Republicans and tax reform advocates continue to push for Minnesota to stop taxing Social Security benefits, but they see the chances of getting more tax relief for seniors narrowing thanks to the Nov. 6 election results.
That's a disappointment to state Sen. Greg Davids, R-Preston, who chairs the House Taxes Committee but will soon have to relinquish his gavel as a new Democratic House majority takes over. Davids vows to introduce legislation to either reduce or eliminate state taxes on Social Security benefits in the coming session.
“We're a very high-tax state, and past legislatures have looked everywhere they could for revenue,” Davids told Watchdog.org.
Through the tax year 2016, Minnesota was one of just five states to follow federal tax rules in taxing Social Security income. Starting in 2017, however, state residents have been able to subtract a fixed amount of retirement benefits that are subject to state taxation, lessening their overall burden.
Making all Social Security retirement income exempt would be costly, according to Davids, but Minnesota Management and Budget now forecasts a two-year budget surplus of more than $1.5 billion. A full exemption could cost the state hundreds of millions of dollars annually, he said.
Under the new law that began giving Social Security beneficiaries some relief last year, nearly 284,000 seniors received tax relief, allowing them to keep more of their own money, Davids said.
“These are not billionaires,” he said, noting that Democratic Gov. Mark Dayton signed the tax relief bill. “They're middle-income, middle-class senior citizens. ... We've had buy in from the other party on this issue before.”
State lawmakers have also exempted military pensions from state taxation, but even so, Minnesota this year was ranked the least tax-friendly state for retirees by the Kiplinger website.
“The North Star State offers cold comfort on the tax front to retirees,” Kiplinger said. “Social Security income is taxable to the same extent as it is on your federal return, though residents with income under $77,000 get to subtract up to $4,500.”
Democratic gains in the Minnesota House of Representatives, however, may make tax relief more of an uphill fight in the years ahead, he said. Democratic Gov.-elect Tim Walz wants to tax and spend and has said he's open to increasing the gas tax, according to Davids.
“You're not going to have someone who pushes for tax relief for the middle class,” he said, adding that the GOP's one-vote majority in the state Senate would serve as a firewall against such impulses.
Phil Krinkie, former president of the Taxpayers League of Minnesota, expressed doubt that Social Security tax relief would be a priority for the state in the near future.
“I just don't recognize that there is a lot of appetite to reduce taxation in the state of Minnesota,” Krinkie told Watchdog.org.
Double taxation is not a concern among progressives, he said, and Walz will be focused on increasing spending on public education, including pre-kindergarten, K-12 and higher education. In addition, tax bills tend to take months to formulate, and they often don't get reviewed until the end of legislative sessions, according to Krinkie.
At the same, the No. 1 issue for Senate Republicans will be to simplify the state's tax code to put it in conformity with income tax reforms that Congress approved last year, he said.
“It will be arduous to get an agreement even on something as important and necessary as federal tax conformity,” Krinkie said.
Nevertheless, anything could happen given the number of new lawmakers who will take office, the give and take of legislative sessions and the election of a new governor, he said.
“Every professional football game holds surprises and different outcomes than the prognosticators predict,” Krinkie said. “I would say the same is true with a legislative session.”
But he said expectations of a large budget surplus might not be enough to prod lawmakers to push for tax relief.
“In my opinion, there is no budget forecast that can't be spent or be quickly evaporated,” Krinkie said.
John Phelan, an economist at the Center of the American Experiment in Golden Valley, supports the idea of ending the state's taxation of Social Security benefits. The policy institute just released a report concluding that Minnesota's high tax rates are hurting private investment and holding down the state's per-worker productivity, which is below the U.S. average.
“This is supposed to be money returned to people who have paid into a fund,” Phelan told Watchodg.org in an email. “Of course, the truth is more complicated than this, but it still makes no sense whatsoever to take money from people in tax (and) then tax it again when you give it back to them.”