Mar 8, 2022 - Politics

Your slice of the surplus: How Minnesota may give the extra cash back

Illustration: Brendan Lynch/Axios

Leaders at Minnesota's divided Legislature agree some of the state's record surplus should go back to voters.

  • But they remain at odds over who should get what — and how to do it.

Driving the news: An updated budget forecast projecting an extra $9.25 billion this biennium — up from $7.7 billion in December — set off a fresh round of shadowboxing over what to do with the cash.

State of play: Republicans pitched permanent income tax cuts that would lower the bill for all Minnesotans, plus an elimination of the Social Security tax.

  • Democrats want more targeted relief in the form of credits for working parents, student loan borrowers and senior homeowners.
  • Gov. Tim Walz, meanwhile, has proposed one-time rebates of up to $1,000 for families and said he's open to a rate reduction if it exempts higher earners.

Zoom in: Here's a closer look at the competing proposals.

Gov. Tim Walz:

The DFL governor wants to triple the size of his proposed one-time rebate checks, to $500 for individuals and $1,000 for couples.

  • He's also open to cutting the tax rate if higher earners are excluded.

What to expect (if it passes): Walz told reporters last week he asked the Department of Revenue to prepare to send the payments this summer.

The price tag: The rebate checks would cost about $2 billion this year.

Senate Republicans:

The majority caucus proposed cutting the tax rate for the state's lowest income tier from 5.35% to 2.8%. Republicans also want to eliminate taxes on Social Security benefits received by seniors.

Between the lines: Because everyone is taxed the same rate on their first roughly $40,000 of income, all Minnesotan couples would get a decrease. A couple making $100,000, for example, would pay $1,000 less.

  • Just over half of Minnesota seniors, including the lowest income, already pay no Social Security taxes. Existing exemptions and deductions phase out based on income.

The price tag: $8.5 billion over three years, with costs ongoing.

House Democrats:

The House DFL is working on a package that would let parents of kids 5 and under deduct a portion of their day care bill and increase the student loan tax credit from $500 to up to $5,000, DFL Rep. Paul Marquart, who chairs the chamber's tax committee, told Axios.

  • The DFL also wants to let seniors exempt non-taxable Social Security income when claiming a state property tax refund or renter's credit, which could increase the amount they get back.

Details: Parents could deduct half of their child care expenses, with an annual cap of up to $5,000 for one child or $12,500 for three or more. Both credits phase out at higher income levels.

The price tag: Marquart said it was premature to offer a total.

Zoom out: While the debate is over how to spend the current surplus, decisions made now could impact the state's future fiscal health.

  • Permanent cuts or credits would be politically hard to roll back, meaning spending reductions on other programs could be needed in leaner years.

For that reason, some experts say one-time expenditures are the way to go.

  • "You run the risk that in three, four years, you may not have the same level of revenue to be able to afford those [changes]," University of Minnesota professor Jay Kiedrowski, a former state finance commissioner, said of both tax cuts and credits.

Yes, but: Republicans argue that the size of the surplus, plus current projections showing some continuing, indicate that residents are being over-taxed.

What to expect: Because the state budget is set in odd-numbered years, lawmakers don't have to reach a deal on how to spend the cash.

  • But with an election around the corner, an eventual deal that combines elements of the various plans so each side can claim credit for saving voters a buck this fall could be in the cards.
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