Cut Social Security taxes? Here’s what MN lawmakers are considering.

Eliminating or reducing state taxes on Social Security and the best way to do it is a key issue under debate at the Minnesota Legislature that will undoubtedly be part of negotiations for the next state budget.

Lawmakers, as well as the state’s seniors, are divided on what to do about the 348,700 households currently paying taxes ion benefits. Especially with the state projecting a $17.5 billion budget surplus.

The House taxes committee heard testimony Thursday from residents on two proposals — to eliminate or modify taxes on benefits.

Bill Raker, a volunteer with AARP Minnesota, testified in support of complete elimination of state taxes on benefits.

“Social Security is an earned benefit. Historically, Social Security was designed as an antipoverty program, not a way to fund government,” Raker said.

Others noted that taxes on benefits currently bring in roughly $600 million in annual state revenue that is used to fund important government services. They say a complete repeal largely favors wealthier recipients.

Nancy Jost, a Fergus Falls senior and early childhood advocate, said it was better to invest in the future than to cut taxes for high-income retirees.

“I want us older members of society to pay taxes so little children, the future of our state, get off to a great start,” she said.

In 2020, about 1.1 million Minnesotans received about $19.3 billion in Social Security benefits. Of those, about 384,700 households have Social Security income that’s taxable. The rest are able to avoid paying taxes on benefits because of exclusions and deductions.

What are the proposed changes?

There’s three competing ideas being debated at the Capitol about what to do about state Social Security taxes — eliminate them altogether, modify the existing complex system of exemptions or create a simpler method with Social Security treated like other income.

All three proposals would reduced state taxes on benefits.

Complete elimination of state Social Security taxes would cut state revenues by about $630 million annually, a figure that would grow to $785 million by 2027. Critics of this proposal say more than half of those tax cuts would go to households with more than $143,000 of annual income.

Modifying the current system of exemptions, a plan put forward by Gov. Tim Walz, would cut taxes for about 377,200 tax filers an average of $278. State officials estimate it would result in about $100 million a year in less tax revenue.

The third plan would simplify how the state taxes Social Security allowing households with below $80,000 of adjusted gross income, or $62,500 for single filers, to completely 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 Social Security state taxes using a federal measure called “provisional income,” which can make it difficult for taxpayers to understand. Critics say it should treated as any other type of income when calculating state taxes.

To that end, some economists question why state lawmakers are so focused on cutting taxes on Social Security. They say it would be better to cut rates or increase credits for everyone.

Next steps

Lawmakers will continue to debate what to do about Social Security taxes as they work to craft the next state budget that is due in May. It will certainly be part of a tax bill that is typically debated at the near the end of the legislative session.

Democratic-Farmer-Labor Party members, now in narrow control of the House and Senate, say they want to focus any tax reductions on lower and middle-income families. The governor wants to do that and send rebate checks to most filers.

Republicans favor permanent reductions in tax rates, including complete elimination of Social Security taxes. They criticized DFLers for promising to repeal Social Security taxes on the campaign trail and not following through.

Republican leaders said recently that permanent tax cuts would be needed in order for them to help pass a state infrastructure bill that requires a super majority in both chambers.

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