Minnesota lawmakers passed a bipartisan tax bill that includes federal conformity provisions, changes to remote seller rules, and a healthcare provider tax.
H.F. 5 was passed in a special session on May 25 and was presented to Gov. Tim Walz (DFL), who is expected to sign it, on May 28. The measure passed in the House on a 74–54 vote and in the Senate on a 52–15 vote.
Minnesota is the only state with a politically divided Legislature, and passage of H.F. 5 required compromise from both sides. The major compromises between the Republican-controlled Senate and the Democrat-controlled House centered around a promise that the bill would be revenue neutral, the bill’s sponsor, Rep. Paul Marquart (DFL), told Tax Notes May 29.
“Compromise was the key. I think it brought together a very strong tax bill,” Marquart said. “It brought together the (federal) conformity and the doubling of the standard deduction from the House bill, which we paired with the income tax rate cut that was in the Senate bill, which was the first rate cut since 2000.”
Federal Conformity
Under H.F. 5, Minnesota would conform to a large portion of the changes made to the federal tax code under the Tax Cuts and Jobs Act, including the $10,000 cap on the state and local tax deduction, the doubling of the standard deduction, the expanded section 179 and bonus depreciation, the cap on the use of active losses from one business to reduce the income of another, and the limit on net operating loss carrybacks and carryovers to 80 percent of the loss.
According to House research, the number of Minnesota filers who opt for the standard deduction will increase from around 62 percent to an estimated 92 percent.
Previous versions of the House tax bill were designed to create what lawmakers called a “tax haven fix” by using the taxation of global intangible low-taxed income at the federal level as a trigger to pull controlled foreign corporations into a domestic unitary group for state tax purposes, but those provisions were eliminated in the final version.
“We had really pushed GILTI as a real fairness issue, because we thought that when you have lost revenues like that, businesses without foreign subsidiaries end up paying higher taxes,” Marquart said. “Once the global agreement to have a zero-tax bill was reached, the big revenue raisers like GILTI and deemed repatriation were dropped. The Republican-controlled Senate was not in support of that.”
The bill would also change the starting point for calculating individual income taxes from federal taxable income to federal adjusted gross income.
Remote Seller Tax
The bill would also change aspects of the state's remote seller sales tax rules. It maintains the $100,000 in sales or 200 transactions threshold that requires a seller to collect and remit sales taxes, but would require marketplace providers to collect and remit sales taxes and require that both sellers and providers are registered. If the seller does not have an agreement with the provider, then the burden to collect falls on the marketplace provider.
The bill would also eliminate a minimum threshold that exempts retailers with under $10,000 in total taxable sales from the duty of collecting sales taxes.
Healthcare Provider Tax
The 2 percent healthcare provider tax that was scheduled to expire at the end of 2019 would become permanent under the bill but would be reduced to a rate of 1.8 percent on healthcare services. The tax is imposed on physicians, dentists, psychologists, optometrists, and services at hospitals and ambulatory surgery centers and mainly goes to fund MinnesotaCare, a health coverage program for low-income individuals.
Tax Credits and Tax Cuts
If enacted, the bill would cut the state's income tax credit for the first time in nearly two decades, reducing from 7.05 percent to 6.8 percent the bracket for individuals making between $26,521 and $87,110, and married couples filing jointly who make between $38,771 and $154,020.
The state Social Security subtraction would be increased to $5,150 for married couples and to $4,020 for single and head of household taxpayers.
The bill would also expand the Working Family Tax Credit, the state’s version of the earned income tax credit, for taxpayers with up to two children, though most of its impact is centered around creating and expanding an additional tier for taxpayers with three or more children.
Budget Provisions
The Minnesota Legislature also passed a $48 billion budget for the fiscal 2020–2021 biennium. The budget would increase spending by about 6 percent in areas such as education and roads and includes approximately $600 million in tax cuts. The final version abandoned Walz’s proposed 20-cent gas tax increase, however.
“It’s not always easy to find agreements with divided control of government, but Republicans and Democrats came together in the last few days in a really impressive way,” Sen. Dan Hall (R) said in a May 29 post on the Senate Republicans’ website. “This budget sticks to the priorities we laid out at the start of session. It provides the first income tax relief in decades, it invests in K–12 schools and colleges and universities, it continues our commitment to transportation without a gas tax increase, and it brings needed reform to health and human services. Minnesotans should be excited with the budget, and I’m proud that we could accomplish that.”