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Gov. Tim Walz signed a $100 million tax plan into law Thursday that will align state tax policy with federal tax law, providing relief to hundreds of thousands of Minnesotans.

The update addresses federal payments to businesses and loan relief for student borrowers intended to help people financially weather the COVID-19 pandemic. 

Business owners who benefitted from federal loans and grants said avoiding paying state tax on the funding will help them stay afloat. Hundreds of millions of dollars of federal help flowed into the state to keep many businesses up and running when they had to close their doors due to state restrictions.

“It would’ve been business-ending,” said Dayna Frank, the CEO and owner of First Avenue, of the potential state tax liability on the federal aid. “Our stages were saved once and they were saved again two minutes ago.”

It’s the first bill to make it to the governor’s desk this legislative session and it had unanimous support in both the Senate and the House of Representatives.

DFL leaders celebrated the bill’s quick passage Thursday and state revenue officials said Minnesotans will have an easier time filing their taxes this year as a result of the new law. 

“This will make things a lot simpler for filers in 2022,” Revenue Commissioner Paul Marquart said. “Everything is in place, things will go much smoother.”

Marquart said the department would almost immediately get to work updating tax forms and that Minnesotans can start filing their taxes on Jan. 23. People can also file amended returns for each of the tax years since 2017, when the state last conformed its taxes to federal law.

Tax committee chairs and legislative leaders crowded the governor’s reception room Thursday to mark the bill’s passage. And Walz said it was a sign that the Legislature could get its work done.

“This is the way the Legislature is supposed to work, this is the way things are supposed to get done for Minnesotans,” he said. “This is a great achievement.”

Wrapping up the conformity measure solves a longstanding problem. But many of the biggest tax debates are just beginning at the Capitol and likely won’t be resolved until spring. 

The bill doesn’t get into larger budget issues, such as how to use the state’s $17.6 billion budget surplus, or rebate checks or exemptions on Social Security income.

Those conversations began in a Senate committee Thursday, as lawmakers again debated whether to exempt all Social Security income and some public pension benefits from state taxation.

State leaders were close to a deal last year to remove taxes from most retirement income, but they couldn’t get it to the finish line before the session adjourned last May. Minnesota currently caps taxes on Social Security based on overall taxable income, reducing the amount that can be deducted once income hits $88,630 for married joint filers.

The extent of an exemption will be a point of friction among DFLers, who control the Legislature and governor’s office. Walz and some lawmakers want an income-targeted tax subtraction rather than an across-the-board elimination.

“I still stand that the vast majority of Minnesotans, as they should, don’t pay state Social Security tax on that but to eliminate it for the very top earners in the state, that is going to come at the potential expense of other things they want to do,” Walz told reporters.

In the 34-33 Senate, several DFLers have signed onto bills that would go the whole way. Sen. Aric Putnam, DFL-St. Cloud, said it’s time for a full repeal.

“There's a tremendous amount of misinformation out there about this issue. You know, we've heard that every single senior in the state of Minnesota is going to move to Florida if we don't do something about this,” Putnam said. “And we've also heard on the other side, that we're the state's gonna go bankrupt, and we're not going to have schools if we get rid of this tax, neither of those things is true. Not even remotely.”

A new estimate from the Department of Revenue said the Social Security tax change would affect 473,000 filers and provide an average decrease of $1,276. The pension adjustment would apply to about 48,000 taxpayers and produce an average savings of $833.

Combined, the two changes would cost the state treasury $840 million in the first year and rise every year.

First-term Sen. Grant Hauschild, DFL-Hermantown, estimated that 90 percent of the constituent correspondence he’s received since his election has been connected to this issue. It was also prominent in the campaign, he said.

“I heard ad nauseum from seniors and those nearing retirement, how critical this issue was,” Hauschild said, adding that the pension element which hasn’t received as much attention previously is vital, too. “We need to include those on public pensions. We can't just do a strict Social Security exemption. So I'm really excited to dive further into this bill and continue to advocate for it.”

The Senate Taxes Committee didn’t vote on the bill Thursday; it plans to resume the discussion and take public testimony on Tuesday. But Chair Ann Rest made clear she supports a total elimination of the Social Security tax.

“I’m 100 percent for 100 percent,” Rest, a New Hope DFLer, said. “But I certainly want to understand where that's coming from.”

Politics and Government News

NewsPartners

2023 Minnesota legislative session

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Brian Bakst

The new law was six years in the making and prevents business owners from paying taxes on federal COVID-19 emergency loans and grants. It had broad support among lawmakers, but more contentious tax debates loom. 

Six years in the making, Walz signs $100 million mini-tax bill

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