FAQ: A $100 million tax bill's done. The next battle: Social Security

On the day Gov. Tim Walz signed a $104 million tax relief package into law -- the first bill lawmakers sent him this year -- the Legislature started debating a tax issue many times bigger: how the state treats Social Security income.

Here's an FAQ on both the smaller bill Walz signed Thursday and the looming fight over Social Security taxation.

What happened with the $104 million package?

The new law received unanimous support in the House and Senate. It clears up inconsistencies between Minnesota tax law and federal law dating to 2017. It was a priority for lawmakers to finish quickly, so the state Department of Revenue and accountants could digest the changes in time for the start of tax filing season Jan. 23.

Who benefits?

The law represents a savings for restaurants, concert venues, other businesses, and student loan borrowers. Businesses that received federal grants during the COVID-19 pandemic that allowed them to keep operating no longer owe taxes on that assistance. 

"For the first time in almost three years, Minnesota’s small businesses, movie theaters, venues, restaurants -- those of us who were the last to close and the first to reopen -- can breathe a giant sigh of relief," said Dayna Frank, chief executive of Minneapolis concert venue First Avenue.

The law also exempts student loan relief from state taxes. That means if the U.S. Supreme Court allows President Joe Biden's debt forgiveness plan to take effect, borrowers won't owe state income tax on up to $20,000 of relief. Oral arguments are scheduled for next month.

What's next?

Businesses that already paid state taxes on pandemic relief can file amended tax returns to get the money back. For businesses that owe money in tax year 2022, Minnesota revenue officials plan to have updated forms available when tax filing season starts.

Earlier Thursday, the Senate Taxes committee started discussing the next tax issue: Minnesota's treatment of Social Security benefits. Here's how that's shaping up:

How is Social Security taxed?

Minnesota is one of 12 states that tax Social Security benefits as income. But not for everyone: 55% of recipients pay no tax on their benefits. Only those with additional investment income pay tax on Social Security. The threshold is roughly $75,000 in combined income from Social Security and investments, though the calculation is complicated.

What are lawmakers proposing?

Lawmakers have filed several bills to exclude Social Security income from state tax liability. Some bills pair the issue with public pension benefits for government workers who don't receive Social Security. Ten Democratic senators have signed onto legislation fully exempting Social Security, and Republicans broadly support the change.

"I’m not a fan of this benefit going to the super-rich," state Sen. Aric Putnam, DFL-St. Cloud, who co-authored one of the bills, said during Thursday's Senate hearing. "But we cannot allow a modest benefit for the wealthy make us throw out the middle-class baby with the wealthy bathwater."

What are the benefits?

According to a Revenue Department analysis, 473,000 tax filers would save an average of $1,276 a year from the Social Security change. About 48,000 public pensioners would save an average of $833 a month.

What about the costs?

Lost tax revenue for the state. The same analysis indicated that Minnesota would lose $603 million next year, a figure that climbs to $776 million by 2027. The public pension change would cost about $40 million a year in lost revenue.

House Speaker Melissa Hortman has opposed full elimination because it's "very expensive in the future."

Who's at odds?

Unlike some DFL lawmakers, Gov. Tim Walz doesn't support full elimination. Walz favors raising the threshold so more retirees are shielded from paying income tax on their Social Security benefits, though he hasn't named his cutoff point. Walz says he'll detail his Social Security plan in his budget proposal on Jan. 24.

"You can expect to see something around Social Security, but I’ve laid it out very clearly. It is going to be scaled to have a bigger impact on the vast majority of families in the middle, not those at the top," Walz said Thursday.

That puts him at odds with the 10 DFL senators who have endorsed full elimination. Notably, those lawmakers include Senate Taxes committee chair Ann Rest.

"I'm 100% for 100% (eliminating the tax)," Rest, DFL-New Hope, said Thursday.

Republicans say some retirees are leaving Minnesota for states that have lower income taxes and no tax on Social Security. Minnesota should try to keep retirees here, especially in a tight labor market, they say.

"There is a disincentive," said state Sen. Carla Nelson, R-Rochester. "Particularly at a time we have a workforce shortage, we want to encourage our retirees to stay in the workforce as long as they would like. We ought not to be penalizing their earned Social Security income."