‘It’s not dead.’ Where repealing MN’s Social Security tax stands

Two months into the legislative session, Minnesota lawmakers now have a clear picture of the state’s finances and are beginning to shape their plans for a two-year budget using — depending on how you count it — a massive $17.5 to $19 billion surplus.

But debate over ending the Social Security tax is far from settled. And the question has pitted Gov. Tim Walz and other DFL leaders who want to scale back the tax against a handful of Democrats who favor a repeal, including several who campaigned on eradicating it from state law and were crucial to the party’s new one-vote Senate majority. Republicans also broadly support a repeal.

As the DFL has advanced a progressive agenda so far in the legislative session, passing things like abortion rights protections and a clean energy law, they have appeared remarkably united despite their narrow majorities. The Social Security tax has been the highest-profile example of a split within the party.

After an economic forecast on Monday that revealed a larger-than-expected surplus, Walz said he still is against eliminating the tax entirely because it would slash collections from the wealthy. “All the angst over people making millions of dollars, trust me they will be fine,” Walz told reporters.

But Senate Majority Leader Kari Dziedzic, DFL-Minneapolis, said her caucus is still considering a full repeal of the tax, especially since Democrats will need all 34 votes to pass a broader tax plan in the Senate if the party receives no GOP support.

“The first bill that was heard in the tax committee was the Social Security exemption,” Dziedzic said, indicating its status as a priority for Senate DFLers.

Sen. Aric Putnam, DFL-St. Cloud, told MinnPost he was promised by Sen. Ann Rest, a New Hope DFLer and chair of the Senate Taxes Committee, that his repeal bill would be included in the chamber’s larger tax plan, which means the Senate would at least take it to negotiations with the state House and Walz.

“I would say it’s not dead,” Putnam said.

Competing Social Security proposals

In 2019, about 795,000 Minnesota households had Social Security income, according to the Minnesota Department of Revenue. While roughly 56% paid some federal tax on those benefits, less than half, about 46%, paid some Minnesota tax because their overall income met a certain threshold.

Those numbers are expected to change, however. Newly updated state projections expect that in 2024, about 877,800 households in Minnesota will have some Social Security income. And a slim majority, 52%, will now pay some Minnesota tax on those benefits without a change in law.

It’s important to note that any state cuts will not get rid of the existing federal taxes on Social Security. The state estimates 63% of Minnesota recipients will pay some federal tax in 2024.

Fully eliminating the Social Security tax would cost lawmakers roughly $1.26 billion in the current two-year budget and another $1.5 billion in the next biennium. State budget documents say the average tax cut would be $1,276.

Putnam said roughly half of tax returns impacted would be tied to filers with a federal adjusted gross income of less than $100,000, which may include two people. However, in 2019, a Senate fiscal analysis found the bulk of the money going back into people’s pockets after a tax repeal would help taxpayers with $100,000 or more.

“I know what some of us are thinking: That means a lot of rich people are going to get this benefit,” Putnam said in the January Taxes Committee hearing. “Let’s be grown ups rather than partisans and admit that is true.”

However, Putnam said there was still merit to the idea, and urged lawmakers to “not let a modest benefit for the wealthy make us throw the middle class baby with the wealthy bath water.”

“Sure, the rich will get a little bit,” he said. “But beyond the numbers, that change will be felt much more profoundly by our friends in the middle class.”

Walz’s plan is more modest. He would raise the threshold for when seniors are taxed for an average reduction of $278. Administration officials estimate the plan would cost significantly less: a total of $219 million in the upcoming two-year budget and another $249 million in the following biennium.

“You are getting probably about 90% of the seniors now who receive a social security benefit would pay no taxes at all, or at least see some sort of a tax cut, under Minnesota law if this was to pass,” said Paul Marquart, commissioner of the Department of Revenue, in a House committee on Tuesday.

House Speaker Melissa Hortman has cautioned against a full repeal, too, not just for its benefit for the wealthy. She has described eliminating the tax as having “exploding tails,” which is legislative-speak for something that will become more expensive in the long run considering Minnesota’s aging population.

About $12.5 billion of the $17.5 billion surplus is leftover money from the last two years and isn’t expected to continue in the future. That means legislators have a smaller share — though still large by historic standards — to enact plans that will cost money down the road. And there are plenty of competing DFL proposals for that cash. Repealing the Social Security tax would eat up a quarter of the “structural” surplus that will carry forward into future years.

Support in the Senate

Still, in the Senate, four new lawmakers who won crucial elections campaigned on eliminating the state tax on Social Security benefits. And even though he was an incumbent, Putnam won a close race in St. Cloud while supporting elimination of the tax as well.

That makes the Social Security bill a political sticking point already, something Republicans have been happy to point out as they crusade for full elimination. “That is something that both parties campaigned on,” said House Minority Leader Lisa Demuth, R-Cold Spring. “That is something that could be a priority. We should have already gotten this done.”

As he introduced the repeal bill in January at its Taxes Committee hearing, Putnam said “We’ve made promises.”

But support for the large tax cut is not limited to those five swing-seat Democrats. A handful of other DFLers — including Sens. Matt Klein of Mendota Heights, Bonnie Westlin of Plymouth, Nick Frentz of North Mankato, John Hoffman of Champlin and Erin Maye Quade of Apple Valley — have either sponsored a bill to fully repeal the tax or have publicly supported it. Even Rest, the Senate Taxes Committee chair, is in favor.

That 11-member contingent is a sizable portion of the 34 total Democrats in the state Senate, where the party holds just a one-vote majority. There are House DFLers who support the idea, too. One bill sponsored by Rep. Dave Lislegard, DFL-Aurora, has 11 Democratic cosponsors, including some in swing districts. But it has not received a hearing in the House, where leaders seem less keen on backing a full repeal. Democrats hold a 70-64 majority in the House.

Putnam said Tuesday that his support for the bill is partly about politics. It was not just a big issue in his campaign, but the top one, he said. People talked about it constantly, Putnam said.

The St. Cloud Democrat also said the tax is extremely complicated, and so the idea of raising an income threshold for who has to pay state, but not federal taxes, is difficult messaging for people who feel getting rid of it is a fairness issue.

Still, Putnam maintains eliminating the tax would show respect toward people, even the wealthy, who worked to gain Social Security benefits. “It’s more than a math problem,” he said. “It’s also about people who worked their whole lives and they want to feel like that work is respected.”

Walz on Monday confined his comments to the rich — and to Republicans. Last year, when the GOP held the Senate, Walz and House Democrats agreed to repeal Minnesota’s Social Security tax as part of a larger tax cut plan. But they never approved the deal, instead squabbling about other issues. The governor said Republicans walked away from the agreement in hopes of winning control of the Legislature, something the GOP has denied.

“That deal had a shelf life,” Walz said. “They chose to roll the dice, and they lost.”

But it’s Democrats that Walz will have to negotiate with on the issue at the Capitol in St. Paul. Walz spokeswoman Claire Lancaster said the governor wouldn’t veto a bill to repeal the Social Security tax if it reached his desk. But a bill reaching his desk without approval is an unlikely scenario since DFLers plan to hash out disagreements before passing any budget.

Putnam said it’s “tough to speculate” whether he would vote for a compromise tax plan in a deal struck by DFL leaders that doesn’t fully repeal Minnesota’s tax on Social Security benefits. “There would be lots of different variables I would have to consider like the size of the repeal, the other stuff that’s in the bill,” Putnam said.