Unpacking tax bills as Minnesota lawmakers prepare for votes in the House today, Senate next week

[MUSIC PLAYING] EMILY BRIGHT: This afternoon, the Minnesota House will take up debate on a wide-ranging tax package. There's a lot to pay attention to here. The package contains rebates, additional exemptions for Social Security income, expanded child tax credits, and aid to local and tribal governments. It would also raise some taxes on top earners and corporations. The Senate is moving toward a vote on its own plan next week, and the chambers are closing in on agreements in some major areas. MPR political reporter Brian Bakst is here to break it all down. Thanks for joining me, Brian.

BRIAN BAKST: Hi, Emily.

EMILY BRIGHT: Hi. So the House vote today will be just a step in the process. But what can you tell us about how the tax negotiations are shaking out so far?

BRIAN BAKST: So we have to look back to March, when legislative leaders and Governor Tim Walz reached a broad agreement on how much of the state's surplus would be used in the tax area on tax cuts and aid to local levels of government. That was about $3 billion in the coming two-year budget and $1.5 billion in the one that follows. So the two chambers built their tax plans around those targets. What we didn't know it at the time but have since learned is that there was a side agreement around Social Security taxes.

EMILY BRIGHT: And what, as you understand it, does that agreement entail?

BRIAN BAKST: Well, let me quickly set the table for you. Some people receiving Social Security have to pay Minnesota income taxes on those benefits if their annual earnings exceed a certain amount. Minnesota has a subtraction that now spares about half of Social Security beneficiaries from paying Minnesota tax. Raising the tax-free zone or shielding benefits entirely has become a potent political issue. Most Republicans and several Democratic legislators campaigned on it. And ditching the tax entirely would cost Minnesota's treasury about $600 million or more per year now and into the future. So that's a pretty big lift.

Here's where Democrats in charge of the House and Senate both landed. They'll raise the exemption level, so couples with $100,000 or less in annual earnings wouldn't pay a tax on their benefits. It's $78,000 or less for single filers. And by their estimates, it would mean at least 75% of people with those benefits would be covered. The price tag is kept below $300 million per year.

EMILY BRIGHT: Well, what about all those campaign promises for full repeal?

BRIAN BAKST: Mhm. Needless to say, Republicans are pointing that out that these bills stop short of that, and then they're preparing to use it against DFL lawmakers in future elections. The DFLers who are getting behind a partial repeal said that they had to balance pricey priorities. They point out that only the most well-off Minnesota retirees will not qualify for the tax break, and they say that retirees struggling financially will get other tax cuts too, including on their property taxes.

I asked Senate tax chair Ann Rest yesterday about support for the bill given the DFL's one-vote margin in the Senate. Here's what she said.

ANN REST: We had similar proposals, but we took the House language. So it's already in there. We ought to be able to go in the very first day of the conference committee report and adopt a Social Security provision.

BRIAN BAKST: Are you fairly confident that you can hold your members together? There are several who campaigned on a bigger repeal. We heard from one of them here this morning. But are all of the members on board given what the conversations you've had?

ANN REST: We had 34 DFL votes for this bill.

BRIAN BAKST: Without changes to the Social Security if an amendment comes forward?

ANN REST: --this bill that I presented today.

BRIAN BAKST: And, Emily, as you're speaking, there's some legislative jujitsu going on that has allowed some of these members to vote for a full repeal in conjunction with other tax increases, but the bill has remained intact so far. And it's important remember that House members are on the ballot next year. So political ramifications will play out there first. Senators won't face voters again until 2026, which is a few years after these tax cuts would kick in.

EMILY BRIGHT: Legislative jujitsu, I like that. So what can you tell us about the tax rebates that have been discussed for more than a year?

BRIAN BAKST: Yeah, Governor Tim Walz really raised expectations by calling for rebates of $1,000 for individual tax filers and $2,000 for couples under certain income thresholds, with $200 more for up to three dependents. That would cost just shy of $4 billion. Democrats in the legislature have been far from enthusiastic about a rebate, and that's reflected in the rebate size in the House and Senate bills. They're not far off from each other. The rebates would be about $550 for couples, $275 for individual filers. They differ when it comes to the amounts for the dependents. The House bill is more generous there by almost five times.

The plans do have one common feature, though. Rebates would go only to households with $75,000 adjusted gross income for singles and $150,000 for married filers. If you made more than that, there's a cliff, meaning no rebate at all. The goal of all the plans is to get rebates out as soon as this fall.

EMILY BRIGHT: And do the smaller rebates have an effect on what else is in the respective tax bills?

BRIAN BAKST: Yes, it means that there's more money to put toward other kinds of tax relief. For instance, the House bill has a child and working family tax credit of more than $350 million per year, also with an income threshold. The Senate devotes $300 million-plus to a child and dependent care tax credit, and those are just some of the features.

EMILY BRIGHT: Sure. So how about the local aid in the bills? What's there, and what's the rationale?

BRIAN BAKST: Both bills put new money into the general allowances that counties and cities get. The House bill does substantially more than what the Senate bill would, but the theory is that the more the state helps out local governments, the less pressure there is to raise property taxes to pay for basic services.

And the bills also provide additional funding to tribal governments. The House bill as well has $30 million in allocation to Saint Paul to help with street repairs and park fix-ups. The Senate plan has a major feature not in the House plan-- $325 million for public safety grants for local governments. That's less than what Governor Tim Walz wanted, but it keeps them in play going into final negotiations.

EMILY BRIGHT: So from what I understand, these bills don't only cut taxes. Who might pay more in taxes?

BRIAN BAKST: Nothing is final yet, but the House bill would establish a new fifth tier on its income taxes. It would assess a nearly 11% rate on income above $1 million for married filers. Estimates show that it could generate $250 million or more per year. That's not in the Senate bill, and the tax chair there says she opposes it. Both bills have a new, let's say, untested corporate tax on businesses with international operations. They're hoping it will raise $450 million in the next two years and hundreds of millions of dollars more down the road.

Minnesota would be the first of its kind with this worldwide tax calculation. And there's not a lot of confidence yet that the money would materialize. Just listen to this exchange today in the Senate Tax Committee between Republican Senator Jeremy Miller and Eric Willette of the Department of Revenue.

JEREMY MILLER: What if the estimate is wrong?

ERIC WILLETTE: All of our revenue estimates are based on the best available information that we have. Some have more reliable data. If you're changing a tax rate on an existing tax, we have quite a bit of confidence in the precision. Any time there's a proposal for something new, where there is an indirect measure, there is a higher risk that the estimate may be wrong. We do whatever we can to validate the numbers. We try to get within a range, knowing we'll never precisely hit an estimate.

BRIAN BAKST: Emily, you won't be surprised that organizations that lobby for businesses are vigorously opposing this measure. And I would expect much more conversation about this one.

EMILY BRIGHT: Yeah, I'll bet. So, Brian, you've covered quite a bit so far. Help give us a roadmap of what's ahead on taxes.

BRIAN BAKST: Well, as we've noted, the House is due to vote today on its bill probably this evening. The Senate is on track for a vote on Monday. That will touch off conference committee negotiations. At some point in May, lawmakers will try to get to a single tax plan to vote on and send to Governor Walz. A lot of the provisions in the bill are retroactive to the start of this year. So people might start feeling the impact soon.

EMILY BRIGHT: Well, thank you, Brian. I know you have a busy day today. We appreciate your time.

BRIAN BAKST: You're welcome.

EMILY BRIGHT: That was MPR News politics reporter Brian Bakst at the Capitol.