2022 Taxes

The Legislature did not pass the 2022 tax bill into law. The House and Senate leadership came to an agreement twice, first in general terms and then in more specific terms. Although the Conference Committee kept saying they had an agreement, no tax bill was ever signed by the conference committee. The chairs held a press conference in which they described "the deal." And even signed, not a conference committee report but "an agreement."

This gave the illusion that it was all done, but as it turned out, it was far from done or agreed to by members of both houses. Why was this? 

The "deal" that was announced by House and Senate Leadership was that the Governor was supposed to spend $4 billion, give $4 billion in tax relief, and leave $4 billion on the bottom line for the next session. 

But even the "$4 billion in tax relief" was a mirage. Most of it was one-time money, not permanent tax cuts. Furthermore, as much as half of the $4 billion was going to go to expanding refundable credits (credits to people that were more than the taxes they owed) and direct payments (Local Government Aid) to cities and towns in hopes that they would use the money to lower property taxes. No guarantee that they would.

What about the Social Security Tax Subtraction ("Removing the tax on social security")? 

This is an issue Republicans and some Democrats have long sought to resolve. They have chipped away at it, making it nontaxable for people with lower incomes (who probably don't owe much in taxes anyway) but still leaving a considerable number of seniors with some income from retirement savings feeling the pinch. At some level, the argument for removing the tax is simply common sense. If Social Security is supposed to be your old-age insurance, accrued during your working life paycheck by paycheck, why does the government need to stick its hand in your pocket yet again? And not just the federal government, but the state of Minnesota, where you may or may not have been during your working life. It's especially galling because Minnesota is now only one of a handful of states that still tax social security.  

In their negotiations, House Democrats held tax relief hostage, arguing they would only support tax cuts, including eliminating the state tax on Social Security, if they got to spend $4 billion and got to design the rest of the "tax relief" so that much of it went to people who didn't pay taxes.  

So what was in the agreement that didn't make it across the finish line?  Here are some highlights.

The tax bill, in a combination of credits and policy changes, would have cost $1.44 Billion in '20-23 and $2.445 Billion in 24'-25.  

(You can view the last spreadsheet here:  https://www.senate.mn/conference_committee/2021-2022/1520_Conference_Committee_on_H.F._3669/CC%20Comparison%2005-22-22.pdf)

  • "Federal Conformity" provisions that match state tax policy to federal tax policy. Usually, this is so that people who no longer pay federal taxes on a portion of their income, don't have to pay state taxes either. This year there were a lot of issues related to COVID ARPA grants and discharging of student loans.  These were accepted as noncontroversial.
  • The Renter's credit.  The House Democrats proposed and the Senate conferees accepted a proposal to repeal and replace the Renter's Property Tax Credit (which is supposed to refund renters for the portion of their rent that would have gone to property taxes if they are below a certain income threshold.  The new provision would have replaced the Renter's Property Credit with a "Renter's income tax credit." So instead of applying separately for the credit, Renters would see a credit on their income tax. Since this was supposed to be a refundable credit, the renter would receive this money whether they owed taxes or not.  The credit was for people with $68,440 or less, with the credit starting at $2,400 at the lowest income level and declining until the threshold.  The new threshold would have increased eligibility by an estimated 125,000 filers.
  • Tax cut by tier. The bill would have reduced the lowest bracket income tax rate from 5.35 percent to 5.1 percent.
  • Child and dependent care credit and expansion of the K-12 education credit. These are also refundable credits that are paid out regardless of whether taxes are owed or not. The child care tax credit would allow a family with up to $105,000 in income to get up to a $2,000 credit per child between birth and the age of 4.

 

By focusing on the lowest incomes, with refundable tax credits a key part of the bill, it was pretty clear that Governor Walz's idea to spend the surplus to the people with the lowest incomes, giving it to renters and families with expensive childcare costs (a popular move). It was pitched at his vision of a progressive tax code that redistributes wealth.  One thing he wouldn't have gotten even if this bill had passed, was to distribute checks to people. Neither the House nor the Senate wanted to hand out $300 "Walz checks" as he had proposed earlier this year.