Minnesota’s 2022 Legislative Session ended on May 23 with much unfinished business, including a tax agreement reached by the House and Senate conference committee that was not enacted into law.
This agreement reflected the two different philosophies that the Republican majority in the Minnesota Senate and the Democratic majority in the Minnesota House brought into those negotiations. It’s worth taking a closer look at that agreement. There is some possibility it would become law in a future special session, or its major components could be back on the table in future years.
Taxes were one part of an overall framework for the surplus
Minnesota had historic projected surpluses in the 2022 Legislative session: $9.3 billion in FY 2022-23 and $6.3 billion in FY 2024-25. That meant policymakers had resources to address challenges that Minnesotans are facing and to build a stronger, more equitable recovery.
In end-of-session negotiations, Governor Tim Walz and legislative leaders agreed to a framework to allocate $4 billion over three years to increased spending, $4 billion for a tax bill, and to leave $4.2 billion unspent, or “on the bottom line,” which would hedge against a slowing economy cutting into the projected surplus.
However, in the final days of the legislative session, the House and Senate failed to reach agreement in many major budget areas, including education, health and human services, transportation, and infrastructure (often called “bonding”). They reached agreement in other budget areas and on taxes, but those bills were not advanced for final votes once it became clear that all of the pieces needed to enact the framework agreement were not going to be completed.
The nearly $4 billion tax agreement reached by the tax conference committee includes a mix of items reflecting the different priorities of the House and Senate. The Senate’s tax bill included $8.6 billion in tax cuts over three years, dominated by a large income tax rate cut and exemption of all Social Security benefits, proposals that provided the largest tax cuts for high-income Minnesotans. Devoting so much of the surplus on tax cuts meant the Senate brought much smaller proposals into the negotiations on other budget areas. The House’s tax bill would use $3.2 billion of the surplus over three years, and was more focused on targeted tax cuts and funding for local governments. The House’s overall plan for the surplus made greater investments in education, human services, and other budget areas.
This analysis looks at some of the larger pieces of the tax conference committee agreement.
| General fund changes in tax conference agreement | FY 2022-23 | FY 2024-25 |
| Individual income tax* | -$1.3 billion | -$2.0 billion |
| Statewide property tax | -$16 million | -$60 million |
| Corporate taxes | -$36 million | -$43 million |
| Sales and use taxes | -$11 million | -$23 million |
| Lawful gambling taxes | $0 | -$15 million |
| Estate tax | -$1.1 million | -$10 million |
| Property tax refunds and other property tax credits* | $0 | $86 million |
| Aids to local governments | $49 million | $218 million |
| Other changes | $30 million | $28 million |
| Total | -$1.5 billion | -$2.4 billion |
*The proposal converts the Renters’ Credit from a property tax refund to an income tax credit. This table includes the net changes to the Renters’ Credit in the individual income tax line item.
Targeted tax cuts for renters and families
The tax agreement includes the House’s transformational expansion of the Renters’ Credit, which lowers the cost of housing by refunding a portion of the property taxes that renters have paid through their rents. The House proposal would benefit low- and modest-income Minnesotans in every corner of the state, including seniors, people with disabilities, workers, and families.
This proposal would make two important changes:
- Convert the Renters’ Credit to a refundable tax credit on the income tax form, instead of the separate property tax refund application process later in the year; and
- Simplify the income definition used to qualify for and calculate the Renters’ Credit, changing from the complex “household income” to the more common Adjusted Gross Income (AGI).
This proposal would have several high-impact results:
- 120,000 Minnesota households would start receiving the Renters’ Credit – these are Minnesotans who already qualify for the Renters’ Credit but face barriers to applying for it through the current mechanism;
- These dollars would get into renters’ pockets sooner, after they file their income taxes rather than in the late summer or fall;
- Changing the income definition to Adjusted Gross Income, like many other credits and provisions in our tax code, makes it simpler for Minnesotans to apply for and for the Department of Revenue to administer; and
- More than 60 percent of currently eligible households would qualify for larger refund amounts than they currently receive because of the change to AGI, and an additional 36,000 would become eligible.
These game-changing outcomes would occur while still maintaining the sliding-scale structure of the Renters’ Credit that prioritizes lower-income Minnesotans and folks whose property taxes are particularly high in relation to their incomes. In all, it would increase Renters’ Credits going to Minnesotans by about $150 million per year.
The proposal also includes targeted tax policies so that low- and middle-income Minnesotans can better afford the costs of raising a family. These include:
- Expanding the state’s Child and Dependent Care Tax Credit, which refunds some of what families pay for this care, to provide larger tax credits and allow more families to qualify to receive it. The income level at which families can receive the maximum value of the credit would be increased from $53,630 to $80,000. The agreement would have increased the tax credit by $56 million in FY 2022-23 and $115 million in FY 2024-25.
- Several long-overdue improvements to the K-12 Education Tax Credit, which refunds some of what families spend on their children’s educational activities. The income level at which a family can qualify for the maximum credit amount would be increased from $33,500 to $70,000, substantially increasing the number of families that qualify, and this “threshold” amount would be increased in future years to keep up with inflation. Eligibility would be based on a family’s Adjusted Gross Income, rather than household income; this makes it easier for families to know whether they qualify. About 38,600 more families would become eligible. This proposal would provide an additional $12 million to Minnesota families in FY 2022-23 and $26 million in FY 2024-25.
Tax agreement’s two largest provisions are poorly targeted tax cuts
Unfortunately, more than half of the conference committee’s tax agreement would go toward two permanent tax cuts that leave out the most struggling Minnesotans while providing the largest tax cuts to high-income Minnesotans.
The largest single item in the tax agreement, with a cost of more than $1.6 billion over three years, would expand Minnesota’s income tax exemption for Social Security benefits beyond the current targeted approach. Existing federal and state tax laws already provide Social Security income tax exemptions that prioritize low- and modest-income seniors. The House proposed expanding and simplifying these exemptions further so that households with incomes up to $58,600 for single filers and $75,000 for married filers would have all of their Social Security benefits exempt, benefitting about 244,300 taxfilers. However, the tax agreement included the Senate’s approach allowing all income levels to exempt all of their Social Security benefits from the state’s income tax, providing the biggest tax cuts to high-income seniors.
The tax agreement also included $667 million over three years to reduce income taxes by cutting the first bracket tax rate from 5.35 percent to 5.1 percent. This is a smaller version of a Senate proposal that the Institute on Taxation and Economic Policy found would provide no benefit to about 1 in 5 Minnesota households, and would provide the largest tax cuts to high-income Minnesotans.
Homeowner property taxes
In addition to the expansion to the property tax refund for renters, or Renters’ Credit, described above, the agreement includes provisions to bring down property taxes for homeowners. The agreement includes the House’s proposal for $72 million in the next biennium for increased property tax refunds for homeowners, also called the Homestead Credit State Refund or Circuit Breaker. It also would expand the Homestead Market Value Exclusion, which reduces the amount of a home’s value subject to local property taxes. Homes with values under $517,200 would benefit from this provision. The agreement would also make it easier to qualify for the Targeted Property Tax Refund, which is for homeowners who see large spikes in their property taxes from one year to the next.
Aids to local governments
The tax agreement includes a scaled-back version of the House’s proposed additional funding for local governments, including $60 million in FY 2024-25 for Local Government Aid (for cities), $60 million for County Program aid, and $66.3 million for School District Equalization Aid.
The agreement would have also sent some one-time dollars to local governments for specific funding needs; one example is $20 million in FY 2023 to counties for pandemic rental assistance payments.
These aids provide more resources to local governments to fund essential public services, and are part of the tax bill because they reduce reliance on local property taxes.
Tax cuts for businesses
The agreement includes a scaled-back version of the Senate’s provision to reduce the state general levy, which is a property tax paid to the state by commercial-industrial and seasonal recreational properties, by $15.9 million in FY 2022-23 and $60 million in FY 2024-25. The Senate had sought to completely eliminate the levy by FY 2036, a total cost of $750 million per year when fully in effect.
The agreement would also reduce corporate taxes by $36 million in FY 2022-23 and $43 million in FY 2024-25, primarily through repealing the scheduled expiration of the Historic Structure Rehabilitation Credit and provisions to conform to federal tax changes.