2023-24 session outcomes: Taxes

Despite a historic nearly $18 billion budget surplus and Minnesota’s already high-tax environment, this session the legislature increased taxes by nearly $10 billion over the next four years. Although some taxes decreased mostly for lowerincome taxpayers through one-time rebates and refundable tax credits, businesses and taxpayers at all income levels will see permanent cost increases. The process of passing these historic increases lacked transparency. Many bills and provisions were not introduced or allowed public testimony and the language was not provided until the night before a final vote. Minnesota’s corporate and incomes tax rates are already in the top five highest in the nation, which adds headwinds to investment, entrepreneurship, and talent recruitment and retention – all needed for a growing economy.

Corporate taxes: The tax bill contained $1.18 billion in tax increases on businesses over four years. Minnesota will tax income earned overseas with inclusion of Global Intangible Low-Taxed Income (GILTI) income. Only 20 states tax this income and Minnesota’s 50% rate will be at the high end nationally. For example, New York only taxes 5% of GILTI income. Corporate dividends received reduction (DRD) was reduced from 80% to 50%. This deduction helps prevent triple taxation for dividends paid by one company to another. In addition, the net operating loss (NOL) cap, that limits the amount of operating loss that a corporation can claim in a year, was reduced from 80% to 70%.

Individual tax increases: Lawmakers imposed $1 billion in tax increases on higher income taxpayers over the next four years. The tax bill imposed an additional 1% tax rate on top of the current 9.85% rate for net investment income above $1 million (defined as income from capital gains, interest, dividends and other gains not derived from a trade or business). The average increase will be about $20,000. In addition, the standard itemized deduction phase-out is accelerated for taxpayers in 4th tier rate effective for tax year 2023. An estimated 116,300 returns would have an average increase in tax of $1,494 per return.

Capital gains: Governor Walz proposed increasing the capital gains tax from 11.35% to 13.85% this legislative session. The Chamber and its partners were successful in blocking this 40% tax hike that would have undermined entrepreneurship and investment, and provided another strong financial incentive for high-wealth individuals to leave the state. This increase would have made Minnesota an extreme outlier with the highest capital gains tax in the nation.

Worldwide combined mandatory reporting: This proposal would have required companies subject to Minnesota’s corporate income tax to file one combined tax return in Minnesota for all their businesses operating worldwide. This income would then be apportioned based on Minnesota’s single sales factor to determine the amount due to Minnesota. No other state or country in the world requires mandatory reporting to calculate corporate income taxes earned on global operations. Other states and nations have rejected these proposals. The Minnesota Chamber and its partners were successful in defeating this effort because of the potential international backlash, undermining foreign investment and instability of this revenue source.

New fifth tier: This proposal would have created a fifth tier for the state’s income tax, at 10.85%. That would have made Minnesota’s income tax the fourth highest in the nation, and disproportionately affected “pass-through entities,” those that pay business taxes through their individual income taxes. The Minnesota Chamber and its partners were successful in defeating this proposal, although it is likely to arise again in the future.

Paid Family and Medical Leave (PFML): The new, historic paid leave mandate forces employers to offer 12 weeks paid medical leave and 12 weeks of paid family leave (maxing out at 20 weeks total in a 52-week period). The program will be administered by a new state agency with over 400 full-time employees. It will be paid for through surplus funds and a considerable increase in payroll taxes, which can be split between employers and employees.

Private tax returns: Defeated a provision requiring the Commissioner of Revenue to release private tax return data for certain corporations. No other state requires a similar release of private taxpayer data and this is prohibited at the federal level. This provision was NOT included in final tax bill.

Net operating loss (NOL): Passed a needed fix from the 2023 tax bill dealing with the effective date for the net operating loss provision (NOL) to allow taxpayers another year to plan for this tax increase from the 2023 bill. The ability to deduct net operating losses is especially important for start-up companies and those operating in cyclical industries as it allows businesses to offset those losses in future years to even out business profitability.  Minnesota will deviate from the federal cap of 80% and move to 70% cap. The conference committee agreement had an effective date for tax year 2024 which at least gave a little more notice and planning time for taxpayers – however the bill's language mistakenly had a date of tax year 2023.   

“Relief”

Rebate checks: The Legislature approved $1.13 billion in rebate checks for Individuals or families under a certain income threshold. Those who lived in Minnesota in 2021 and filed an income tax return or property tax refund are eligible, if their adjusted gross income is $75,000 or less for single filers or $150,000 or less for married couples. Recipients will receive payments between $260 and $520.

Child tax credits: The Legislature approved $893 in child tax credits, starting at $1,750 per child. That amount decreases for married filers who make $35,000 annually.

WATCH: 2023 Statewide Policy Tour discussion on taxes
 

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