Should the pension tax be eliminated?
Minnesota is like many other states in that it generates operating revenue from a combination of sources, not the least of which is a state tax on incomes, including pensions. As a member of the House Tax Committee for the last four years, I have had the opportunity to hear and research several proposals, including the concept of eliminating income tax on Social Security pensions.
During the 2015 session, the House GOP included in their omnibus tax bill a full exemption of all Social Security income over five years. As you may already know, that omnibus bill never made it out of conference committee. It remains there today with an uncertain future again in 2016.
I am not at all opposed to conversations about reducing income taxes on pensions. In fact, I am a co-author of a bill that begins to treat certain amounts of particular military pensions as non-taxable. I believe it is a valid conversation to have, but in the proper context that any revenue eliminated has to be made up from another source.
With that in mind, a review of current law relative to taxing of social security pensions may be useful to gain proper perspective. Minnesota follows current federal law with respect to taxing these benefits. Under these rules, 15 percent is always exempt. By design, this prevents "double taxation," once when the FICA tax is paid and once when the benefit is collected.
How much of the balance of Social Security benefits are taxable depends on the individual taxpayer's provisional income and filing status under a formula in current law. For example, single filers with provisional incomes less than $25,000 a year and joint filers with incomes less than $32,000 a year will pay no Minnesota income tax at all ... and that is current law. To put that into perspective, approximately one half of all Minnesotans collecting Social Security benefits are exempt from paying any income tax on those pensions. The other half of recipients are earning amounts above the threshold.
So how much would it cost Minnesota to exempt all Social Security pensions from Minnesota income tax? Once fully implemented, a total exemption would cost Minnesota nearly $500 million dollars a year in lost revenues. Now, that may be a good idea, or perhaps it is not. Remember, current law already exempts the lowest pension recipients entirely. In addition, current law already exempts the first 15 percent of all amounts over the threshold. But the proposal to eliminate all Social Security pensions may not be the best policy if you consider that approximately 40 percent of the tax reductions will be from incomes greater than $100,000 a year.
There is room for a lot of discussion about effective and progressive tax policy in Minnesota. I am committed to that discussion, but it is important to consider all the facts, and not make hasty decisions.
Erik Simonson, DFL-Duluth, is the Minnesota state representative for District 7B.