Governor’s tax proposals include cuts, credits and checks

“Walz checks” are only the beginning.

Yes, the big-ticket item in the tax proposals Gov. Tim Walz has brought to the Legislature is a one-time refundable tax credit. But that’s among dozens of proposals that are part of the governor’s tax bill, HF1938.

Sponsored by Rep. Aisha Gomez (DFL-Mpls), the House Taxes Committee laid the bill over, as amended, Tuesday for omnibus tax bill consideration. After public testimony is completed Wednesday, debate will continue and additional amendments will be heard.

While Gomez is the current tax committee chair, she turned most of the presentation over to her immediate predecessor, Paul Marquart, who is now the state’s revenue commissioner.

“Not only is it the largest tax cut in the history of this state, about $5.8 billion of tax cuts just this biennium,” Marquart said. “But 85% of the ongoing tax cuts go to kids and families. And we know that this will lower child poverty rates by at least 25%. When you can do things like that, you improve educational attainment, you improve your workforce, you make for a stronger economy, you lower incarceration rates, reduce disparities that you have concerning early education and employment. It benefits the entire community and the entire state.”

Here are the key changes proposed in the bill.

Income tax credits

The Revenue Department estimates the bill’s provisions would reduce the General Fund by $5.45 billion during the 2024-25 biennium. The bulk of that would come from a one-time advanced refundable tax credit of $2,000 for those married filing jointly and $1,000 for individual filers, with an additional $200 for each dependent in the household, up to $600. It would be available to married filers with federal adjusted gross income up to $150,000 or $75,000 for single filers.

It's estimated that over 2.5 million households would receive a payment. That would amount to $3.9 billion worth of change to the state’s bottom line.

“If this passes in May, checks could go out by early fall,” Marquart said.

Another $1.3 billion decrease in General Fund revenue would come from a new child tax credit of $1,000 per child, with a maximum credit of $3,000. It would gradually be phased out for each $1,000 of federal adjusted gross income over $50,000. It’s estimated that, in tax year 2023, about 363,700 returns would claim the credit, at an average credit of $1,500.

While the bill doesn’t call for elimination of taxes on all Social Security benefits, it would increase the maximum subtraction to $10,000 for married filers and $5,000 for individual filers. And the phaseout thresholds would increase to $120,000 for married filers and $60,000 for individuals. The Revenue Department believes that about 377,200 tax returns would be affected, with an average decrease in tax of $278.

The bill would also expand the child and dependent care credit by increasing the income threshold and maximum credit. The average credit would be expected to increase from $523 to $1,589. Also expanded would be the K-12 education credit — doubling the number of eligible families — and the working family credit.

Local government aid

Annual appropriations for local government aid and county program aid would increase by $30 million for each program. The bill also calls for $300 million in one-time aid to supplement public safety spending, the funds meted out to cities, counties and tribal governments based on population.

Also included is a sales tax exemption for construction materials purchased by contractors for government and nonprofit organizations, $44 million in one-time tribal nation homelessness aid, and a permanent funding mechanism for soil and water conservation districts at $12 million per year.

Property tax modifications

The Senior Citizen Property Tax Deferral Program would see its income threshold increase to $75,000, while the number of years a senior must have lived in their home would decrease to five. The school bond agricultural tax credit would increase, and property owners with an individual taxpayer identification number would qualify for homestead classification. It’s estimated that about 1,900 additional homeowners would become eligible for a property tax refund with the change.

Business tax changes

In addition to adopting federal changes on the deduction for excess business losses and nonresident percentages of state tax liability, the bill would reinstate the historic rehabilitation tax credit and extend the angel investment tax credit through 2030, setting available funds for that at $10 million in annual total credits.

Going up?

Some changes to the state’s tax code would raise the taxes of some residents. Individuals, trusts and estates would see a 1.5% increase in taxes on capital gains and dividend income between $500,000 and $1 million, with an additional tax of 4% on income over $1 million.

Because of those changes, Rep. Chris Swedzinski (R-Ghent) took issue with characterizing the bill’s provisions as a “tax cut.”

Sales tax policy would also be updated to include edible cannabinoid products.

The Republican plan

Earlier Tuesday, a group of House and Senate Republicans presented their “Give it Back” tax relief plan. It includes full repeal of taxes on Social Security income; lowering the income tax rates on the first and second tiers of earners; raising the exemptions on homestead, agricultural and resort properties; and one-time rebate checks for all taxpayers of $1,250 for single filers, $2,500 for married filing jointly.

As in the governor’s bill, those checks would be what affect the General Fund most (at about $5 billion), but their proposal also includes a child tax credit of $1,800 per child that would add up to about $4 billion.