With a distraction or two in the news and no legal requirement to do much of anything at the State Capitol this session, the Minnesota Legislature is attracting some attention so far in 2022. That may be a mistake because a tireless watchdog – the always-excellent Minnesota Center for Fiscal Excellence – is out with an eye opening update.
Not for more than 20 years, the center reports, “have lawmakers been … tempted to embark on a similar enjoyment of both tax cuts and new spending.”
With the Treasury bulging out of a record-breaking expected budget surplus of $ 7.8 billion, plus various still streams of federal pandemic aids, state leaders are busy planning what they seem to assume will be years in the making of such an abundance.
Governor Tim Walz’s “supplementary budget proposal,” the center says, “consumes … 98% of current surpluses” and “93% of the currently expected … structural balance” for the next biennial in 2024-2025.
All of this is happening, the center notes, “nine months before we elect legislators to determine what the budgetary needs and priorities of FY 24-25 should be.”
And “meanwhile, the Republicans in the Senate have not yet revealed the specific elements of their tax cuts ….”
It’s enough to inspire a celebration of Minnesota’s usual, currently unusual and always reviled split government and the stalemate it often brings. “A shared legislative assembly,” the center notes, “guarantees that none of the parties’ visions of a fundamental transformation of the state’s budget and financial structure will be adopted.”
It would be nice to think that the forced compromises ahead could ensure that the only best ideas will survive – the most useful and necessary spending programs, the most equitable and economically energizing tax cuts. That would be nice, but also naive.
“The only sure thing,” the center predicts, “is a bill to exclude all social security income from [state] taxation. “Seven such bills have been tabled, including a co-authored by the DFL’s co-chair of the House Tax Committee.
You could call this misunderstood political idea the kind of tax cuts for the affluent (for the most part) that even liberals can warm up to – or the kind of unproductive redistribution of wealth that conservatives embrace. Either way, it’s a “targeted tax cut” that, like most targeted tax cuts, is that the government chooses favorites primarily to inspire their political gratitude. This would cost about half a billion dollars in reduced revenue per year.
The Center notes that what is called “horizontal equality” is a key principle of fiscal justice. It is the idea that people with the same income should pay the same tax. As part of its lighting Homepage With detailed information on state tax treatment of social benefits, Minnesota House Research staff offers an interactive calculator that shows how far from that kind of justice tax-free social security is heading.
Under current law, a couple over 65 who earn $ 100,000 in regular annual income and do not yet have social security will pay $ 4,365 in Minnesota income tax. If the couple retired and began receiving a total of $ 50,000 in annual social security benefits while pensions and savings were used for an additional $ 50,000 – and kept their total income at $ 100,000 – its tax liability in Minnesota would drop to $ 2,809.
This tax deduction exists because the federal tax law already excludes a portion of social security benefits from taxable income, while Minnesota has already enacted additional deductions for state income tax purposes.
And if full exemption becomes law?
In that case, our couple, who are still living on $ 100,000 a year, would only owe $ 1,209 in state taxes – just under a quarter of what they pay from the same income before retirement.
Things would grow even less fair if our couple had earned total social benefits of $ 75,000 a year and only deducted $ 25,000 from other sources to collect their total income of $ 100,000. Its state tax in that case would, under applicable law, be only $ 754.
And under full exemption, its state income tax would be – $ 0.
Meanwhile, less affluent retirees are hardly forced to eat their cats by Minnesota’s social security tax. Under current law, a couple who deduct $ 40,000 in total in social benefits could add $ 25,427 in other income before owing a single dollar in Minnesota income tax.
Social security is different, we are told; workers paid into the system over many years. Yes, and that’s why federal law excludes some of the benefits from taxation. But contributions are typically a fraction of the benefits one is entitled to during a long retirement. Most of one’s social benefit is, in effect, a previously untaxed return on one’s contribution. In short, there is no double taxation on social security.
It is also doubtful whether lower taxes on social security do much to grow the economy – to encourage employment or investment or innovation. If anything, they seem a little encouraging for earlier retirement and less paid work during retirement.
How about worries about wealthy seniors leaving high-taxing Minnesota and taking with them their tax payments, their charitable donations, their volunteer talents and energies? It’s worth thinking about. The center’s idea is that if affluent seniors escape Minnesota taxation, it’s certainly the entire state’s tax system that concerns them, not whether the state exempts “what is often a relatively small portion of their income.”
All of this may point to the real appeal of this proposal. Minnesota definitely needs tax breaks, in fairer and more economically productive forms – mostly broader cuts. But smaller “targeted” cuts may be more difficult to implement politically. Any politician can see some wisdom in pleasing senior citizens.
It is this “political wisdom”, the center speculates, that inspires most states to fully exempt social security benefits from taxation as “a way for lawmakers to gain the favor of one of the most politically engaged demographic groups, which also happens to be one of the richest. “
Tax-free social security may not be the most wasted thing politicians do in St. Louis. Paul this year – but that may not say much.
DJ Tice is at [email protected]