Minnesota Senate GOP: Turn surplus into tax cuts

Minnesota Senate Republicans would use most of the state's projected $1.3 billion surplus for tax cuts, a plan that diverges sharply from proposals by Gov. Tim Walz and House Democrats to beef up the state's budget reserves and fund school programs.

A blueprint of their plan, rolled out Thursday, would reduce the lowest tax rate from 5.35% to 4.9%, expand deductions for businesses and parents of school-age children, and fully eliminate taxes on Social Security income.

"The goal is to reduce the burden on all Minnesotans, so they can stay here, work here, have a productive life here and raise a family and drive this economy," said Republican Sen. Roger Chamberlain, chairman of the Senate Tax Committee. "We want to be fair. This tax plan impacts everybody in this state — every single person."

Republican senators, who hold a three-seat majority in the upper chamber, acknowledged their tax proposal is unlikely to get far in the DFL-controlled House. Leaders there have already said they want to spend $500 million of the surplus on early education and child care. Walz, a Democrat, wants to strengthen the state's budget reserves and spend remaining money on early education and school lunches.

House Speaker Melissa Hortman, DFL-Brooklyn Park, blasted the GOP plan as "not fiscally responsible," saying it would "undermine our ability to provide good schools, good roads and good health care for Minnesotans."

Some fiscal analysts also have pointed out that the latest state budget estimates did not take into account inflation, which could all but wipe out the projected surplus.

"Senate Republicans are back to their tired destructive budgeting ways, playing election-year politics and shortchanging Minnesota's future," said House Majority Leader Ryan Winkler, DFL-Golden Valley. "Instead of their irresponsible tax promises, we should ensure any investments we make keep our budget stable and invest in all Minnesotans."

While the Legislature reduced the tax rates for Social Security benefits last year, Minnesota remains one of 13 states that tax the federal retirement income. Critics of fully eliminating the tax, including Walz, have said it would benefit wealthy Minnesotans most. The state's lowest-income seniors are already exempt.

Senate Majority Leader Paul Gazelka, R-Nisswa, said Thursday that an analysis shows that under current law, married couples earning more than $60,000 are paying taxes on their benefits. The Department of Revenue estimates that fully eliminating the tax would cost the state nearly $435 million in the next fiscal year and affect 377,600 tax filers.

DFL Tax Committee Chairman Paul Marquart said he expects the Legislature will likely make some cut to Social Security income taxes this session. "It's in the ballgame," he said, but added that the state cannot responsibly eliminate that income tax — despite that being an eventual goal of both Democrats and Republicans.

"We have to do that in a responsible way that allows you to cut taxes for senior citizens but still allows you to maintain the resources to provide for important services — health care, housing and security for senior citizens," Marquart said.

The GOP plan also would expand the K-12 education tax credit, align state-level business deductions with the federal tax code, and enlarge a program that provides tax credits to investors who fund startups. Senate Republicans said in a statement that they want to "provide more money to school districts that have less property wealth" and reallocate mortgage and deed tax revenue to affordable housing.

A reduction in the lowest marginal tax rate would apply to income up to $26,960 for individuals and $39,410 for married couples, under the GOP plan, which was being drafted Thursday into a bill. Chamberlain estimated that lowering the rate would cost the state about $440 million in all. But GOP senators said a full financial analysis of the entire plan and its impact on state revenue will come later when the legislation gets a committee hearing.

The amount of the projected budget surplus could change based on how much tax revenue the state pulls in. An updated forecast is due next week. Sen. Ann Rest, a New Hope Democrat who serves as lead on the Tax Committee, cited that uncertainty in a statement, calling the GOP proposal a "reckless" wish list.

Chamberlain said the plan would remain a priority regardless of whether budget analysts say the state has more or less to spend. While the surplus is a finite pool of cash available for use now, Republicans aim to make the cuts permanent by reducing spending in future years.

Gazelka said Republicans would also consider using some of the surplus for budget reserves or one-time spending in certain areas, including disaster relief and aid for farmers. But he said he hopes to find common ground with Democrats to pass at least some of the tax plan this session.

"We have divided government in Minnesota," he said. "We just have to figure out how to come together at the end with a product everybody feels good about."

Republican senators call the plan "Get Your Billion Back," a slogan of tax-preparation company H&R Block.

Staff writer Jessie Van Berkel contributed to this report.