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Business loans, unemployment benefits won’t be taxed by state

Budget compromise leaves heavy lifting to legislature

David Colburn
Posted 5/19/21

REGIONAL- Demonstrating that money is potent grease for the wheels of bipartisanship, Gov. Tim Walz, Senate Majority Leader Paul Gazelka, and House Majority Leader Melissa Hortman used a joint press …

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Business loans, unemployment benefits won’t be taxed by state

Budget compromise leaves heavy lifting to legislature


REGIONAL- Demonstrating that money is potent grease for the wheels of bipartisanship, Gov. Tim Walz, Senate Majority Leader Paul Gazelka, and House Majority Leader Melissa Hortman used a joint press conference on Monday to reveal an agreement on a $52 million two-year budget outline.
Republicans and DFLers were at odds from the outset of the legislative session, as Walz proposed major tax hikes on the wealthiest Minnesotans to fund his expanded agenda for education and social programs in the next biennium, while Gazelka and others adamantly vowed to block any attempt to raise taxes.
But then came the news last week that the state would be getting $2.8 billion in cash from President Joe Biden’s American Rescue Plan (ARP). After a week of closed-door bargaining the trio of politicians crafted what they termed a “win-win” compromise as the constitutional clock was ticking down on reaching a solution.
“We are required to send a big thank you to the federal government, President Joe Biden and the Democratic members of Congress who voted for the American Rescue Plan,” Hortman said. “It made this agreement possible today where we were able to do pretty much everything everybody wanted, with some compromises.”
Gazelka also acknowledged the role of the federal money in the compromise, as it allowed the GOP to keep their no-tax-hike pledge while including an agreement on how to spend ARP money that satisfies a concern of the GOP that goes back to last spring — that lawmakers have a role in spending the federal funds, not just Walz. Under the agreement, Walz will have $500 million to respond to pandemic-related costs, with the balance to be used by the Legislature to make up for lost revenue and for general budget purposes.
“This year has been a battle,” Walz said. “We made the commitment together that this budget would be about recovering from COVID, it would be about investing in families, their children and education, it would be about providing relief for families in the form of tax cuts.”
Tax relief
The most immediate consequence from the compromise will be tax relief for businesses that received federal Paycheck Protection Program loans and those who received additional $600 and $300 weekly federal unemployment benefits.
Forgivable PPP loans were a boon to employers of all sizes, allowing them to keep workers on the payroll and cover other specific expenses as the pandemic-induced recession deepened. However, under the tax code, once the loans were forgiven they became taxable income. With the additional ARP funding, the path was clear for Walz, Gazelka, and Hortman to agree that no Minnesota taxes would be levied against the PPP loans.
Record numbers of Minnesotans filed for unemployment benefits during the pandemic, and many were likely not aware that payments are taxed just like other kinds of income. Another complicating factor is that in order to get payments out as quickly as possible, Minnesota didn’t withhold taxes from the extra $600 and $300 weekly payments, further inflating the potential tax bills for recipients.
Under the compromise, $10,200 of unemployment benefits are not exempted from state income taxes.
Both changes bring Minnesota in alignment with the tax adjustments made at the federal level.
The announcement came on the final day for Minnesotans to file their 2020 income tax returns, and Revenue Commissioner Robert Doty said that the department would try to accommodate the changes as best it can.
“We will try to adjust as many of those returns as we can automatically,” Doty said, “but there will be a significant number of those that we will not be able to adjust automatically and, quite frankly, that will depend on the complexity of the returns.”
If automatic adjustments can’t be made, taxpayers will be notified to file an amended return.
Policy disagreements remain
Monday’s final hours agreement wasn’t the end of the budget process, but only the beginning, Gazelka said. While the agreement sets overall financial targets for each of the 12 omnibus spending bills, legislative conference committees must still hammer out how the money will be spent by June 4. A special legislative session to pass the bills into law must occur by June 14.
A deeply-divided Legislature will have to wrestle with a host of policy differences ranging from police accountability to environmental issues, and no bill is guaranteed to be approved. Placing the responsibility for resolution in the hands of the conference committee chairs, Walz, Hortman, and Gazelka each expressed guarded optimism agreements could be reached.
However, when it comes to environmental spending, Senate Republicans refuse to budge from their demand that “Clean Cars” regulations developed by the Minnesota Pollution Control Agency be delayed by two years. If the emissions rules aren’t delayed, conference committee co-chair Sen. Bill Ingebrigtsen has vowed to stop the bill from being brought to a vote.
That would force state parks to shut down after June 30 and threaten a plethora of environmental programs and state agency work.
The committee is so divided over the issue that Senate Republicans and Sen. David Tomassoni, DFL-Chisholm, didn’t bother to attend a virtual meeting of the committee last Saturday, leaving House members to discuss and vote on purely symbolic revisions to the bill.
“We do not have a quorum today because none of the Senate members of the conference committee have made the choice to participate today,” co-chair Rep. Rick Hansen said. “It is unfortunate that we are moving towards adjournment without progress. I’m realistic but hopeful that we should be able to come to some agreement so that we won’t be facing a government shutdown. I’ve been through that before, and it’s not pleasant for any of the employees of the state and the contractors they work with.”
“We’re coming out of COVID and just opening up, and now we have the threat of shutting down again because of the disagreement over policy.”


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