State-level tax changes: Minnesota's key players are in place

It may appear that the 2018 Legislature is all about guns, opioids, elder abuse, and something called MNLARS that is making everyone at deputy registrars' offices very grumpy. But early-session appearances can be deceiving. For my money — and more's the point, yours — the session's main event is about to start in the House and Senate taxes committees.

Those committees' hearing rooms are the venues for what could be a multiyear tussle over how to adapt state tax policy to the sweeping changes contained in the federal Tax Cuts and Jobs Act enacted in December.

Many of the observers' chairs in those rooms will be filled by lobbyists for business. They are eager to argue that any state gain from conforming with the new federal tax code should be used to "improve Minnesota's competitiveness" by reducing the state's top-bracket personal and corporate income tax rates. And that the several hundred million dollars that the state is already due to get from federal business tax changes should go back to businesses, perhaps in the form of another whack at the statewide business property tax that was just cut last year. Got to warm up that frosty Minnesota business climate, they'll say, or jobs will make like snowbirds and fly away.

Just as reliably, another chair in those hearing rooms will be occupied by Nan Madden.

Madden, 48, has been a tax committee regular for 20 years as the director of the Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits. They're the charities that decided a few decades ago that low- and middle-income people deserve a tax lobbyist, too.

If you want state and local taxes to take about the same share of income from the rich, the poor and all the folks in between, you can be glad Madden is there. And you should know that she's worried that the tax fairness gains of the last five years are at risk in the looming federal conformity fight.

"There are all kinds of ways that this creates a bad situation," Madden fretted when I caught up with her after a recent hearing. "It's going to be hard to structure our response to protect lower- and middle-income families."

Conform to the federal changes without additional adjustments, she explained, and lower-income taxpayers in at least two categories will be ill-served:

• Recipients of the property tax refund, either the "circuit breaker" homestead credit for homeowners or the renter's credit, whose households include senior citizens, the disabled and dependent children. Households with those members have benefited from an exemption that would no longer be available without a change in state tax law, Madden said. That would mean the loss of refunds totaling $84 million per year beginning in 2020, to the detriment of some of the state's most struggling households.

• Large families. Until now, Minnesota has piggybacked on federal personal and dependent exemptions to adjust its income tax bite according to family size. Those federal exemptions have disappeared under the new tax law in exchange for a larger standard deduction. Unless Minnesota finds a new way to figure family size into state tax calculations as it conforms, larger families will fork over an estimated $266 million more to the state for tax year 2019.

How much larger? "It could happen for families as small as three," Madden said as my jaw dropped. "You don't have to have a very big family before the larger standard deduction doesn't make up for the loss of exemptions."

Meanwhile, Madden said, conforming to the federal law is forecast to deliver a $350 million tax cut in fiscal 2019 to businesses that "pass through" their profits to their owners, who then pay taxes on those profits as if they were personal income. Some middle-income people are in that category, but so are many upper-income professionals. Cut their taxes that much, and tax fairness could suffer, she says.

Despite Republican receptiveness to the drumbeat for lower business and personal income taxes, Madden says the Legislature's GOP majorities seem sensitive to the ill effects of federal tax conformity on lower-income Minnesotans. She's hopeful that they will respond in some fashion.

But there's more to worry about, she said. The recently forecast $329 million state surplus through mid-2019 is there in part because businesses with foreign-source income now have a federal tax law incentive to "repatriate" that income over the next several years. Doing so is forecast to produce a nice state revenue bump for a few years, then fade away. And that makes those revenues a weak foundation for permanent budget changes such as the tax cuts the business lobby wants.

Or, I'll add, for the spending increases DFLers want. Either way, the taxing-and-spending decisions made in this normally "non-budget" session are likely to have far-reaching consequences for all the things Minnesotans expect from state government.

With his State of the State message on Wednesday and the release of a supplemental budget proposal Thursday, Gov. Mark Dayton is due to weigh in on the tax conformity fight. The DFL governor was elected in 2010 on a promise to make state taxes fairer. He delivered in 2013 by signing a bill to boost the state's top income tax rate to 9.85 percent, the third-highest in the country.

Dayton's veto pen is the biggest obstacle to business dreams of tearing down that tax rate this year. But Dayton is serving his last year, while the business lobby isn't going anywhere.

I'd bet that neither is Madden.

Lori Sturdevant is a Star Tribune editorial writer. She is at lsturdevant@startribune.com.