This year, policymakers are considering transformational changes and long-overdue investments to make Minnesota a state where all can thrive. That holds true for the tax policy debate. A joint House-Senate conference committee is currently negotiating to put together an omnibus tax bill that meets the agreed-upon target of a total of $3 billion in FY 2024-25 and $1.3 billion in FY 2026-27 in net tax reductions and increases in aids to local governments.
Each of the plans include policies to create a more equitable and inclusive tax system, fight child poverty, improve Minnesotans’ economic well-being, and raise revenues needed to fund those tax policies and maintain investments in public services after the short-term surplus bubble has ended.
This blog looks at our priorities for the tax bill and other major elements at play in the tax conference committee; it does not cover tax and revenue provisions included in other pieces of legislation, such as the transportation and housing budget bills.
Child Tax Credit and Working Family Credit
We are very excited that all three tax plans propose sizable investments in a targeted Child Tax Credit (CTC) as one of their centerpieces. We’ve called on policymakers to create a Minnesota Child Tax Credit that builds on the documented success of the federal expanded CTC in reducing child poverty, improving family economic security, and narrowing racial, income, and geographic disparities in economic well-being.
Walz’s tax proposal allocates more than $1 billion per biennium to create a CTC of $1,000 for each child or eligible adult dependent with special needs, up to a maximum of three dependents. The full $1,000 credit would be available to families with incomes up to $50,000 for married couples and $33,300 for head of household or single income tax filers. Families could qualify for smaller credit amounts until they reach certain income limits that are determined by their family size. For example, a married couple with three children would be eligible until their incomes reached $80,000.
The Senate’s similarly structured Child Tax Credit would provide $620 per child, up to a maximum of three, and has the same parameters as the Walz plan in terms of incomes at which families would receive the maximum credit amount or become ineligible. It provides a total of $649 million in CTCs to families in the FY 2024-25 biennium and $691 million in FY 2026-27. Both the Walz and Senate CTC would expire after eight years.
The House proposal adds a Child Tax Credit component to the state’s Working Family Credit. Under the revised credit, to be called the Child and Working Family Credit, eligible families would qualify for a CTC component of $1,275 per child, and importantly, there is no cap on the number of children per family that can qualify. Families can also qualify for an additional Working Family Credit amount based on their earned income, which is improved and simplified compared to current law.
Because the House CTC builds on the existing Working Family Credit (WFC), the net amount of additional tax benefit that families would qualify for varies considerably depending on their family size, amount of earnings, and how much WFC they currently qualify for. For example, for a single parent with one child earning up to $28,000, the amount of additional credit they qualify for would range from about $500 to more than $1,200.
The House proposal is estimated to reduce child poverty in Minnesota by 26 percent, according to the Center on Poverty & Social Policy at Columbia University. The Senate proposal is estimated to reduce child poverty by 14 percent.
All three CTC proposals would make real differences improving the lives of Minnesota families and children. The Minnesota Budget Project prefers the House version because of the greater anti-poverty impact at about the same financial investment as the Senate, because it does not sunset or cap the number of qualifying children, and for some more technical reasons related to how the credit phases out. (Read more about the details of these proposals in our CTC issue brief.)
The House proposes a total of $691 million in FY 2024-25 and $717 million in FY 2026-27 in additional funding for the revamped Child and Working Family Credit.
A relatively small portion of the funding increase would go to improve the Working Family Credit for workers without dependent children. These Minnesotans have long been eligible for the WFC, but receive much smaller credit amounts, lose eligibility at lower incomes, and face arbitrary age restrictions. Building on progress made over the past several years, the House would increase the maximum size of the WFC for these workers from the current $316 to $500, increase the maximum income to qualify, and expand eligibility to include workers aged 18 and 65 and older (currently, only those between 19 and 65 years old qualify).
Building a more inclusive tax code
Some Minnesotans use a federal Individual Taxpayer Identification Number (ITIN), instead of a Social Security Number, for tax purposes because of their immigration status. All three tax plans would remove arbitrary barriers that keep otherwise eligible Minnesotans from qualifying for certain elements in our existing tax code.
Under all three tax plans, ITIN filers could apply for homestead status on homes they own, removing a barrier that currently means these Minnesotans may pay higher property taxes than their neighbors and cannot qualify for the state’s homeowner property tax refund. In addition, workers and families that meet all other eligibility requirements could also begin qualifying for the Working Family Credit when filing with ITINs. These two proposals together have a fiscal impact of about $22 million in FY 2024-25 and $25 million in FY 2026-27. ITIN filers would also be eligible for the proposed new Child Tax Credit under all three tax plans.
K-12 Credit Expansion
All three tax plans would make overdue updates to Minnesota’s K-12 Education Credit, which refunds a portion of what lower-income families have paid for expenses related to their children’s education, from school supplies to software to tutoring to driver’s ed, up to a maximum credit of $1,000 per child. (Families with higher incomes receive a tax benefit for similar expenses through the K-12 Education Subtraction.)
All three tax plans would simplify the K-12 credit and update it for inflation. Eligibility for the credit would be based on families’ Adjusted Gross Income (AGI), instead of a more complicated “household income” measure that is used now. In addition, families could qualify for the full value of the K-12 credit at higher income levels: that threshold would be $70,000 under the Senate version; in the House, it is $70,000 for families with one or two children and higher for larger families. The House increases funding for the K-12 Credit by about $30 million per biennium on average, the Senate by around $23 million, and the governor by around $21 million.
Child and Dependent Care Credit (Great Start Credit)
The Senate and the governor's tax bill would substantially expand the Child and Dependent Care Credit, and rename it the Great Start Credit. This credit refunds a portion of what families have paid for child care expenses, and currently is focused on families with incomes under about $80,000.
The Senate would substantially increase the amount of credit families can receive, including larger credit amounts for children under age 5, and significantly raise the income levels at which families can qualify for the full value of the credit to AGI of $160,000, and for smaller credit amounts until reaching $200,000 for married filers. In total, the Senate would put $450 million in FY 2024-25 and $457 million in FY 2026-27 toward this expansion. Walz has proposed a similar expansion.
The House’s tax plan would make a smaller change. Currently, parents of a child under one year old can claim the credit whether or not they paid for child care expenses, but this is limited to married filers only. The House would make this “newborn credit” available regardless of marriage status.
Expanded Social Security income tax exemption
All three tax proposals would build on Minnesota’s targeted approach to Social Security exemption. Currently, federal law already exempts between 15 percent and 100 percent of Social Security benefits from income taxes, and lower- and middle-income Minnesotans can take an additional exemption on their state income taxes on top of that. As a result, about 70 percent of Social Security benefits are already exempt from Minnesota state income taxes, and 58 percent of Minnesota households who receive Social Security do not pay any state income taxes on that income.
Under the Senate and House tax bills, Minnesota’s Social Security tax exemptions would increase so that Minnesotans could exempt 100 percent of their taxable Social Security income from state income taxes if their AGI is no more than $100,000 for married filing joint filers or $78,000 for single or head of household filers. Folks with AGI above those income thresholds may qualify for some exemption, with the Senate allowing the subtraction for households higher up the income scale than the House.
The House and Senate would also make the state’s Social Security exemptions easier to understand, as they would change them to be based on a household’s Adjusted Gross Income (AGI), like many other elements of the tax code, instead of the less familiar and more complicated “provisional income” measure that is currently used.
The Senate proposal expands the Social Security exemption by a total of $496 million in FY 2024-25 and $577 million in FY 2026-27. The House expands it by $409 million in FY 2024-25 and $479 million in FY 2026-27. While substantially less expensive than an unlimited exemption, the legislative plans are roughly twice as large as what Walz had proposed.
Minnesota policymakers are doing the right thing by rejecting calls for an unlimited Social Security exemption, which would have been much more expensive and provided the largest tax cuts to high-income households.
Property tax reductions for homeowners and renters
The tax plans take various approaches to reducing Minnesotans’ property taxes.
Income-targeted property tax refunds are the state’s major tool for taking folks’ ability to pay into account in regard to property taxes. Those are commonly called the “circuit breaker” for homeowners and the Renters’ Credit for renters.
The House tax bill includes the transformational Renters’ Credit expansion that was included in last year’s 2022 tax agreement (but which was not enacted into law). By refunding a portion of the property taxes that renters have paid through their rents, the Renters’ Credit brings down one of the costs of housing. To qualify, renters must have incomes below certain limits and their property taxes must exceed a certain share of their incomes.
The House proposal would do two things: 1) it would integrate applying for the Renters’ Credit into the state’s income tax-filing process (replacing a stand-alone process); and 2) it would simplify the credit by making it based on Adjusted Gross Income, instead of a more complex “household income” measure. As a result of these changes, an estimated 119,000 more Minnesota households would receive the credit – these are folks who are already eligible but not currently applying for it.
The net impact of these changes in the Renters’ Credit would be to expand it by more than $135 million per year. There is an additional one-time cost of $379 million in FY 2025, because shifting the timing of when Renters’ Credits are paid from the fall to spring results in two calendar years of Renters’ Credit being paid out in the same state fiscal year during the transition from the current system to the new one.
This game-changing proposal is a priority for the Minnesota Budget Project, and we are happy the House brought it into conference and that Senator Ann Rest has expressed her enthusiasm about this proposal during conference committee discussions.
The House would also increase the property tax refund for homeowners by $42 million in FY 2025 and $85 million in FY 2026-27. It would also allocate $125 million for a one-time 13.8 percent increase in homeowner and renter property tax refunds paid in 2023.
The state’s targeted property tax refund (also called the “special” property tax refund) is for homeowners whose property taxes spike up in one year, and has no income limit to qualify. Currently a homeowner must see their property taxes increase by 12 percent in one year to qualify, and the maximum refund amount is $1,000. The Senate would make it available to folks whose property taxes increase by 10 percent or more in one year, and increase the maximum credit amount to $2,000. The House would provide a one-time $23 million boost to the targeted property tax refund in FY 2024 only.
Finally, both the House and Senate would increase the amount of homestead property tax value that is excluded from local property taxes – the Senate would increase this up to $517,200 and the House to $437,100.
Rebates
All three tax plans propose a one-time tax rebate. The House would allocate $1.3 billion and the Senate $1.1 billion for rebates, with some variations in how the rebates would be calculated.
- The Senate plan is a $558 rebate for married or head of household filers, or $279 for single filers, plus $56 for each dependent up to a maximum of three. Eligibility is limited to taxpayers with AGI under $150,000 for married or head of household filers and $75,000 for single filers.
- The House plan is a $550 rebate for married joint filers or $275 for other filing statuses, plus $275 per dependent up to a maximum of three. Qualifying taxpayers must have AGI below $150,000 for married filing joint filers and $75,000 for other filing statuses.
These proposals are similar in structure but smaller in scale than the Walz proposal of a one-time $3.9 billion tax rebate of $2,000 for married and head of household filers, $1,000 for single filers, plus $200 for each dependent.
Each of the tax plans outlines how rebates may be sent automatically to some taxpayers, and a process through which other qualifying Minnesotans can apply for them.
General fund revenue-raisers
Importantly, all three tax plans include general fund revenue-raising proposals that help fund other components of the tax bill and recognize the need to sustainably fund public services.
The House would focus on those with the most resources by creating a new top state income tax bracket – called a millionaires’ tax, or a “5th tier” because it would be added to the state’s existing four income tax brackets. It would apply a 10.85 percent rate on taxable income above $1 million for married filing joint filers, above $800,000 for head of household filers, or $600,000 for single filers. This progressive tax policy would raise $529 million in FY 2024-25 and $500 million in FY 2026-27.
Both the House and Senate tax bills included provisions to raise $438 million in FY 2024-25 and $694 million in FY 2026-27 from adopting worldwide combined reporting for corporate taxes. The Center on Budget and Policy Priorities includes this policy on their list of state revenue options for advancing equity and prosperity, as a means to combat the ability of multinational corporations to shift their profits to low- or no-tax foreign countries.
During the conference committee conversation, the Senate has said they no longer support this position but are looking at other ways to raise revenues. One of these alternatives may be the governor’s primary general fund revenue-raiser, a capital gains and dividend income tax surcharge of 1.5 percent on capital gains/dividend income of $500,000 to $1,000,000, and 4 percent on such income over $1,000,000. Walz argued that this proposal responds to the fact that these forms of investment income are taxed at lower rates at the federal level than wages and salary income. This would raise $680 million in FY 2024-25 and $625 million in FY 2026-27.
Aids to local and tribal governments
Another area where all three tax plans have similar elements but different dollar figures is increased and new aids to local governments and tribal governments so that cities, counties, and tribal governments have more resources to meet the needs of their residents. (Note that tribal governments are sovereign entities; they are not subdivisions of the state like cities or counties.)
In total for this category of funding, the House proposes an additional $501 million in FY 2024-25 and $753 million in FY 2026-27, the Senate $574 million in FY 2024-25 and $140 million in FY 2026-27, and the governor $698 million in FY 2024-25 and $184 million in FY 2026-27. Some of the major components are:
- The House provides the largest increases in Local Government Aid to cities and County Program Aid, which are the two major general aids to local governments, while Walz and the Senate provide smaller increases.
- Walz includes $550 million and the Senate $325 million in one-time public safety aid in FY 2024 to cities, counties, and tribal governments.
- Walz and the Senate would allocate $44 million in FY 2024 only to tribal nations to address housing and homelessness needs. The House would allocate $100 million in FY 2024-25 and $70 million in FY 2026-27 to create a Local Affordable Housing Aid program for local governments and tribal governments. The House would also increase the funding for Local Homeless Prevention Aid and allocates a portion of the funding to tribal governments.
- The House would create a new Tribal Nations Aid of $75 million per year, recognizing the public services that tribal nations provide to their communities, including non-Native folks who live on or near reservations.
- The Senate includes $20 million per biennium to reimburse local governments for elections costs.
The conference committee has about another week to figure out the details of the final tax bill. We urge them to craft a bill that ensures the broadest number of Minnesotans have more resources to succeed in the workforce and in their roles as parents, caregivers, and members of their communities.