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Tax changes will leave Minnesota lawmakers with a big job

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Greg Davids, left, chairs the House tax committee
Rep. Greg Davids, left, who chairs the House tax committee, expects to spend a lot of time with the state's top tax and budget officials in the coming months.
Tim Pugmire | MPR News file

State lawmakers periodically try to help Minnesota tax-filers by lining up the state tax code to recent changes in federal tax policy. 

This year, the scope of the changes will make it a much bigger job.

Rep. Greg Davids, R-Preston, who chairs the House tax committee, said he expects to spend a lot of time with the state's top tax and budget officials in the coming months to sort out what needs to be done for tax conformity. He expects special interests to weigh in as well. 

"Once we get the details, the winners will want us to immediately conform with everything the feds did, and the ones that don't win will want us to make some exception for them," he said.

The federal changes will spur economic growth by making the tax system for businesses much more competitive with other countries and helping small businesses that pay taxes through the owner's individual return, said Beth Kadoun, vice president for tax and fiscal policy at the Minnesota Chamber of Commerce. She wants Minnesota to make similar changes to its tax laws

"Right now, Minnesota's top rate, both on the individual side and business side, is third highest in the nation," she said. "So, we need to reduce those to be more competitive."

Minnesota should also repeal its estate tax or raise its exemption threshold closer to the pending, higher federal level, Kadoun said. If not, she fears the state will lose more of its wealthy residents.

But critics say the bill has too many tax breaks for wealthy Americans. Nan Madden, director of the Minnesota Budget Project, contends that a new tax break for those with pass-through business income will cause greater inequity between individuals who own businesses and those who are salaried employees.

"That's a preference that doesn't make a lot of economic sense," Madden said.

Madden added that state lawmakers will have to wrestle with the potential loss of revenue from tax cuts that match the federal bill. She says the Legislature, unlike Congress, needs to balance the budget.        

DFL Senate Minority Leader Tom Bakk has similar concerns. Following this month's release of an economic forecast that projected a $188 million deficit in the state budget, Bakk cautioned against a rush toward tax conformity.

"We are going to deviate widely with where the federal government is at," Bakk said. 

Typically, state lawmakers act on conformity bills early in the session to make sure changes are in place ahead of the tax filing season. But the federal changes this time won't kick in until next year, and won't be an issue for taxpayers until they file their 2018 returns in early 2019.

Sen. Roger Chamberlain, R-Lino Lakes, the chair of the Senate tax committee, said he wants to take plenty of time to consider conformity proposals.    

"Because it appears to be more complicated, it's going to take some time to work through those changes," he said. "I would anticipate working with the House to walk through this and make sure we got it right."