State lawmakers could make four MN tax credits bigger — and simpler

Giving credit where credit is due, Minnesota’s tax credits can make life more affordable for families and help create new companies. But are they doing enough?

On Tuesday, the House Taxes Committee laid over four bills for possible omnibus bill inclusion, each designed to either expand tax credits or simplify them. Be it for education expenses, child care or startup companies, each tax credit was presented as a valuable asset that could use some improvement.

The education credit

Rep. Cedrick Frazier (DFL-New Hope) said the state’s education credit and subtraction has not changed since 1997 and could use an update, so he’s sponsoring HF1373.

Current law allows a taxpayer a refundable income tax credit equal to 75% of eligible education expenses for a qualifying child in kindergarten through 12th grade. The maximum credit is $1,000 per child. Under Frazier’s bill, that list of eligible expenses would grow to include internet service, and the amount of computer hardware, software and internet expenses used to claim the credit would grow from $200 to $300.

Rep. Cedrick Frazier

As amended, the bill would also set the “phase-out” threshold for the education credit at 185% of the federal poverty line, as opposed to the $33,500 currently in statute. If enacted today, that would push the threshold to $40,626 for a family of three.

The Department of Revenue estimates the change would reduce the General Fund by $27.8 million in fiscal year 2022. It also estimates that about 39,100 returns would benefit from the increased credit for computer and internet expenses; about 15,200 returns from the new phase-out thresholds; and about 2,800 returns would receive a reduced credit.

The bill’s companion, SF1251, sponsored by Sen. Ann Rest (DFL-New Hope), awaits action in the Senate Taxes Committee.

Rep. Kristin Robbins (DFL-Maple Grove) was prepared to offer what she characterized as a friendly amendment, one that would allow low-income families to list tuition among their eligible education expenses. She withdrew the amendment but said that the Senate bill contains such language.

The dependent care credit

Rep. Jamie Becker-Finn (DFL-Roseville) knows of a family in her district with two young children that pays $45,600 per year to have an infant in day care three days a week and a toddler in preschool four days a week.

Rep. Jamie Becker-Finn

“What they pay in one year is more than most people make in a year,” she said.

So Becker-Finn sponsors HF1401, which would increase the Minnesota dependent care credit. While the credit currently matches the amount allowed federally, the bill would increase it to 2.5 times that amount. What is now a maximum credit of $2,100 would become $5,250.

The Revenue Department estimates the change would reduce the General Fund by $35.4 million for fiscal year 2022. It also said that about 42,600 returns would see an average reduction in tax of $830 in tax year 2021.

The bill’s companion, SF1777, sponsored by Sen. Carla Nelson (R-Rochester), awaits action by the Senate Taxes Committee.

The angel credit

Those who put their money into early-stage companies to help get them off the ground are called “angels” in the world of startups. Minnesota offers a credit to such investors, but it’s set to expire after tax year 2021.

Rep. Carlie Kotyza-Witthuhn

HF1816, sponsored by Rep. Carlie Kotyza-Witthuhn (DFL-Eden Prairie), would repeal that sunset provision and double the current state outlay for the credit, allocating $20 million each year to the credit for tax years beginning in 2022. Unlike the others discussed Tuesday, the “angel credit” is paid out through a state fund that’s tapped into until it’s gone.

As amended, the bill would place an emphasis upon businesses owned by women, people of color and veterans, and those in Greater Minnesota. Its companion, SF1314, also sponsored by Nelson, awaits action by the Senate Taxes Committee.

“When we’ve not had an angel credit in place, we’ve seen fewer companies start up here,” Kotyza-Witthuhn said.

Testifiers included co-founders of companies finding success in health care software, virtual care, even creators of tiny brains used in medical research. All said that the angel credit made their growth possible.

The research credit

Robbins believes the state’s research and development tax credit would be more widely used if it were simpler. She’s sponsoring HF277 to create an “alternative simplified credit” that mirrors the one used at the federal level.

Rep. Kristin Robbins

As amended, it would apply a flat rate of 6% to the difference between a taxpayer’s current-year research and development expenses and an alternative base amount.

Nelson also sponsors the companion, SF930, which awaits action by the Senate Taxes Committee.

The Department of Revenue estimates the change would cost the state’s General Fund about $22.2 million in fiscal year 2022, and that it would increase the research and development credit amount for about 50 corporate taxpayers, a number projected to grow to about 200 in ensuing years.

Rep. Aisha Gomez (DFL-Mpls) cited a 2017 Office of the Legislative Auditor report that suggests a number of changes to the credit.

“We haven’t made any of their suggested changes,” Gomez said. “We should be focusing on making it better. Broadly, an overwhelming majority of the money is going to the biggest companies that operate in Minnesota. … But there’s no definition of purpose for the tax credit. Hence, we have no way of evaluating if it’s doing what we want it to, because we don’t say what we want it to do.”