How the U.S. tax plan plays out in Minnesota
ST. PAUL—Republicans in Congress are close to a sweeping rewrite of the U.S. tax code that will have long-term implications for Minnesotans.
The $1.5 trillion tax cut bill approved by the Senate early Saturday and a similar bill approved by the House of Representatives in November represent the largest changes to the tax code in three decades. Both were passed without any Democratic support.
The bills differ, but would essentially:
•Cut the corporate tax rate from 35 percent to 20 percent as well as lower the rate for "pass through" businesses that pass profits onto individuals who then pay taxes on them.
•Double the standard deduction to $12,700 for single and $24,000 for married tax filers. The standard deduction is the minimum amount a taxpayer can reduce their taxable income.
•Modify tax brackets for earned income.
•Increase the child tax credit.
•Eliminate or modify popular deductions for mortgage interest, state and local taxes and educational expenses.
Republicans argue these changes are key to improving the nation's competitiveness and jump-starting the economy. They believe economic growth created by the changes will pay for the $1 trillion or more of long-term costs of the bill.
Democrats — united in their opposition — argue the changes largely benefit the wealthy and businesses at the expense of the middle class and lower-income families. They note that the tax cuts for individuals will eventually expire while changes to popular deductions and corporate tax rates are maintained.
They also say nearly all economic analyses of the legislation show it will add $1 trillion or more to the nation's $20 trillion debt.
Advocates from six sectors most likely to be affected by the bill gave their thoughts on the plan. What emerged was some backing for lowering tax rates, but also worry the other changes may have long-standing negative impacts.
At the heart of the tax bills approved by Congress is the idea that slashing the corporate tax rate from 35 percent to 20 percent would make the U.S. more competitive globally and kick the economy into a higher gear.
The bills also would lower taxes for so called "pass through entities," businesses that file taxes through an individual taxpayer rather a corporation.
Beth Kadoun, Minnesota Chamber of Commerce vice president for tax and fiscal policy, says the changes are good for businesses large and small across the state.
"We grow the economy and put more money in the pockets of taxpayers and businesses to allow them to invest in employees and companies," Kandoun said.
Kandoun added the changes will help Minnesota retain and grow its ranks of corporations. Changes to how overseas earnings are taxed also would be a boon to the state's many businesses that operate internationally.
Leaders of nonprofits worry increasing the standard deduction for taxpayers will result in fewer filers itemizing their returns and less charitable giving.
John Pratt, executive director of the Minnesota Council of Nonprofits, said increasing the standard deduction could cut in half the number of people who will itemize their tax returns. Itemizing is when taxpayers detail tax deductions beyond the standard deduction.
"It doesn't necessarily affect what (charities) they give to, it affects the amount they give," Pratt said.
He's also concerned eliminating the tax on large estates will mean fewer wealthy families will donate large sums to charities and foundations to limit their tax liability.
Finally, Pratt says plans to eliminate the "Johnson Amendment," a provision on prohibiting nonprofits from political endorsements, could further inject politics into the philanthropic world.
"The danger is creating a Wild West where organizations are under pressure to support candidates," Pratt said.
Education advocates argue parts of the bill will discourage students from seeking advanced degrees and could hurt public school teachers who spend their own money on classroom supplies. The House bill eliminates the deduction for teachers buying supplies while the Senate bill increases it.
"It's a symbolic slap in the face," said Chris Commers, president of the Chaska Education Association and a teacher in the East Carver County school district.
Commers attended a protest of the bill last week.
"Teachers are already trying to make classrooms run on a shoestring," he said.
Matt Kramer, vice president of government relations for the University of Minnesota, said proposals to eliminate deductions for student loan interest and to tax graduate school tuition waivers will hurt the state's workforce.
"At a time when employers are crying out for workforce, it just seems extremely odd to come up with ways to disincentive people from getting advanced workforce skills," Kramer said.
The Senate tax bill includes the repeal of the Affordable Care Act mandates that nearly all residents have health insurance or pay a fine.
Republicans argue the mandate is a punishment for low-income people and those who don't want health insurance. Repealing the mandate could save hundreds of billions of dollars over the next decade because the government will pay fewer subsidies to keep insurance affordable, they say.
In contrast, Democrats say repealing the mandate will wipe out a key pillar of the ACA, driving up health care costs and leaving more people uninsured.
Wendy Burt, spokeswoman for the Minnesota Hospitals Association, said eliminating the insurance mandate will encourage some healthy people to drop coverage, leaving insurers with a smaller pool of customers.
"They will just be insuring sick people that have to have insurance," Burt said.
Home builders are concerned the change in mortgage interest deductions would hurt the housing market.
Remi Stone, executive vice president of the Builders Association of Minnesota, said altering the deduction, on the books for more than a century, could have a widespread impact on an industry that makes up roughly 15 percent of the economy.
"It is a significant incentive for home ownership that bolsters our industry and the state economy," Stone said. "Anything that disrupts that is not good for any of us."
Stone downplayed proposed compromises to cap the interest deduction at mortgages of $500,000 or less, saying escalating home values could easily overtake that cap.
"If you look at the East Coast and West Coast you can easily see where our market is going," Stone said. "You have to plan ahead and this is regressive."
Both tax bills include changes to how much state and local taxes can be deducted.
Local government advocates worry changes to these 'SALT' deductions will mean homeowners will be less likely to support property tax levies to pay for local infrastructure and services.
"If taxpayers end up paying more money it will make it more challenging when local governments have to ask for tax increases for projects," said Gary Carlson, Intergovernmental Relations director for the Minnesota League of Cities.
Carlson said he's concerned other provisions in the tax bill might lead to fluctuations on the municipal bond market that governments tap to borrow money. He says lower overall tax rates could make municipal bonds less desirable to some investors.
Additionally, there are proposals that could limit the way governments refinance debt when interest rates fall. Other changes could hinder municipalities' ability to support projects in the public interest, such as affordable housing.
Before the legislation can become law, the Senate and House must rectify differences in the two bills. That is expected to happen quickly as Republican congressional leaders have vowed to get a final version to President Donald Trump before Christmas.