The federal Tax Cuts and Jobs Act signed into law in December 2017 was designed to reduce taxes on most individuals and businesses and simplify individual tax filing. This sweeping federal tax reform bill resulted in the need for the Legislature to address state tax impacts on Minnesota taxpayers and opportunities to make our system more competitive.
|Beth Kadoun, vice president of tax and fiscal policy, testifies with Representative Joe McDonald, R-Delano, on lowering business taxes.|
Minnesota, similar to most other states, uses federal tax definitions as a starting point to determine state income-tax liabilities. It is important to update Minnesota’s state tax laws to these new federal definitions to reduce the cost and complexity of complying with state tax laws. If Minnesota simply adopted the new federal tax definitions, Minnesota taxpayers would have paid more than $1.4 billion in state income taxes over the next four years unless the state mitigated those tax changes with other tax reforms. As part of federal tax conformity, the Minnesota Chamber advocated for enactment of pro-growth tax reforms to improve our business tax climate, to mitigate state tax increases by reducing Minnesota’s high individual and corporate income-tax rates, and to provide full conformity with Section 179 business expensing provisions, allowing businesses to expense the cost of equipment in the same year it is purchased.
The House and Senate passed two omnibus tax bills providing important tax updates and pro-growth reforms. Governor Dayton vetoed both tax bills.
HF 4385 – House vote
OMNIBUS TAX BILL
CHAMBER SUPPORTED/BILL PASSED; GOVERNOR VETOED
YES is a vote for Minnesota Chamber position
This bill made important progress to enact pro-growth tax reforms and needed tax updates due to the major federal tax changes. The House bill provided for net tax relief of $105 million in FY 2018/19. The Chamber specifically supported the adoption of the full conformity for Section 179 business expensing provisions, repeal of the corporate alternative minimum tax, and reductions in the individual and corporate income tax rates. Section 179 conformity allows small businesses and farmers to immediately expense certain purchases versus having to depreciate over numerous years. This encourages them to invest in their Minnesota operations and brings Minnesota more in line with other states that already fully conform to this pro-growth provision. The bill reduced the corporate income-tax rate of 9.8% (third highest in the nation) to 9.1%. The reduction would help mitigate, but not completely offset, the tax increases from adoption of the new federal tax definitions. The Chamber supported the 7.05% individual rate reduction as a good first step toward improving competitiveness of Minnesota’s tax system and also urged policymakers to reduce the top two income-tax rates that impact the majority of Minnesota businesses that pay business taxes through their personal income-tax returns and are the most uncompetitive. Minnesota’s individual income top rate of 9.85% ranks fourth highest in the nation and the 7.85% rate ranks ninth highest. These high tax rates impose headwinds on Minnesota’s growth as well as talent recruitment and retention. The Governor vetoed the bill, as he said he would only sign a tax bill if the Legislature enacted additional school funding. The school funding was not part of the Governor’s original budget request and came with only three weeks left in the session and after all the legislative committee deadlines. In the spirit of compromise, the Legislature added school funding to the second omnibus tax bill to garner the Governor’s signature. He vetoed the second tax bill, citing concerns over the reductions in tax rates and that businesses were not given a bigger tax increase. The Governor had proposed a net business tax increase of $1 billion in FY 20/21.
We thank Tax Chairs Representative Greg Davids, R-Preston, and Senator Roger Chamberlain, R-Lino Lakes, for their leadership in advancing tax reform and relief.
HF 4385 – Senate vote
SENATE OMNIBUS TAX BILL; Marty amendment imposing new taxes on businesses with international earnings
CHAMBER OPPOSED/AMENDMENT FAILED
NO is a vote for Minnesota Chamber position
The Senate omnibus tax bill included important federal conformity updates, tax reforms and provided net tax relief of $171 million for FY 2018/19. The Senate bill would have helped improve Minnesota’s tax climate and encourage investment in Minnesota by enacting full conformity with Section 179 business expensing; increasing the estate tax threshold; and prioritizing tax relief triggered by future budget surpluses. The Minnesota Chamber opposed the amendment authored by Senator John Marty, DFL-Roseville, that would further expand Minnesota’s taxation of income earned and retained overseas. There are both constitutional legal constraints and policy constraints on the ability of states to tax this international income. Minnesota’s economic success relies greatly on the ability of our businesses to compete in the international marketplace, through selling abroad and to attract investment into Minnesota. Under the Marty amendment, Minnesota would be more of an outlier for taxation of global companies as many high-tax states such as New York and California are not taxing this international income.
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