Tax committee sets its sights on federal conformity

CORRECTION: clarifies the sixth paragraph as to the potential effect of the federal law 

Filing state income taxes will be much more complex and costly for individuals and businesses if the Legislature does not respond to recent changes in the federal tax code.

Revenue Commissioner Cynthia Bauerly shared that news with the House Taxes Committee Tuesday, outlining the potential effects of not pursuing conformity with updated federal tax codes.

“Our goal with our presentation here today is to make sure that you all have a better understanding of what happens to Minnesota’s tax system and taxpayers were we to do nothing,” she said.

The 2017 federal tax law, enacted last December, changed the federal tax code substantially. Without the state responding to those federal changes, Bauerly suggested there will be complexity that her department cannot mitigate.

“If Minnesota does not respond by making changes to our own law, Minnesotans will be faced with a more complex filing system,” she said.

A Revenue Department report indicates with conformity and no other policy changes an additional $460 million in new state taxes could be collected from Minnesotans in the current biennium and more $1 billion in the 2020-21 biennium.

WATCH Full video of Tuesday's hearing on YouTube 

Minnesota relies on the federal tax system as the starting point for determining individual and corporate state income tax. State statutes are presently conformed to the definition of federal taxable income as it was constructed on Dec. 16, 2016. Any amendments to the federal tax code since that time, such as the 2017 law, are not incorporated into Minnesota’s current calculations.

The federal law changed the definition of federal adjusted gross income (the base from which federal taxable income and Minnesota taxable income are derived) in a number of ways. If not addressed, these discrepancies would have far-reaching effects.

“It will impact virtually all Minnesotans in all parts of the state. It will impact all tax preparers and all vendors that provide tax preparation software,” said Assistant Revenue Commissioner Cynthia Rowley.

Bauerly recommends the Legislature respond to the issue during the current legislative session, warning that retroactively conforming the system early next year would still present a very challenging filing system for 2019.