ST. PAUL — Lawmakers at the Minnesota Capitol are considering proposals to cut the tax on Social Security benefits — including a bill that would reduce the tax for many state residents and another that would eliminate it altogether.
Minnesota is just one of a dozen states that tax income on Social Security payments, something opponents say is unfair to retirees and counter to the purpose of the benefit.
But opponents of eliminating or cutting the tax say it’ll mainly help wealthier retirees and hurt the state budget.
Gov. Tim Walz and some Democrats in the Legislature back a partial elimination of the tax. Republicans and some Democrats support the complete elimination of the Social Security income tax, a move that would affect around 350,000 Minnesota tax filers. About 1.1 million Minnesotans get benefits.
It was a proposal backed by Democratic-Farmer-Labor lawmakers that recently got a hearing in the House Tax Committee. Sponsor Rep. Dave Lislegard, DFL-Aurora, told members of the committee Thursday, March 9, that getting rid of the tax was the No. 1 issue he heard from constituents while campaigning in his Iron Range district. The $17.5 billion budget surplus means the state can finally make the move, he told members.
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“Social Security tax is a matter of fairness for middle-class retirees and the investment in the financial security of Minnesotans for years to come,” he said. “With the unprecedented surplus in Minnesota, we have a historic opportunity to eliminate this tax.”
Lislegard’s bill would eliminate the tax altogether, a move that would cost the state more than $600 million in annual revenue. Republicans in the past have said eliminating the Social Security tax cut would provide an average of $1,277 in tax relief to 472,902 Minnesotans.
Bill Raker, an AARP volunteer in Minnesota, acknowledged the losses but said the state shouldn't tax an earned benefit gained over a lifetime of work.
“Social Security was designed as an anti-poverty program, not a way to fund state governments,” he told the committee.
But Megan Dayton, a state demographer and president of the Minnesota Association of Professional Employees, a state public employees union, said in the long run, major cuts could hurt much-needed services. Minnesota, which budgets on a two-year cycle, would lose more than $1 billion in each biennium, and that amount is set to increase in the future.
“We believe an ongoing more than one billion reduction to the state’s general fund created by a total tax repeal on Social Security would do more harm than good and jeopardize the programs upon which seniors rely,“ she said. “Our population is rapidly aging and the cost of caring for Americans will only increase, and if the budgets that support this population’s services are cut we will have done more harm than good.”
Dayton said the state should instead focus on reducing the cost of health care prescription drugs and housing.
Partial elimination
At the same hearing, Rep. Jessica Hanson, DFL-Burnsville, explained her bill for targeted Social Security tax relief , something she said would keep “more money in the hands of Minnesotans who need it.”
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Under the Hanson bill, an estimated 269,000 filers in Minnesota would save an average of $524 a year on taxes. Joint tax filers with an adjusted gross income of under $80,000 a year would be 100% exempt from Social Security taxes. A single filer making less than $62,500 would not have to pay anything on the income either.
Walz is proposing a partial reduction in the tax that his office said would affect about 377,200 tax returns and on average reduce taxes by $278. The state would lose about $200 million in the upcoming biennium, according to Department of Revenue estimates.
Under the plan, 90% of Social Security payment recipients would get a tax cut or not pay taxes at all on their Social Security income.
It would raise the complete phaseout for the tax on Social Security income to $120,000 per year for married joint filers. Republicans want to eliminate the tax completely, and legislative Democrats have been noncommittal on the issue, though leadership opposes a complete elimination of the tax.
While the DFL now controls the Senate, House and governor’s office, eliminating the tax on Social Security, an issue historically championed by Republicans, is far from dead in the Legislature. Four DFL senators campaigned on eliminating the tax, and their party only has a one-seat majority in the Senate, where there are 34 DFLers and 33 Republicans.
On top of that, Senate Republicans said tax cuts must come before they vote for a public infrastructure borrowing bill, or bonding bill. That would require a three-fifths majority in order to pass.
During the last session, a Legislature divided between Democrats and Republicans reached a tax deal that would have included the elimination of the Social Security tax benefit. But lawmakers and the governor were never able to reach an agreement on a proposal in an election year marked by gridlock at the Capitol.
Follow Alex Derosier on Twitter @xanderosier or email aderosier@forumcomm.com .
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The Trust Project
