Walz tax plan expands Working Family Credit, funds investments in schools and communities

Narrowly defined, the primary responsibility for policymakers this legislative session is to pass the state’s next two-year budget. But more broadly, their focus should be to ensure that our state lives up to its promises, and becomes one where everyone can thrive, regardless of their zip code. To do that, policymakers need to take on some of the things impeding our path to that future. For one, the state’s budget surpluses aren’t expected to last beyond the next couple of years, and funding sources specifically for transportation and health care need to be shored up. And lack of investment in some of our communities means too many of our neighbors have a particularly steep hill to climb to reach economic security.

Governor Tim Walz’s budget takes aim at some of those barriers through investments in schools, health care, and communities. His tax plan raises revenues needed to fund our current commitments as well as the new investments. In this blog, we take a closer look at some of the details including how those revenues would be raised.

Put everyday people first and invest in communities

Walz’s proposal would expand the Working Family Tax Credit, a tax credit for workers and working families that we’ve long championed because of how it boosts incomes, gets children off to a stronger start, and contributes to a fairer tax system. Walz would expand the credit by just over $50 million a year through two policy changes:

  • Providing an expanded tax credit for families with three or more children, making a long overdue update to match the structure of the federal tax credit that the Working Family Credit is based on; and
  • Adding an additional $100 to the Working Family Credit for single or head-of-household filers and $200 for married couples. This increase is meant to offset the impact on these Minnesotans from the governor’s proposed gas tax increase.

The tax plan would also treat homeowners equitably by allowing immigrants who own their homes to gain homestead status. Currently, some Minnesota homeowners pay higher property taxes simply because they use an Individual Taxpayer Identification Number, or ITIN, when they file their taxes rather than a Social Security Number.

In addition, the Walz tax plan would increase funding for state aids to cities and counties by about $60 million per year; this helps fund public services in communities across the state and reduces reliance on local property taxes.

Tax conformity

A major component of tax proposals this year is “tax conformity”, or updating the state’s tax code in response to federal tax changes, primarily the 2017 federal tax bill. Minnesota’s income and corporate tax systems use many federal tax law definitions as their starting point, so when there are federal changes, Minnesota policymakers have to decide whether or not to mirror those changes in our tax code.

Since the federal tax law passed, we’ve argued that Minnesota should not repeat that bill’s flaws. The federal bill provided large permanent tax cuts for corporations, including a 40 percent cut in the federal corporate tax rate. In contrast, tax cuts for individuals and families are temporary, and the largest tax cuts go to high-income households. And overall, the federal bill harms the nation’s ability to fund essential services.

Minnesota instead should put everyday people first in its approach to conformity. For individuals and families, Walz’s income tax conformity proposal would maintain many of the deductions, exemptions, and other state-level tax benefits that would be lost if the state simply conformed to the federal bill.

Given the sizeable federal tax cuts for corporations and businesses, it makes sense for the state to recapture a portion of that tax benefit to fund needed investments in our schools, communities, and other building blocks of broader prosperity in Minnesota. Walz’s tax conformity proposal would raise $899 million in the FY 2020-21 two-year budget cycle and $819 million in FY 2022-23 from corporations and businesses. While the federal tax bill deeply cut the corporate tax rate, it also “broadened the base” or expanded the share of business profits that are taxable. The governor’s tax plan raises revenues by adopting many of these base broadeners, as well as some changes that reduce taxes (such as federal rules for accounting for purchases of new equipment).

Reverse past tax cuts that have proven to be unsustainable and unaffordable

Another way that the governor’s tax plan would stabilize state revenues is by reversing or freezing three tax cuts passed in 2017 that are growing in cost in each year. His proposal would reinstate inflationary adjustments on tobacco taxes and the statewide property tax paid by businesses, and freeze the exemption amount in the estate tax at current levels (rather than allowing it to rise further). These provisions would raise $76 million in FY 2020-21 and $231 million in FY 2022-23.

Shore up dedicated funding sources for transportation and health care

In addition to the tax provisions described above, which largely impact the state’s general fund and are contained in House File 2125, Walz takes other measures to maintain and strengthen funding sources that go to specific areas of the budget.

  • He would maintain the health care provider tax, rather than allow it to expire. This would prevent the loss of about $700 million a year in dedicated health care spending. His health care proposal would also create a state tax credit to put a cap on how much Minnesotans can pay for premiums if they buy insurance in the individual market.
  • Walz’s transportation proposal would raise the gas tax in multiple steps, ultimately increasing it by 20 cents a gallon, as well as increase other funding sources dedicated to transportation. Not only would this help the gas tax regain its buying power and fund needed transportation improvements, but it also would allow the governor to end the recent practice of using general fund dollars to fund transportation investments, leaving less available for schools, human services, and the many other state services that vie for funding in the general fund.

The governor’s tax bill is a strong foundation to start from as the state’s tax debate moves into the next phase. We’ve encouraged policymakers to add additional progressive tax components as they develop their tax plans, and the House’s proposal to strengthen the Renters’ Credit for lower-income Minnesotans is one good example of how to do so.

-Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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