Minnesota Legislature Passes IRC Conformity, Rate Reductions

The Minnesota State Legislature has sent an omnibus tax bill to Gov. Mark Dayton. The legislation would make numerous changes to state corporate and personal income tax law.

IRC Conformity

The legislation would move the Internal Revenue Code (IRC) conformity tie-in date for purposes of computing corporate franchise and personal income tax liability to March 31, 2018 (previously, December 16, 2016). In doing so, the state would largely adopt changes enacted by the federal:

  • Disaster Tax Relief and Airport and Airway Extension Act;
  • Tax Cuts and Jobs Act;
  • Bipartisan Budget Act of 2018; and
  • Consolidated Appropriations Act of 2018

Starting Point, Standard Deduction, and Personal Exemptions

Under the legislation, the starting point for calculating personal income taxes would be changed from federal taxable income (FTI) to federal adjusted gross income (FAGI). To account for this change, the legislation passed by the legislature would set:

  • the state standard deduction as that allowed under federal law prior to the Tax Cuts and Jobs Act; and
  • the amounts of the state personal and dependent exemption allowance to that allowed under federal law prior to the Tax Cuts and Jobs Act.

In addition, this proposed tax legislation would create a subtraction for:

  • the new state personal and dependent exemption allowance; and
  •  the state itemized or standard deduction.

State itemized deductions would be defined as equal to the itemized deductions permitted under federal law prior to the enactment of the Tax Cuts and Jobs Act. However, Minnesota would allow:

  • the elimination of the deduction for contributions to colleges made in return for athletic ticket seating priority;
  • the deduction of private mortgage interest payments as home mortgage interest for tax year 2017; and
  • the 7.5% threshold for computing deductible medical expenses for tax years 2017 and 2018.

Corporate and Personal Income Tax Rates

For tax years beginning 2017, the legislation would reduce the corporate income tax rate from 9.8% to 9.65%. The rate would be further reduced to 9.1% for tax years after 2019. The legislation would also adjust the personal income tax bracket dollar amounts and reduce the bottom two bracket rates as follows:

  1. For tax years 2018 and 2019, the 5.35% rate is reduced to 5.3%. The 5.35% rate would be further reduced to 5.25% for tax years after 2019.
  2. For tax years 2018 and 2019, the 7.05% rate is reduced to 6.95%. The 7.05% rate would be further reduced to 6.85% for tax years after 2019.

For tax years after 2017, the personal income tax brackets would be indexed for inflation based on the Chained Consumer Price Index for Urban Consumers (C-CPI-U).

Alternative Minimum Tax

Under the legislation, the alternative minimum tax would be repealed for tax years beginning after 2017.

Potential for Gubernatorial Veto

The tax bill was passed on the last day of the 2018 legislative session. The governor has 14 days to sign the bill into law. However, he has threatened to veto the tax legislation. On May 17, 2018, the governor vetoed an omnibus tax bill (H.F. 4385/S.F. 3982). He noted that the legislation prioritized protections for multinational corporations and provided disproportionate tax cuts for wealthy taxpayers.

H.F. 947, as passed by the Minnesota House of Representative and Minnesota Senate on May 20, 2018; Governor Dayton Vetoes Republican Tax Bill, Urges Minnesota Legislature to Put Kids First with Emergency School Aid, Office of Minnesota Gov. Mark Dayton, May 17, 2018

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