No neighboring states tax Social Security. Minnesota Democrats face pressure to eliminate it here

When her husband died last April, Peggy Hiestand-Harri had to process her grief at the same time she confronted her financial situation.

His death meant losing one Social Security payment every month, which also meant less money for heath care and insurance costs, plus thousands in taxes, fees and repairs on her Hermantown, Minn., home. A retired registered dietitian, Hiestand-Harri planned for retirement and lived frugally — she drives a 22-year-old used Toyota Camry — yet she finds it difficult to put money aside for future health emergencies.

Rising costs have only made it harder, and so do state taxes on her Social Security benefits.

"Minnesota sits here like an island," said Hiestand-Harri, 72, noting that no bordering state has the same tax. "I could move five miles and not have to deal with the Social Security tax. Most people probably live within two to five hours from a state that doesn't tax this."

A proposal to eliminate that state tax is gaining momentum at the Minnesota Capitol, where a growing number of Democrats are rallying behind the idea as a way to cut costs for seniors. The Department of Revenue estimates 473,000 Minnesota filers would see an average $1,276 in relief if the tax were eliminated.

But the idea has divided the party in power, with some Democrats in leadership worried about the proposal's hefty price tag. A full repeal would blow a $1.3 billion hole in state finances over the next two years and even more in the following two-year budget. The idea is competing for a slice of a $17.6 billion budget surplus with other items on Democrats' agenda, many of those focusing on the other end of the age spectrum — children, families and classrooms.

"It's very expensive in the future," House Speaker Melissa Hortman, DFL-Brooklyn Park, said. "If we're going to do something like that, we need to know what happens in future years to things like public schools."

Minnesota, like the federal government, has taxed Social Security benefits for roughly four decades. The state taxes between zero and 85% of taxpayers' Social Security benefits, depending on their income. All residents get 15% of their Social Security exempt from taxes, but the exemption is as high as 100% for some. In Minnesota, 45% of households with a Social Security beneficiary pay tax on their income, according to House research.

Under the Senate bill to eliminate the tax, Minnesota filers with income between $30,000 and $50,000 would see a $284 tax cut on average. The largest group of filers who pay taxes on Social Security have income between $50,000 and $100,000. They would see an average tax cut between $773 and $1,137, according to a Senate fiscal analysis.

Roughly 66,000 of the wealthiest Minnesotans would see an average tax cut between $2,000 and $2,800. The bill also affects about 48,200 filers who have public pensions and can't get Social Security income, with an average decrease in tax of $833.

Minnesota is one of 11 states in the nation that impose a tax on the benefits, a distinction that some argue contributes to retirees choosing to move or live elsewhere for part of the year. Sen. Aric Putnam, DFL-St. Cloud, who is sponsoring the bill to eliminate the tax, said it's part of a patchwork of taxation concerns that might be influencing people to leave the state.

"I don't believe that a senior who makes $500,000 a year is going to leave the state because they pay $2,500 in taxes," Putnam said. "But they might leave because they feel their labor and their time aren't being respected."

The proposal to eliminate the tax has been circulating at the Capitol for more than a decade, and last spring, it was part of a $4 billion tax cut deal struck under divided government. But that deal fell apart in the waning hours of the session and became a popular talking point for both parties on the campaign trail.

Republicans promised to come back and cut even more taxes if they won the majority in both chambers. Democrats blamed Republicans for walking away from that deal.

Democrats maintained their control of the House and flipped the state Senate by a single seat. Now, at least 10 Senate Democrats who campaigned on the issue have signed their names to bills to eliminate the tax, including freshman Sen. Grant Hauschild, DFL-Hermantown, who said his district skews older because people want to retire near Minnesota's North Shore.

He said he heard about the issue "ad nauseam" on the campaign trail from seniors and those nearing retirement. Now that he's in office, he said about 90% of his correspondence with constituents is about this issue.

Some Democrats prefer an alternative that would not eliminate Social Security taxes for the state's highest earners. Gov. Tim Walz plans to roll out his full two-year budget proposal this week and wants to include a Social Security tax cut targeted at middle-class Minnesotans.

"You have to look at the whole budget and you have to see the give and take," Walz said. "To eliminate the very top earners in the state, I think once you start showing the analysis of the cost of this, that is going to come at the cost of other things."

Retired teacher Joan Beaver said her first instinct was to cheer when she heard lawmakers were considering getting rid of the tax on Social Security income. But her husband is rehabilitating from a recent stroke, making her think more about assisted living and the struggle with workforce shortages in long-term care.

As a former teacher, she cares about education and doesn't want to see property taxes increase to cover costs for schools in the future because lawmakers cut too deep in other areas.

"You'll increase property taxes if you cut education funding, and that's a regressive tax and that hits older people," she said. "It looks like a nice thing, but if you start to take it apart it raises a lot of questions."

Hiestand-Harri said her husband's death has meant less help with projects on her home. She's looked into assisted living but worries about the costs. She'd support a Social Security tax targeted for people in the middle class, which would help those who need it the most.

Some action from legislators this year would mean something to many seniors who feel they've been forgotten, Hiestand-Harri said. That feeling was only heightened by the pandemic.

While she's felt tempted to move across the border to Superior, Wis., her roots are in Minnesota.

"I was born and raised here, my parents are buried here. My grandparents were from here, " she said. "That's hard for me to do."