DFL lawmakers split over whether to exclude Social Security from Minnesota taxes

They may have full control of the state Capitol and a $17.6 billion projected budget surplus to work with, but Minnesota Democrats have differences over how to spend the money.

Wednesday, after Gov. Tim Walz was noncommittal about fully exempting Social Security income from state taxes, four incoming DFL senators said the issue was their top budget priority. Similar divisions appeared one day earlier between Walz and DFL legislative leaders over the governor's interest in rebate checks.

For years, lawmakers have debated how to incentivize older residents from moving full-time to Florida or Arizona. Some have said the state's tax structure makes it uncompetitive: Minnesota is one of 12 states that taxes Social Security benefits as income.

Walz said Tuesday that he supports a partial tax break that shields Social Security from state taxes for more retirees. But the tax break shouldn't help the wealthiest people, he said.

"I'm focusing on working-class Minnesotans and senior citizens," Walz told reporters. "The only thing I can pledge to you for certain around taxes is that I will not be proposing a tax cut for the wealthiest Minnesotans. That's not going to happen."

Earlier this year, Walz agreed to a deal that ultimately didn't pass the divided Legislature but would've fully excluded Social Security from state taxes. With Democrats in full control this January, Walz said the old agreement needs to be renegotiated.

A full exclusion, which would eventually cost the state about $600 million a year, also got a chilly reception from the two incoming House and Senate majority leaders.

"Me personally? I'm on the record having deep concerns about that," said incoming Senate Majority Leader Kari Dziedzic, DFL-Minneapolis.

"I think that if you eliminate the tax on the very wealthiest in our state...that has a big impact on our budget and a more limited impact on those individuals," said incoming House Majority Leader Jamie Long, DFL- Minneapolis.

Republicans have long considered the tax break one of their biggest priorities. Wednesday, four DFL senators from swing districts who campaigned on the issue said they plan to push for it in 2023.

"With the historic budget forecast announced yesterday, it is clearer than ever that relief from the double-tax on Social Security benefits for our seniors should be an attainable goal. As four incoming senators who helped deliver the majority to the DFL, we will be making this our top budget priority going into the legislative session," said incoming Sens. Heather Gustafson, Grant Hauschild, Judy Seeberger, and Rob Kupec in an emailed statement.

Workers pay taxes out of their paycheck to fund the Social Security system. In retirement, Minnesota already shields many people's benefits from state taxes. About 55% of people pay no tax on their benefits, according to a nonpartisan House report in August 2020.

Retirees who have incomes less than $50,000 a year between Social Security and other forms of income pay little -- if any -- tax on their benefits. Most of the taxation kicks in for retirees who have $75,000 or more in income from Social Security, investments, and other sources.

The differences again became apparent during a pre-session forum with legislative leaders Wednesday.

State Sen. Nick Frentz, an assistant DFL leader, said he would vote for a full exclusion of Social Security income. But House Speaker Melissa Hortman said she had problems with giving a tax cut to retirees with $1 million in investment income without giving a break to a first-year teacher who makes $36,000.

"I certainly am interested in exploring eliminating the tax on Social Security, but we have to understand that right now, that largely means we’d be giving a tax cut to wealthier people who are not at the peak of their spending on child care and housing and all the other things that go with it," said Hortman, DFL-Brooklyn Park.

Republicans say the tax sends the wrong message to older residents.

"The tax on Social Security is a tax on money that already has been taxed," said state Rep. Jim Nash, R-Waconia.