Eliminating or reducing state taxes on Social Security and the best way to do it is a key issue under debate in the Minnesota Legislature, which will undoubtedly be part of negotiations for the next state budget.
Lawmakers, as well as state elders, are split on what to do about the 348,700 households currently paying taxes and benefits. Especially with the state projecting a budget surplus of 17.5 billion dollars.
The House Tax Committee heard testimony from residents Thursday on two proposals — to eliminate or modify benefits taxes.
Bill Raker, a volunteer with AARP Minnesota, testified in support of eliminating state benefits taxes entirely.
“Social Security is an earned benefit. Historically, Social Security was designed as an anti-poverty program, not a way to fund the government,” Raker said.
Others noted that benefit taxes currently bring in about $600 million in annual state revenue, which is used to fund important government services. They say a full repeal heavily favors wealthier beneficiaries.
Nancy Jost, a Fergus Falls elder law attorney and early childhood advocate, said it’s better to invest in the future than cut taxes for high-income retirees.
“I want us, the older members of society, to pay taxes so the young children, the future of our state, get a head start,” she said.
In 2020, about 1.1 million Minnesotans received about $19.3 billion in Social Security benefits. Of these, approximately 384,700 households have social security income that is taxable. The rest can avoid paying benefits taxes because of exclusions and
deductions.
What are the proposed changes?
There are three competing ideas being debated on Capitol Hill about what to do about state Social Security taxes — eliminate them altogether, change the existing complex system of exemptions, or create a simpler method with Social Security treated like other income .
All three proposals would reduce state taxes on benefits.
Completely elimination of state social insurance taxes would reduce state revenues by approx 630 million dollars annuallya figure that would rise to $785 million by 2027. Critics of the proposal say more than half of those tax cuts would go to households with annual incomes above $143,000.
Modification of the current system of exemptions, a plan proposed by Governor Tim Walz, would cut taxes for about 377,200 tax filers by an average of $278. State officials estimate that would result in about $100 million a year in lower tax revenue.
The third plan would be simplify the way the state taxes social security allowing households with an adjusted gross income below $80,000, or $62,500 for single filers, to fully deduct their benefits. It would give about 286,600 filers an average tax cut of $524 and cost $140 million a year.
Other things to consider
Minnesota calculates who pays state Social Security taxes using a federal measure called “provisional income,” which can be difficult for taxpayers to understand. Critics say it should be treated like any other type of income when calculating state taxes.
To that end, some economists wonder why state lawmakers are so focused on cutting Social Security taxes. They say we’d better cut rates or increase credit for everyone.
Next steps
Lawmakers will continue to debate what to do about Social Security taxes as they work to draft the next state budget due in May. It will certainly be part of a tax bill that is usually debated near the end of the legislative session.
Members of the Democratic-Farmer-Labor Party, which now hold narrow control of the House and Senate, say they want to focus any tax cuts on low- and middle-income families. The governor wants to do that and send rebate checks to most depositors.
Republicans favor permanent cuts in tax rates, including the complete elimination of Social Security taxes. They criticized the DFL for promising to repeal Social Security taxes on the campaign trail and not following through.
Republican leaders recently said that permanent tax cuts would be needed for them to help pass a state infrastructure bill that requires a supermajority in both chambers.
