GOP renews push to end Minnesota tax on Social Security

Greg Davids
House Taxes Committee Chair Greg Davids, R-Preston, photographed in 2013, says cutting the Social Security tax is a top priority this legislative session.
Jim Mone | AP

Republicans in the Minnesota House are pushing again for tax cuts with a renewed focus this session on phasing out the state tax on Social Security income.

GOP leaders say the move is needed to keep retirees from leaving the state, although Senate Democrats and DFL Gov. Mark Dayton warn that the loss of revenue from such a large cut would damage future state budgets.

The tax bill House Republicans passed last year, when the state budget had a $1.9 billion projected surplus, would have cut the Social Security tax by 20 percent a year for five years. The proposal remains alive this session in a conference committee.

This year, the estimated surplus dropped to $900 million. Cutting the Social Security tax, however, is still a top priority, said House Taxes Committee Chair Greg Davids, R-Preston.

"We want to be retiree-friendly, and with our tax laws on Social Security taxation, we're not friendly," Davids said. "I want Minnesota to become a friendly state for seniors to retire in, bring them here. They're very, very important in our communities. Let's not drive them out of the state because we're taxing their Social Security benefits when most other states don't do that."

The Minnesota Department of Revenue estimates the GOP phase-out plan would affect 381,000 returns in the current tax year, with an average reduction of $213.

Rep. Paul Marquart, DFL-Dilworth said he supports some tax relief for senior citizens but thinks a complete exemption of Social Security income would put too big of a hole in the state budget.

"I haven't talked to one senior citizen that wants to bankrupt their grandchildren's future. That's exactly what the Republican bill would do," he said. "It would cost about $500 million a year when fully phased in."

In Minnesota, Social Security benefits are already fully exempt from state and federal taxes for married couples with annual incomes of less than $32,000. The full exemption applies to individuals with income of less than $25,000. There's a 50 percent exemption on slightly higher incomes. No more than 85 percent of anyone else's benefits are subject to the state tax.

Marquart and other Democrats want to raise the income thresholds, which haven't changed since 1994. Dayton also supports an adjustment, but he did not include one in his own budget plan.

Senate Taxes Committee Chair Rod Skoe, DFL-Clearbrook, said the state could spend about $15 million a year and exempt everyone who makes less than $60,000.

Skoe said the full exemption favored by Republicans would primarily benefit people with the highest incomes.

"The vast majority of the money, if we exempt Social Security, goes to people making over $100,000 in income," he said. "That would be investment incomes that relatively well-to-do people have, and they would be exempt from paying any income tax on their Social Security. Doesn't seem like a good policy direction for us to go."

Skoe said Senate Democrats won't support any tax cuts that put the budget at risk.

Some Republicans, though, see room to negotiate a phase-out schedule agreeable to Democrats. House and Senate negotiators will begin working again on a potential tax bill compromise later this month.

"The state of Iowa did it in eight years. If it takes us 15, 20 years, I mean that's fine," said Sen. Dave Senjem, R-Rochester. "I think we just have to begin the journey. We're not competitive for retirees anymore, in many ways."