Tax agreement is ready to go, complete with PPP, unemployment exemptions

Conformity will cost you. That lesson stands out in the long-awaited omnibus tax bill.

Minnesota doesn’t automatically change its tax laws when the federal government makes changes, and that means that it’s up to the Legislature to pick and choose which adjustments in the federal tax code to mirror on a state level.

The compromise tax bill fashioned from the omnibus bills that passed the House and Senate conforms to many changes in federal tax law made since late 2019, but not all of them. One is making forgiven Paycheck Protection Program loans tax exempt, as well as unemployment benefits up to $10,200.

The bill, SSHF9, sponsored by Rep. Paul Marquart (DFL-Dilworth), was presented to the House Taxes Committee at an informational hearing Friday, and it’s expected to be the last bill taken up on the floor before the House adjourns the special session. Its next stop is the House Ways and Means Committee.

“[SS]HF9 provides immediate assistance to those who lost their jobs, as well as businesses affected by COVID-19,” Marquart said. “After the PPP loans and unemployment benefits, the remaining part of the bill focused upon how can we do things that really make a difference and impact people’s lives. I think we’ve done that. For example, homelessness prevention aid to counties, helping people with no income, no home. What this provides is local solutions to a huge problem.”

The bill received glowing reviews from both sides of the aisle.

“I think you put together a really good bill,” said Rep. Pat Garofalo (R-Farmington), joking that he thought the Republican lead on the committee, Rep. Greg Davids (R-Preston), had hijacked Marquart’s Zoom account.

“There are some amazingly strong provisions in this bill,” Davids added.

Rep. Dave Lislegard (DFL-Aurora) agreed, saying to Marquart, “I appreciate you being pragmatic and willing to compromise and coming up with something that will benefit all Minnesotans.”

Its companion, SSSF26, sponsored by Sen. Carla Nelson (R-Rochester), awaits action by the Senate Taxes Committee.

The bill would produce $49.1 billion in fiscal years 2022-23 and provide $4.2 billion in refunds, aids and credits. Proposed tax policy changes in the bill would cost the state’s General Fund $751.4 million in the ’22-23 biennium.

[MORE: View the spreadsheet]

But the bulk of the big changes can be found in the ledger lines for fiscal year 2022. That’s because many of the provisions relate to tax year 2020, for which May 17 was the filing deadline. Hence, tax bills and refunds will likely be altered. Expect updated guidance from the Revenue Department about that if the bill is signed into law.

The most common tax talking point during the regular session – especially for Republican legislators – was making forgiven Paycheck Protection Plan loans tax exempt. The bill does that, and it will cost the General Fund $375 million in fiscal year 2022.

Throw in the state conforming to the Consolidated Appropriations Act and the Further Consolidated Appropriations Act and conformity causes a $403.2 million reduction in state revenue for fiscal year 2022.  

But that’s before you add in another oft-talked-about issue: unemployment insurance benefits. Under the bill, the state would make all benefits tax exempt up to $10,200 for tax year 2020. That would cost the state $234.8 million for fiscal year 2022.

As for aids and credits, the changes that would make the largest adjustments to the state’s bottom line would affect the budget for fiscal year 2023.

For example, veterans’ benefits would be excluded from household income. Hence, a total of $3.5 million would be returned to taxpayers in fiscal year 2023 under the homestead tax credit (an estimated average reduction of $145 for qualifying taxpayers) and another $1.2 million under the renters’ credit (an average of $120 back for 10,000 taxpayers). And a one-time local government aid supplement would send $5 million out in fiscal year 2023.

The bill would also:

• extend both the small business investment “angel” credit and historic structure rehabilitation credit;
• establish new state tax credits for film production and charitable contributions to a housing investment fund;
• allow taxpayers ages 19 to 21 without children to qualify for the working family credit;
• modify the student loan credit calculation to reduce the marriage penalty; and
• establish a state subtraction for payments from charitable contributions to volunteer drivers.

It would also establish a fully refundable pass-through entity tax that would allow electing pass-through businesses to pay state income tax at the entity level and deduct that tax for federal income tax purposes. Sales taxes would be exempted from sales made by school-associated student groups. And retailers, both in-state and out, delivering tobacco products would need to file a monthly tax return accompanied by the full unpaid tax liability.

As for aids and credits, the bill would create a new local homeless prevention aid for counties, and provide a supplemental aid to cities losing local government aid in 2022.

Property taxes

Among other property tax changes, the bill would:

• authorize the creation of fire protection districts;
• move the homestead application deadline to Dec. 31;
• set the first tier valuation limit for 4d property at $100,000 for the next two assessment years; and
• authorize the use of special assessments for energy improvement projects.

Local taxes

The bill would:

• create a definition of “capital project” for which revenues collected from a general local tax may be used;
• remove the expiration of the Sartell food and beverage tax; and
• authorize general local sales taxes for Carlton County, Cloquet, Edina, Fergus Falls, Grand Rapids, Hermantown, Itasca County, Litchfield, Little Falls, Maple Grove, Mille Lacs County, Moorhead, Oakdale, St. Cloud, St. Peter, Staples, Wadena, Waite Park and Warren.

Tax increment financing

The bill would modify tax increment financing law to:

• provide temporary flexibility of the use of unencumbered TIF increment;
• expand the pooling rules to allow for expenditure of increment on certain housing projects;
• extend the five-year rule to eight years for redevelopment districts certified after Dec. 31, 2017, through June 30, 2020; and
• provide a corresponding extension of the six-year rule.

The bill would also provide special tax increment financing authority to Bloomington, Burnsville, Minnetonka, Mountain Lake, Richfield, St. Louis Park, Wayzata and Windom.

Also included in the bill are measures that would:

• establish a legislative Tax Expenditure Review Commission;
• require contractors with access to federal tax information to undergo background checks; and
• increase the budget reserve amount.

How would all this affect the state budget?

Here are the provisions that would alter the state’s bottom line the most, with how much they will cost the General Fund in fiscal year 2022:

• conforming to federal individual income tax provisions, $210.4 million;
• conforming to federal corporate franchise tax provisions, $192.8 million;
• exempting certain construction material vendors, $12.1 million;
• a one-year extension of the historic rehabilitation credit, $5.6 million;
• full conformity for carryover properties under Section 179 expensing, $5.2 million;
• a non-refundable film production tax credit, $4.9 million; and
• lowering the minimum age for the working family tax credit to 19, $4.3 million.

But some provisions won’t significantly subtract from the state’s budget until fiscal year 2023, such as increasing the homestead market value exclusion to $150,000, which would cost the state $10.6 million in fiscal year 2023, and extending the small business investor (or angel) tax credit, which will cost the General Fund $5 million that year.