Tax deal reached in last weekend of State Capitol hearing

Seniors would stop paying taxes on Social Security income, millions of Minnesotans could see a small cut in income taxes, and tens of thousands of families and renters across the state would qualify for more tax credits under a sweeping deal closed Saturday in the divided Capitol.

Top legislative negotiators announced the $4 billion package as transformational for Minnesotans after two years of battling the COVID-19 pandemic and as costs rise in nearly every aspect of their lives.

“We have the largest tax cuts in state history in this bill,” said State Representative Paul Marquart, DFL-Dilworth, chairman of the House Taxation Committee. “It will positively impact — in a real and meaningful way — families, seniors and businesses across the state.”

The tax deal is one of the first major deals to happen at the Capitol, as lawmakers have a Sunday night deadline to approve bills for the year. But its fate is tied to a comprehensive deal that includes an additional $4 billion in proposed spending on classrooms, public safety and health care, which legislative negotiators continue to spar over as time goes by.

“It is our duty to put these resources back into the hands of Minnesotans to help them better pay for their lives during this time of skyrocketing inflation,” said Carla Nelson R-Rochester, chair of the Senate Taxation Committee. “We must not let this transformative, historic tax bill be held hostage to many of these other things.”

Both sides made this session a priority of tax cuts with a projected budget surplus of nearly $9.3 billion on the bottom line, but they started the session in January with widely divergent priorities.

In the final deal, the Republicans in control of the Senate abolished state taxes on Social Security income, a top priority they’ve been pushing at the Capitol for decades. They estimate the change will affect 460,000 seniors in Minnesota.

Republicans have also proposed lowering the first income tax rate from 5.35 to 2.8%, which equates to about $1,000 in savings per year for a family earning $100,000. The final deal will permanently reduce that percentage to 5.1%, a much smaller reduction than they originally proposed.

In return, House Democrats were given their top priority to convert a renter tax refund into an income tax credit and increase the eligibility of an estimated 125,000 filers. Overall, Democrats say there are more than $600 million in multi-year property tax cuts in the bill for homeowners and renters.

The deal also increases a tax credit for children and dependents, which will help an estimated 81,000 families. Democrats have also successfully pushed for a childcare tax credit that would allow a family with incomes of up to $105,000 to $2,000 for a child between birth and age 4, Marquart said.

Notably absent from the final deal are one-time discount checks for Minnesotans, which was a top priority for DFL Governor Tim Walz. House Democrats said they initially offered his rebate plan during negotiations, but senators pushed back its inclusion in favor of permanent tax relief. sen. Tom Bakk, I-Cook, said he was concerned that one-time checks would be subject to federal taxes.

“Why would we have wanted to send so much of the surplus to Washington?” said Bakk, a former Senate tax chairman. “I think people would have been quite disappointed.”

In addition to the $4 billion in new spending over the next three years, the global framework hit by Walz and top leaders leaves an additional $4 billion on the bottom line. DFL House Chair Melissa Hortman has said all spending and savings agreements must be closed before passing the tax bill.

But legislative negotiators are struggling to resolve their differences over how to increase spending on classrooms, health care and public safety. Behind the scenes talks are taking place to draft a $1.4 billion package in construction projects in a bonding bill.

Talks have been particularly tense around education, where the two sides have been arguing all week over how to split $1 billion over things like special education costs for school districts, funding student mental health and literacy programs.

Democrats are also pitching to allow hourly school workers to collect unemployment insurance, which Republicans don’t support.

“I don’t know what else to do,” said Roger Chamberlain, chair of the Senate Education Committee of R-Lino Lakes. “We don’t have days and days, we hardly have hours to figure it out.”

Home education chairman Jim Davnie, DFL-Minneapolis, said the tax deal should serve as a “model” for lawmakers trying to negotiate a deal on school funding.

“It’s Saturday night, it’s time to finalize this bill,” Davnie said. “We have the resources to provide these services, we have the needs.”

Walz has said he doesn’t want to recall lawmakers for a special overtime session to finish their work, meaning lawmakers have a midnight deadline on Sunday to finalize the bills.

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