Minnesota lawmakers have tried to eliminate the tax on Social Security earnings before, but it was always a tough sell during tight budget times. Supporters of the proposal believe that the state’s projected budget surplus of nearly $9.3 billion makes it a much easier decision this year.
Sen. Carla Nelson, R-Rochester, chairs the Senate taxes committee and has authored one of the bills to get rid of the Social Security tax.
“Often times Social Security is a main source of income for retirees,” Nelson said. “All of our retirees are living on fixed income.”
Nelson wants Minnesota to join 37 other states that do not tax Social Security benefits, even though the proposed elimination would come at a big price. Nelson recently told members of her committee that the cost would be $539 million in fiscal year 2023, and well over $1 billion during the following two-year budget cycle.
“It is a significant revenue to our state,” Nelson said. “But I submit to you that these benefits were purchased by the retirees and it’s a significant part of their retirement.”
Not all Social Security earnings are taxed in Minnesota. The tax is determined by a retiree’s overall income. Some pay little or nothing. Most of the revenue comes from those with an annual income of $150,000 or more.
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There were 565,000 state tax returns that reported Social Security Income in 2017, according to the nonpartisan Minnesota House Research Department. More than half of those returns –55 percent– paid no tax on their benefits.
Nelson’s proposal has supporters and opponents.
“Why tax more from the citizens who already worked so hard for this money? The Minnesota government can afford not to tax Social Security,” said Barry Bisbee of Stewartville, during a hearing on the bill.
“Collecting taxes from people in my economic situation or better is one of the ways we’re able to fund the programs and services that keep Minnesota a good place to live,” said Mary Jo Malecha, a retiree from New Brighton and member of the group ISAIAH, was among those who spoke against the bill.
Gov. Tim Walz also opposes a full elimination of the tax on Social Security earnings. The DFL governor said a further reduction on the lower end of income would be fair, and he’s open to that discussion. But Walz doesn’t want to go too far.
“Eliminating this will give the most massive tax break to the very wealthiest Minnesotans, who aren't depending, to live, on Social Security,” Walz said.
The tax committee in the DFL-controlled House is another obstacle. The committee’s chair Rep. Paul Marquart, DFL-Dilworth, said the tax bill he’s working on would provide direct help to senior citizens through property taxes and health care rather than Social Security.
“Exempting all of Social Security, I just don’t think really solves a problem that I see as the most important one for senior citizens,” Marquart said.
But Marquart is open to some changes. He says simplifying what he views as a “convoluted formula” for Social Security taxation is one thing worth considering.
“Let’s make it simple, so people totally understand,” Marquart said. “Because there are a lot of senior citizens who think they’re paying taxes on their Social Security, but they’re not.”