Federal tax changes could have a big price tag in Minnesota

Senators work on the floor Monday Feb. 27, 2017 in St. Paul.
Senators work on the floor Monday Feb. 27, 2017 in St. Paul, Minn.
Glen Stubbe | Star Tribune via AP 2017

Researchers at the Minnesota Department of Revenue looked at the new tax code provisions that affect taxable income, including the repeal of deductions or exclusions. Their preliminary estimate of adopting the federal changes, with no changes in Minnesota policy, is that state tax collections would grow by nearly $850 million in the current two-year budget period.

The number would be nearly $1.5 billion for the following two years.

"Doing nothing is not an option," said Rep. Greg Davids, R-Preston, the chair of the House tax committee.

Davids wants to get to work on what's called a tax conformity bill for the 2018 legislative session, both to avoid such a tax increase and to make it easier for Minnesotans to do their taxes.

"I want to conform with everything I can," he said. "Now, some of the issues are going to be a little tougher than others, just because of the cost. But everything that we can conform with is something we can take off the table for more tax forms and having to do things twice."

The federal law broadens the tax base and lowers rates. But the benefits of those changes would not be fully realized if Minnesota's rates remain unchanged.

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The tax chair in the Minnesota Senate, Republican Roger Chamberlain of Lino Lakes, said state rates must be addressed.

But if the rates change and the state collects less money, it could mean a big state deficit. Unlike the federal government, Minnesota must balance its budget.

One costly provision is the new 20 percent federal deduction for small business owners. The report shows it would reduce state revenue by $963 million through fiscal year 2021. Chamberlain said small business owners deserve the break, and he doesn't view it as a cost to the state.

"People keeping their property and their assets and their money and what they have earned through hard work and achievement is not a cost to the state," he said. "That is a value to the state, right?"

After reviewing the analysis, Sen. Ann Rest, DFL-New Hope, said the implications of the federal tax law are still not entirely clear. Rest said she thinks the increase in the standard deduction and the elimination of personal exemptions will have the biggest impact. But she wants to know more.

"The Minnesota Legislature needs to be very careful and cautious as we really work to understand what the impacts are going to be on Minnesota taxpayers," Rest said.

Lawmakers expect to spend much of the session working on tax issues.

Tax conformity is typically noncontroversial and bipartisan, said Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence. But Haveman said this time legislative tax committees face a once-in-a-generation challenge.

"There are so many things going on, so many issues to think about, so many taxpayer interests that are going to be in play," he said. "Sorting all that out is going to take a lot of time and mental energy on the part of policymakers."