Taxes Committee joins the Social Security subtraction conversation

It’s a subtraction that’s proven a major addition to the public conversation recently. Whether Minnesotans should pay state taxes on Social Security income became a prominent campaign issue last year, creating more dialogue on doorsteps than any taxation issue in recent memory.

And now the House Taxes Committee is taking up the topic.

On Thursday, it began consideration of HF300, a bill sponsored by Rep. Dave Lislegard (DFL-Aurora) that would allow the entire amount of a taxpayer’s Social Security benefits to be allowed as a subtraction, to the extent included in federal adjusted gross income.

“It is the No. 1 issue I heard on the doors,” Lislegard said. “I will say that not everyone understood that they didn’t pay tax on Social Security at the state level. Approximately 50-plus-percent don’t pay. So there is a lot of confusion. … It’s very complex, but, for me, it’s a fairness issue. Social Security tax is a matter of fairness for many middle-class retirees and the investment in the financial security of Minnesotans for years to come. The time to stop taxing the hard-earned Social Security benefits is now.”

The bill would also create a new subtraction for public pension benefits, provided a taxpayer’s benefits are based on service for which they’re not receiving Social Security benefits. Lislegard said it would affect 5% of all Minnesotans over age 65.

The Revenue Department estimates that about 445,800 tax returns would be affected by the expanded Social Security subtraction in tax year 2023, with an average decrease in tax of $1,338.

As for how this would affect the state budget, the Revenue Department projects that the bill’s changes would reduce the General Fund by $1.32 billion in the next biennium and $1.52 billion in the 2026-27 biennium.

In an uncommon twist, the proposal was presented alongside HF1040, a bill sponsored by Rep. Jessica Hanson (DFL-Burnsville) that would allow a 100% subtraction on Social Security income — up to a point. It would be tax-free for those with adjusted gross incomes below $62,500 for an individual or $80,000 for those married filing jointly.

That bill would decrease the General Fund by $298.2 million in the next biennium and $349.1 million in the fiscal 2026-27 biennium.

Both bills are scheduled to be debated by committee members Tuesday, but, after the bills were introduced, the rest of Thursday’s meeting was given over to public testimony. Of 21 testifiers, eight spoke in favor of HF300, while 12 spoke against it and one advocated for HF1040. More of the positive responses were inspired by HF300’s pension benefit changes than its Social Security provisions, but those potential changes also received praise.

“Historically, Social Security was designed as an anti-poverty program, not a way to fund state governments,” said Bill Raker, a volunteer with the American Association of Retired Persons. “It is an earned benefit paid for over a lifetime of work.”

But St. Cloud State University professor Jen Tuder echoed the sentiments of several testifiers.

“I urge you to view our budget surplus not as evidence of over-taxation, but of underinvestment in the future of Minnesota,” she said.

“I don’t wake up every morning eager to pay more taxes, but I’ve lived here for 33 years and I’m proud of our commitment to one another,” said Naomi English, a retired nurse from St. Paul. “And I’m certainly not going to leave Minnesota over a couple of bucks a month.”