State’s pass on tax conformity to hit many wallets

By Bill Salisbury

St. Paul Pioneer Press

For thousands of Minnesotans, filing state income tax returns next year will be a little more complex and expensive because of some below-the-radar changes in the tax law passed by the Legislature and signed by Gov. Mark Dayton last spring.

If your employer pays tuition for you to take college courses, for example, the federal government won’t tax that benefit, but the state will.

About 12,000 Minnesotans will pay an average of $250 to $300 more in state income taxes as a result of that change. Taxing employer-paid education benefits is expected to generate an additional $4.4 million for the state over the next two years.

An estimated 650,000 married couples will have to pay a so-called “marriage penalty” that will add an average of $120 to their tax bills.

Other taxpayers will lose tax breaks for employer-paid adoption benefits, child care, student loan interest, mortgage insurance premiums and teacher classroom expenses, among other items.

Filing will be more complicated because taxpayers will have to add back certain federal deductions on their state income tax returns.

The cost and complexities resulted because Dayton and lawmakers failed to change state tax law to conform to tax breaks that Congress added to the federal tax code late last year.

Why didn’t they match the federal change? “It costs money,” Senate Taxes Committee Chairman Rod Skoe, DFL-Clearbrook, said Friday.

Conforming to the new tax credits and deductions that Congress passed would have cost the state about $300 million in lost tax revenue over the next two years.

“I think it would have been a good thing to do, but we weren’t able to raise that kind of revenue,” Skoe said.

“We had one group of people (legislators) running around saying we shouldn’t raise any revenue and another set that wanted to spend a whole lot more.”

The House Democratic-Farmer-Labor majority passed a tax bill that would have conformed state law to the federal tax code. But to offset the loss of revenue because of new tax breaks, the House bill lowered the income levels at which the state’s income rates take effect.

Overall, that tradeoff would have provided a net tax cut, said House Taxes Committee Chairwoman Ann Lenczewski, DFL-Bloomington. But Republicans accused the DFLers of increasing taxes.

The bracket adjustments would have boosted taxes for 31 percent of taxpayers, while 26 percent would have gotten tax cuts from the new tax preferences.

But in the final tax bill negotiations, Lenczewski said, House members “weren’t able to get the Senate or the administration to support conformity.”

The failure to adopt the federal changes, she said, means “if you’re a business, you have to keep two sets of books. If you’re an individual, you have to go through a huge inconvenience.”

The loss of tax breaks slipped through with little notice because most attention was focused on the DFL’s income tax increases on the wealthiest Minnesotans and new business-to-business sales taxes.

The state Department of Revenue has been publicizing the tax changes. They provide details and tips for employers and employees on their Web site, revenue.state.mn.us.

“We try to provide information in a clear and understandable form so that people can work through it in a straightforward fashion,” Deputy Revenue Commissioner Matt Massman said.

But Minneapolis tax attorney Tim Goodman said he suspects most taxpayers are unaware of the changes and aren’t prepared to pay higher taxes.

He said many of his clients were surprised when he noted in a recent newsletter that employer-provided education and adoption assistance will now be taxed by the state. When employers notified employees about the changes, “they’ve gotten very angry messages back,” Goodman said.

For the past quarter century, Minnesota has matched most federal tax changes. But in response to budget shortfalls in recent year, policymakers have been cutting back on the number of federal tax breaks they match.

But this year for the first time, they decided not to conform on some of the most basic tax benefits.

“It’s disappointing that things that used to be perfunctory have become political footballs,” Lenczewski said, noting that most other states with income taxes conform to the federal tax code.

She and Skoe said they will push for conformity, but it won’t happen in the special legislative session Monday. Dayton called lawmakers back for one day to provide financial aid to areas damaged by storms in late June, and he and legislative leaders agreed not to consider tax relief or any other issues during the session.

“I’m hoping next year I can get my colleagues to see why it’s so important,” Lenczewski said. “Let’s just conform for the simplicity and convenience of the taxpayer.”

But it would be an uphill climb. 2014 will be a non-budget year for the Legislature, and leaders from both parties have said repealing some of the new business-to-business taxes will be a top tax priority.

Skoe agreed, however, that lawmakers should make simplifying taxes a long-range goal.

“My expectation is,” he said, “we will continue to work to bring Minnesota’s tax code into conformity with the federal tax code so Minnesotans and Minnesota businesses have an easier time filing their taxes when they don’t have to add back income on their Minnesota returns.”

Distributed by MCT Information Services