Approved tax bill increases credits for families, taxes on Minnesota’s wealthy

With a looming projected state surplus of more than $17 billion according to latest estimates, lawmakers have approved a state tax bill that prioritizes one-time credits to Minnesota families, while increasing taxes on the wealthiest residents in the state.

Sponsored by Rep. Aisha Gomez (DFL-Minneapolis), H.F. 1938, also known as the state's omnibus commerce finance and policy bill, would reduce taxes on Minnesota filers by $3 billion throughout the current biennium (or the end of fiscal year 2025). The bill was approved Thursday night on a 69 to 57 vote.

In total, the legislation would include $1.25 billion for a one-time refundable credit payment for both married and single tax filers (effective retroactively for tax year 2021), $728.4 million for a tax credit for families with children to establish a Minnesota child credit of $1,175 per child, and a modified Social Security subtraction that will apply to 76 percent of Minnesotans receiving benefits.

"This bill constitutes the largest tax cut in Minnesota history, regardless what you may have heard. It contains targeted tax cuts and puts money in the pockets of Minnesotans who need it most," Rep. Gomez said Thursday on the House Floor prior to the vote. "This bill is going to improve lives. It focuses on families and children who are in poverty, and helps us take steps towards our goal of making Minnesota the best place in the country to raise a family."

However, as part of the omnibus bill, H.F. 442, sponsored by Rep. Kaohly Vang Her (DFL-St. Paul), would establish a fifth tier for Minnesota’s income tax – targeting the state’s highest earners with a new, and higher, tax percentage effective for tax year 2023.

The new rate would be 10.85 percent, and would apply to Minnesota taxable income in excess of $1 million for married taxpayers filing joint returns, $600,000 for single taxpayers and $800,000 for heads of households. The highest, or fourth tier, currently caps limits at where the proposed tier would begin, and taxes those filers at 9.85 percent.

DFL lawmakers proposed the new tax as a way to stabilize income for future projects, despite the state’s current budget surplus, while GOP lawmakers argue the new tax is excessive, pointing to the very same surplus for vindication.

"Anyone with common sense would say we can expect some tax relief back, but on top of a $17.5 billion surplus, Democrats are raising taxes another $9.5 billion. That’s why what’s happening in this bill is a real crime," Rep. Kurt Daudt (R-Crown) said Thursday on the House Floor prior to the vote. "This is the kind of thing where you should be wearing a mask if you’re going to steal this kind of money… When you voted for Democrats, this is what you got, and we will remind Minnesota."

The DFL currently holds a trifecta in the Minnesota Legislature, with control of both the Minnesota Senate and House after last November’s election.

As the state’s highest earners, the Revenue Department estimates the change would affect about 24,200 tax returns or about 0.8% of all filers. Those filers would see an average tax increase of $9,231 per return. The department also estimates the change would increase the state’s income by $281.9 million in the fiscal year 2024.

Family, child credits

Portions of the legislation will restructure the Minnesota working family credit into a combined credit based on the taxpayer’s earned income and the number of qualifying children.

The "child credit" component of the credit equals $1,175 per child, with no cap on the number of eligible children, while the "working family" component of the credit equals four percent of the first $12,500 of earned income, up to a maximum credit of $500.

The combined amount is phased down beginning at $35,000 of earned income or adjusted gross income (whichever is greater) for married joint filers and $28,000 for all other filers.

Accordingly, the bill permits the Department of Revenue to establish a system of advance payments for the credit.

For families without children, the legislation creates a one-time refundable credit payment of $550 for married couples filing joint returns and $275 for single and other filers, plus $275 per dependent for up to three dependents. The credit is based on 2021 incomes and returns and could be filed retroactively. 

One-time aid provided also temporarily increases the homestead credit refund and renter’s credits by 13.8 percent and would apply to 2023 refunds only (based on rent paid in 2022 and property taxes payable in 2023).

Offering additional tax breaks for homeowners, temporary increases would provide additional "targeted" refunds for homeowners who experienced large year-over-year property tax increases.

Under current law, the refund applies to homeowners whose property tax refunds increase by more than 12 percent and is limited to $1,000. For refunds based on 2023 property taxes, the refund would apply to homeowners with increases larger than six percent, and the maximum refund would be $2,500. 

Social Security benefits

The bill would also address Social Security benefits for most Minnesotans.

The legislation would expand Minnesota’s Social Security subtraction to allow taxpayers with adjusted gross income below $100,000 for married joint returns, or $78,000 for single (or head of household) returns to subtract the full amount of the taxpayer’s taxable Social Security benefits.

The subtraction would be phased down by 10 percent for each $2,000 of adjusted gross income in excess of the thresholds.

An amendment proposed by Rep. Bjorn Olson (R-Fairmont) would have exempted 100 percent of Social Security benefits, but it was not approved prior to the full House vote.