As Minnesota lawmakers piece together a tax bill, a new higher tax bracket is on the table for the state’s highest earners.
It’s a move supporters say will bring needed ongoing funding for state programs, but opponents argue it could hurt business growth and push high earners out of the state.
The House Taxes Committee is considering a fifth new tax bracket that would create a 10.85% tax for individual filers making more than $600,000 a year. The earning level for joint filers would be $1 million. It would go into effect for the 2023 tax year.
Bill sponsor Rep. Kaohly Vang Her, DFL-St. Paul, who has carried a similar proposal in the past, told the tax committee this week that while Minnesota has a historic $17.5 billion budget surplus, much of that is one-time cash and the new bracket would be necessary for creating ongoing revenue for the state.
“From our farmers to our families in the city … in order for us to provide the resources they need to have good quality of life we do need to have increased dedicated revenue sources,” she said at a Tuesday hearing.
Who it would impact
Should Minnesota create the fifth tax tier, it would affect 24,200 tax returns in the state with an average increase of $9,231, according to the Department of Revenue. It would account for 0.8% of all returns. Revenue Department analysis predicts the new tier would bring Minnesota an additional $281 million in revenue in 2024.
While it’s not yet clear whether the new bracket will make it into this legislative session’s tax bill, the tax committee on Tuesday held onto the proposal for possible inclusion. A clearer picture of the state’s future tax plan will come when they meet again next week.
And that’s just the House version of the bill. Any differences in the Senate version of the tax bill will need to be hammered out in a conference committee and reapproved by both chambers before heading to the governor’s desk.
Currently, the top tax rate in Minnesota is 9.85% under a system adopted in 2013 that created a fourth bracket. It applies to individual earners making more than $183,340 and joint filers making more than $304,970. Tax brackets are recalculated each year based on the rate of inflation.
That new tax bracket proved controversial at the time, and opponents are again raising similar business concerns, including worries high earners would leave the state. That didn’t happen, but Republican lawmakers and business groups argued that a new tax tier could drive wealthy Minnesotans to relocate.
Criticism from business advocates
The Minnesota Chamber of Commerce and Minnesota Business Partnership pointed to research saying the new bracket would move Minnesota from the sixth-highest top taxable rate in the nation to the fourth — behind New York, California and Hawaii.
Vang Her said the state needs the additional cash to help fund pension programs and agriculture aid, ongoing state expenses that only get more expensive each year and can’t be funded by the surplus.
Democrats won complete control of state government in last November’s election. And with majorities in the House and Senate, they have been able to move on new spending and tax plans that were out of reach when Republicans had control of the Senate.
Democratic-Farmer-Labor lawmakers and Gov. Tim Walz are already pushing for a new paid family and medical leave program to create a more than $1 billion payroll tax. Also on the table are increases to vehicle registration fees and a 75-cent fee on taxable deliveries from pizzas to Amazon orders.
Republicans on the committee asked why Minnesota needed to create a new tax bracket in light of the surplus, and as DFLers weigh new spending and other taxes. The budget framework agreed upon by the governor and DFL lawmakers calls for $17.9 billion on top of the more than $50 billion base budget.
“The state is not short on money right now, but we’re being asked to pay more here, pay more there,” said Rep. Jon Koznick, R-Lakeville. “We don’t have a revenue problem. It is absolutely a spending problem.”
