Minnesota Legislative Update: Senate Passes TCJA Conformity Tax Bill

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Authors: David H. Johnson , Donovan M. Hurd

With 16 days left in the session, the Minnesota Legislature and Governor Dayton are turning their attention to reaching agreements on tax, bonding and supplemental budget bills. The House passed the last in a series of supplemental budget bills on Thursday, merging them into one bill. Negotiations between the Senate and House on the supplemental budget will begin next week. This week, the Senate released and passed an omnibus tax bill, which includes their proposal for responding to federal tax reform. A conference committee to reconcile differences with the House will begin early next week. Finally, the House released an $825 million bonding proposal. With the May 21 constitutional adjournment date fast approaching, legislative activity will increase dramatically next week.

Senate Passes Conformity Tax Bill

On Tuesday the Minnesota Senate released its omnibus tax bill containing its federal tax conformity proposal and reducing individual income rates. Since late February, the Committee heard proposals on how best to conform to corporate and individual tax reform changes contained in the Tax Cut and Jobs Act of 2017 (TCJA). The Senate’s bill would provide roughly $171 million in tax relief for fiscal years 2018 and 2019, and it would provide another $93 million in 2020 and 2021.

HF4385, authored by Sen. Roger Chamberlain (R-Lino Lakes), prevents tax increases for 99.8 percent of Minnesota individual taxpayers, with 82 percent of taxpayers receiving tax relief. The vast majority of the relief results from lowering the first tier of individual income taxes from 5.35 percent to 5.1 percent. The bill also increases the estate tax exemption to $5 million.

Of interest to corporate taxpayers, the Senate bill provides the following:

Full conformity for Sec. 179 and bonus depreciation
$5 million one-time for the angel investment credit
Full conformity on foreign repatriation
Makes adjusted gross income as starting point for calculating state income tax liability, rather than federal taxable income
Automatic corporate and income tax reductions when the state’s economic surplus projects a surplus

Proponents stated this is a bridge for Minnesotans to maintain simplicity and hold them harmless from the federal tax law changes. Reducing the first tier will encourage people to move and stay in Minnesota and reward hard work.

Opponents contested the tax relief in the bill will benefit the wealthy and big business rather than working families. Amendments were offered eliminating the estate tax exclusion amount to increase funding for the working family tax credit but were defeated. They also raised caution regarding the automatic tax rate reductions as it would bind future legislatures ability to address unforeseen needed emergency investments and jeopardize the structural fiscal stability of the state budget.

The Senate passed the tax bill on a party line vote Thursday. Next week, the House Senate conference committee will begin meeting to iron out differences.

House Releases Capital Bonding Proposal

On Wednesday, the House released its capital investment proposal. HF4044, authored by Rep. Dean Urdahl (R-Grove City), proposes $825 million in general obligation bonds to fund new state infrastructure and asset preservation. It is just over half of Governor Dayton’s $1.5 billion proposal. Key provisions include $153 million for water and conservation projects and $120 million for roads and bridges.

Chair Urdahl said hard work was done to make sure the bill funded projects in both urban and rural areas and was bipartisan. Governor Dayton said although the House bill was a good start, and he is waiting to see where the other half of the bill is.

Senator David Senjem (R-Rochester), Chair of the Senate Capital Investment Committee, stated on Thursday his proposal would be public early next week.

House Responds With Supplemental Finance Bill

On Thursday, May 3, the House heard a number of supplemental budget bills, merging them into one supplemental budget bill. This was done to line up with the previously passed Senate supplemental budget bill that included spending in all areas from education to HHS and agriculture to commerce. The House decided to hear the four supplemental budget bills -Education, Health and Human Services and Transportation, Public Safety, and Agriculture, Environment and Natural Resources, Job Growth and Energy, and State Government Finance- separately then merge them into one bill in a marathon 10 hour long session. The bill was then amended to include the House language for the last of the House supplemental budget bills: Agriculture, Environment and Natural Resources, Job Growth and Energy and State Government Finance.

The bill was passed 77-49 after nearly 12 hours of debate. Highlights of the bill include:

$217,000 increase for statewide mental health counseling services for farm families and businesses and $35 million for the Rural Finance Authority
Department of Agriculture prohibited from adopting new nitrogen rules which would restrict fertilizer application in some parts of the state during the fall
$750,000 appropriation to the Department of Natural Resources to address chronic wasting disease
Transfer of $26 million from the Stadium Reserve Fund to the General Fund to build three new veterans homes in Bemidji, Montevideo and Preston
Provision requiring state agencies to dedicate 3.5 percent of their budget to cybersecurity
Reduction in state agency budgets by $9.65 million
$15 million for the Border-to-Border Broadband Development Grant Program

Republicans highlighted the cybersecurity provisions and the new veterans homes as real achievements. DFLers lamented on the cuts to the Department of Human Rights and other policy provisions they consider “poison pills.”

Next week, conference committees will begin to work through the differences between the House and Senate supplemental budgets.

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