Tax Deal Reached

The tax conference committee reached a deal last evening that ended up accommodating most everyone’s spending, relief, and redistributional wishes in at least some manner, all paid for by Minnesota businesses and high-income households.  Entering the negotiations, both the House and the Senate sought to raise $640 million in their respective omnibus bills for the forthcoming FY 24-25 biennium.  They exited agreeing to raise $1.034 billion -- a 61% increase.

The revenue raisers:

• Federal conformity to GILTI with a 50% dividend received deduction with no Section 250 deduction. Effective tax year 2023, it is projected to raise $437 million in FY 24-25.
   
• Reduced deductions for dividends received from domestic subsidiaries.   An earlier proposal had been to conform with federal law (>20% ownership: 65%; <20% ownership: 50%).   The agreement reduces those deduction percentages downward to 50% and 40% respectively increasing projected tax collections by roughly 60% over the previous proposal.   Effective tax year 2023, it is projected to raise $128 million in FY 24-25.
   
• Modifications in the existing phaseout of standard and itemized deductions for high income earners by adding two new thresholds.  Deductions would be reduced by 10% of AGI over a threshold of just over $300,000 and 20% of AGI over a threshold of $1 million (MFJ)  -- up to a maximum of 80% of total deductions.  Effective tax year 2023, it is projected to raise $354 million in FY 24-25.
   
• A new 1% tax on all net investment income (interest, dividends, annuities, royalties and other gains not derived from a trade or business, but excluding gains agricultural land sales) of individuals, estates, and trusts over $1 million.  Effective tax year 2024, it is projected to raise $128 million in FY 24-25.
   
• Decoupling from corporate net operating loss provisions limiting the deduction to 70% rather than 80% of taxable income in a given year (with unused amounts still being carried forward up to 15 years).  Effective tax year 2024, it is projected to raise $22.5 million in FY 24-25.

There is no 5th tier, increase in corporate minimum fee, capital gains surcharge, or elimination of data centers’ sales tax exemption.

As would be expected, the deal also includes some last minute surprises.  For example, the modified student loan credit which both sides had concurred on vanished from the final bill.  On the other hand the sales tax exemption for suite licenses and amenities included with athletic event admissions, which was dropped in negotiations, was resurrected.   There are also several brand new items.  Most notably, the push to provide teachers with an earlier retirement with full benefits found a home in the tax bill, although the provision’s $97.5 million cost is in FY26-27 suggesting it won’t be effective until a couple years from now.  For a closer look at this issue as well as the last remaining big unknown shaping the biennial budget – state labor contracts -- see our March/April Issue of Fiscal Focus now (finally) available as a pdf under the Fiscal Focus drop down on our website.

Much more on everything in the coming days and weeks including a look at the sustainability of the 2023 budget actions.