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Minnesota Governor Proposes New Income Bracket, Capital Gains Tax 

Posted on Feb. 1, 2021

Minnesota Gov. Tim Walz (DFL) has proposed several tax changes to help the state recover from the pandemic, including higher taxes on wealthy residents and large corporations.

Walz's proposed fiscal 2022–2023 biennial budget — called the COVID-19 Recovery Budget — would create a new tax bracket for households with incomes over $1 million, increase the corporate franchise tax rate from 9.8 percent to 11.25 percent, impose an additional tax on capital gains and dividend income over $1 million, and reinstate the estate tax exclusion at $2.7 million, according to a summary of the budget's revenue changes

In a January 26 news release, Walz said the additional revenue the changes would bring "will help level the playing field and ensure all Minnesotans have a fair shot at economic recovery." The budget proposes to invest $95 million to expand the state's first-tier individual income tax bracket, which Walz said will lower taxes for more than 1 million households.

“Not every Minnesotan was impacted by the COVID-19 pandemic equally. We know the COVID-19 pandemic hit our working families, small businesses, and students particularly hard. They need our help," Walz said in the release.

The budget would also expand the working family credit and increase it by about $160 per household and would allocate $7 million to the angel tax credit program aimed at helping small businesses engaged in technological innovation. 

Tax Increases

The proposed budget would establish a fifth-tier income tax rate for households with incomes over $1 million for married couples filing jointly, $750,000 for heads of household, and $500,000 for single filers. The new tier would affect only the top 0.7 percent of income tax returns and would raise $403 million over the biennium, according to the summary document. There are four tax brackets under current law, with a top rate of 9.8 percent for incomes over $276,000.

Walz is also proposing to increase the current corporate franchise tax rate starting in tax year 2021, from 9.8 percent to 11.25 percent, which would raise $424 million over the biennium by having profitable corporations “pay their fair share.”

The budget would also impose an additional tax of 1.5 percent on capital gains and dividend income between $500,000 and $1 million and an additional 4 percent on income over $1 million. Minnesota currently taxes capital gains income at the same rate as other taxable income. The proposal would raise $486 million over the biennium.

Under the budget, foreign income would be taxed when it is repatriated, retroactive to tax year 2016. The change would generate $336 million over the biennium and would reinstate "the approach of taxing repatriated foreign income that was in effect prior to the changes included in the 2019 tax bill," according to the summary.

The budget would also reinstate the estate tax exclusion at $2.7 million, which would raise $28 million over the biennium. The estate tax exclusion was increased to $3 million by the Legislature in 2017.

A proposed gross receipts tax of 35 percent on retail sales of nicotine solutions and devices and a 95 percent tax on electronic vaping devices would raise $12 million over the biennium, according to the summary. The budget also proposes a $1-per-pack increase to the cigarette tax and a correlating increase on "moist snuff." The proposed increase would raise $139 million over the biennium.

Walz did not respond to a request for comment by press time.

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