased out over the next $20,000 of income.

“That means 76% of seniors will pay no tax at all on these benefits,” Gomez said.

The Social Security tax has been a political flashpoint at the Legislature. Republicans support fully repealing the state tax, as do a significant chunk of DFLers, including some in political swing districts that handed Democrats control of the Minnesota Senate in the election last year. 

House Democrats also agreed to fully eliminate the tax last year as part of a deal with Republicans who controlled the state Senate at the time. But that deal fell apart amid other disagreements at the Legislature and has not been revived with DFLers in full control.

Although the Senate DFL’s tax plan hasn’t been released, Sen. Aric Putnam, DFL-St. Cloud, said earlier this year he was promised a full elimination would be part of their chamber’s proposal.

“I believe that (full elimination) will pass the Senate,” said Sen. Carla Nelson, R-Rochester, on Monday. “I certainly hope it does.”

Still, it could be a difficult political lift. Nelson said she feared the House DFL would block a full elimination.

Separately, budget targets — a loose spending framework — agreed to by Walz, Hortman and Senate Majority Leader Kari Dziedzic, may not be large enough in the future to pay for a full elimination without new tax increases that Senate DFLers may be less likely to entertain.

Child tax credit, but not child care credit in tax plan

The House DFL also booked $728 million in this biennium for a “Child and Working Family Tax Credit,” which is aimed at replacing a lapsed federal tax credit meant to reduce childhood poverty. 

The amount of the credit depends on income and the number of children someone has. An eligible family could get $1,175 per child with no cap on the number of children. Another component of the credit would grant 4% of the first $12,500 of earned income up to a maximum credit of $500. The combined amount would be phased down starting at $35,000 of earned income or adjusted gross income — whichever is greater — for married couples, and $28,000 for others. 

“It’s targeted at lower income Minnesotans,” Gomez said. “For most family arrangements … it’s fully phased out in the $50-to-$65-to-$70,000 range, depending again on how many kids you have.”

One idea the House DFL did consider was a tax credit primarily meant to help shoulder the cost of child care. That one would benefit more people in the middle class — Walz’s plan would begin to phase out at a total household income level of $200,000. The governor had banked nearly $540 million for that credit in his budget plan, which would offer families $4,000 a year for every child under the age of 5 for childcare expenses, up to a maximum of $10,500.

But in the end, the House DFL jettisoned the idea, opting instead for the child tax credit helping lower-income households.

“It’s not because we don’t believe it’s necessary and worthy,” Gomez said. “Within our budget reality we made choices and we chose to go with this sort of expanded child tax credit that would cut child poverty by almost one quarter.”

Local Government Aid would get a boost

Elsewhere in the taxes bill, the House DFL would boost both yearly payments under Local Government Aid and County Program Aid by $100 million and tie the programs to inflation so they will rise over time. The subsidies help local officials with the costs of basic services, and supporters of the program say LGA and CPA also help stave off increased property taxes. That amount is less than some advocates had pushed for.

If the budget plan is a winner in some of the more liberal DFL districts, what about in more conservative swing districts? The tax bill is only a slice of the overall state spending. It has less than what some rural Democrats wanted for LGA, and it does not fully eliminate the state’s Social Security tax. The DFL plan also raises taxes at a time when the state is more flush with cash than it has ever been and may ever be.

Rep. Dave Lislegard of Aurora — the last Iron Range DFLer in the House — leads property tax policy for Democrats and appeared at a news conference Monday in support of the tax plan. 

He told reporters the bill was a fair, pragmatic and reasonable compromise. “Maybe it doesn’t seem like the right time” to raise taxes like the corporate income measure, Lislegard said. “But it’s exactly the right moment.”

Correction: The House transportation budget contains a 0.75% metro area sales tax for transit. This article initially misstated the tax rate as 0.50%. The Senate version of the budget has a 0.50% sales tax.

Editor’s Note: Peter Callaghan and Walker Orenstein wrote this story for MinnPost.com. MinnPost staff writers Mohamed Ibrahim and Ava Kian contributed to this report.

It was initially published on April 18.

Callaghan covers the state government for MinnPost.

Orenstein reports on the state Legislature for MinnPost, with a particular focus on covering issues affecting Greater Minnesota.

MinnPost is a nonprofit, nonpartisan media organization whose mission is to provide high-quality journalism for people who care about Minnesota.