The Minnesota Senate passed a plan Tuesday that expands a state tax exemption for Social Security benefits without eliminating the tax after maneuvering around a version of repeal that fell short.
The item is just one element of the sprawling tax package, which would also deliver one-time rebates, boost child and dependent tax credits, send more money to local governments and bump up property tax relief programs. The bill also includes an increase in taxes on companies with foreign subsidiaries they sometimes use to trim their tax liability.
The final vote was 34-33 along party lines, with majority Democrats voting in favor.
Much of the debate centered on the tax treatment of Social Security benefits, given that it was a potent campaign issue.
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The bill would prevent the state tax on Social Security income for couples earning $100,000 or less and singles under $78,000 – more than current law allows and at a level that would cover about three-quarters of benefit recipients.
Sen. Aric Putnam, DFL-St. Cloud, pointed out that it’s not a cliff beyond that level, meaning that it would also reduce the tax burden for people earning more than the tax-free level. The tax cuts are phased out after a couple on Social Security earns $140,000 in total income.
“This is the largest tax cut for retirees who receive Social Security benefits in the history of Minnesota,” he said.
Sen. Carla Nelson, who was tax chair when Republicans led the Senate last year, said the result is short of what it should be.
“One hundred percent of Minnesotans should be 100 percent exempt from the income tax on Social Security,” said Nelson, of Rochester.
The Senate considered amendments that would tie the full Social Security tax repeal to increases in other taxes on annual investment income, estates and trusts above $250,000 per year.
The amendment eventually failed after hours of discussion. But DFLers who campaigned on eliminating the tax were able to cast a vote for repeal nonetheless.
Republicans accused the majority of using the procedural tactic purely for political cover. They said Minnesota’s projected $17.5 billion budget surplus should provide plenty of money to get the job done.
“We've given this body ample opportunities to pass a clean and clear cut Social Security tax exemption because that's what the people wanted. And that's what they told us last year when we were all going door to door,” said Sen. Andrew Mathews, R-Milaca. “But when the fog grows thick in the Capitol and you start losing your common sense and you start getting drowsy with the heaviness of what all these special interests are saying, they start running you.”
DFLers said Minnesota voters also favor new investments in education, health care, transportation and other areas. Those expenses have combined to chew up a lot of the available money in the proposed two-year budget under consideration.
A full repeal of the tax would siphon at least $1.2 billion every two years out of the state treasury, with the amount increasing as the number of retirees grows. The partial tax reduction substantially shaves the cost.
“Everybody has been clamoring for an elimination of Social Security tax. We also provide elimination for pension income,” said Sen. Bonnie Westlin, DFL-Plymouth. “But it has to be paid for.”
The parameters around Social Security in the bill are similar to legislation approved last week by the Minnesota House.
As for the rebates, the bill would authorize one-time payments of $558 for couples and $279 for individual filers, with $56 for up to three dependents. The rebates are smaller than what Gov. Tim Walz proposed and would be subject to income limits, capped at joint filers who make $150,000 or less and singles at $75,000 or less.
Senate Taxes Chair Ann Rest, DFL-New Hope, touted it as a nearly $1.1 billion giveback for low and middle income families.
Sen. Bill Weber, R-Luverne, said there shouldn’t be a cap.
“We are not on board with means testing,” he said. “We think that everybody should get that rebate because everybody contributed to the surplus, either through their purchases and sales tax or through their income and income tax.”
That provision also tracks closely with a bill that has passed in the House already.
The Senate did adopt a Republican amendment from Sen. Julia Coleman that would exempt a range of baby products from sales taxes, everything from cribs to car seats to infant eating utensils.
A final tax agreement is expected by mid-May.