February 1, 2021
Minnesota Governor's proposed budget for COVID-19 recovery includes tax changes
On January 26, 2021, Minnesota Governor Tim Walz announced his proposed COVID-19 Recovery Budget (proposal) for the next two years. The objectives are to support working families, ensure students catch up on learning and help small businesses stay afloat while driving economic recovery. The proposal includes tax changes affecting corporations and individuals.
Proposed corporate franchise tax changes
The proposal would increase the corporate franchise tax rate from the current flat rate of 9.8% to 11.25% beginning in tax year 2021.
The proposal would also tax foreign income when it is repatriated to the US. This treatment would effectively reverse legislation enacted in 2019, which decoupled Minnesota law from federal changes to deferred foreign income enacted under the Tax Cuts and Jobs Act and allowed corporations (and individuals) to subtract foreign income included on their federal return (see Tax Alert 2019-1107). Under the proposal, taxpayers repatriating IRC Section 965 income would include those amounts in Minnesota income subject to the state's dividend-received deduction. The current-year inclusion for global intangible low-taxed income also would be subject to the dividend-received deduction.
Proposed individual income tax changes
The proposal would expand the first-tier individual income tax bracket by increasing the income threshold, which would decrease taxes for some individuals. Under the proposal, the individual income tax rate would be 5.35% for income below $27,230 for single taxpayers, $33,520 for a head of household, and $39,810 for married taxpayers filing jointly. The proposal would also increase the income threshold for the second bracket. As a result, taxpayers whose last dollar of taxable income falls in the second bracket would have a tax decrease, with more income taxed at 5.35%. The third-bracket threshold would be lowered by an offsetting amount, so that taxpayers with income over the third-tier threshold would not see a change.
The proposal also recommends establishing a fifth-tier income tax rate for household incomes above $1 million (married filing jointly), $750,000 (head of household) and $500,000 (single). This new tier is expected to increase personal income tax liability for about 21,000 households, by an average of $8,072 per return.
These rate changes would apply for tax year 2021 and be adjusted for inflation starting in tax year 2022.
The proposal would impose an additional tax of 1.5% on capital gains and dividend income over $500,000 up to $1 million and 4% on income over $1 million for individuals, trusts and estates. Minnesota currently does not have a separate state rate for capital gains income. Minnesota currently includes net capital gains income in taxable income and subjects it to the same tax rates that apply to other income. Capital gains are generally reported by higher-income taxpayers. The proposal indicates that about 7,000 households would experience an average tax increase of $30,000 per return due to this change. This provision would be effective starting with tax year 2021.
The proposal would increase taxes for corporations and individuals, significantly in some cases. For calendar-year taxpayers, the proposals would be retroactively effective and could affect taxpayers later in the year, depending on the enactment date. As such, taxpayers may want to monitor these proposals and their progress through the legislature. EY will continue to monitor developments in this area.