K-12 Tax & Spending Climate: Raising Taxes Reduces Revenue

Dale Kurschner

Two actions and one inaction by the Minnesota Legislature in 2013 led to the “last straw” for many wealthier Minnesotans.

That year, Gov. Mark Dayton and the DFL House and Senate majorities enacted a tax bill increasing by 25% the taxes to be paid by the state’s highest wage earners—and lowered the threshold of “highest” to individuals making $154,950 or more annually or households making $258,260 or more annually.

The new top rate of 9.85% ranks as the third-highest such tax in the nation. It also hit many of the state’s 22,000 Subchapter S corporations, as their profits are passed through to their owners’ tax returns. In comparison, Florida has no income tax (nor do South Dakota, Texas, Nevada and three other states). Florida also has no tax on pension or Social Security benefits.

The second action was the enactment of a gift tax, one of only two such state gift taxes in the country. The tax was on the transfer of property by one individual to another while receiving nothing or less than full value in return. It was 10% on such gifts in excess of a lifetime total of $1 million made by Minnesota residents—and non-residents who owned property in Minnesota. There was such an uproar the Legislature repealed the gift tax a year later.

The inaction in 2013 pertains to the estate tax. That year, Congress approved an exemption amount of $5 million, indexed to inflation (so in 2016 it is $5.45 million per individual or $10.9 million for a married couple) on federal estate taxes. If the estate is below this level when the individual dies, heirs pay zero estate tax. If it’s over this amount, the estate can be taxed up to 40%.

Minnesota is one of 14 states that still have an estate tax (which dates from a time when the federal estate tax allowed a dollar-for-dollar credit for state estate taxes; this ended in 2001, and the majority of states repealed their estate taxes). Unlike the federal estate tax, Minnesota’s kicks in at more than $1 million in estate value (this will rise to $2 million by 2018) and is taxable at between 9% and 16%—on top of what’s paid in federal estate taxes.

These actions and inaction followed years of intensified auditing by the Department of Revenue of those who claim their domicile is in another state but still have a home here and visit often.