The Legislature convened in February with some optimism. The state had a modest surplus that would allow some budget flexibility and a general agreement on what bills needed to be passed, if not the specific provisions they would contain. However, that optimism was in short supply as the session ended on May 20 with the Legislature, under the threat of vetoes to several bills, passed a very large budget/policy bill, a tax bill that would conform Minnesota’s tax system to the new Federal law, and a bonding bill. Governor Dayton subsequently vetoed both the federal tax conformity and supplemental budget bills, representing the bulk of the Legislature’s work this session. The Governor did sign the bonding bill, which contained top priorities for the region. Following is a summary of what happened at the Legislature in 2018.

Bonding Bill / Highway 14

After significant negotiations over the final weekend of session, especially in the Senate where a proposal had been voted down earlier in the week, the Legislature passed and sent to the Governor a $1.43 billion bonding bill. Of the $1.43 billion, $825 million is general obligation bonding with the remaining coming from trunk highway bonds and other sources. The good news for the Greater Mankato region is the bonding bill that passed the legislature will fund the completion of Highway 14 from Owatonna to Rochester (about $160 million worth of funding). Our organization’s advocacy on this issue, including recently testifying at the legislature in support of additional Corridors of Commerce funding, really helped secure a successful result.  Other Mankato projects in the bill include funding for the emergency levee repair on 169 and the completion of the Clinical Sciences facility at Minnesota State University, Mankato. The bill was subsequently signed by the Governor.

Tax Bill

With the passage of the Federal Tax Cuts and Jobs Act of 2017 (TCJA), tax conformity was a prominent topic of discussion at the Minnesota Legislature. Without any action by the legislature, roughly 300,000 Minnesotans would see a tax increase, and filing state taxes would become quite complicated. Both the Governor and the legislature supported a tax plan that conformed to many, but not all, of the federal changes. Both plans also offered tax relief to many individual taxpayers who would experience tax increases based on the federal changes. The legislature also enacted tax reductions for businesses, while the Governor proposed conforming to some provisions beneficial to business, but increased business taxes in several key areas.

The final tax bill passed by the legislature conformed to many TCJA provisions and provided roughly $140M in tax relief in 2018-19 and $43M in 2020-21. It also contained emergency school aid requested by the Governor to assist school district’s experiencing deficits. The bill passed the House with a bipartisan vote of 85-42 and the Senate 34-33 along party lines. However, Governor Dayton vetoed the measure over concerns that the bill was too generous to businesses/higher income individuals and didn’t provide enough tax relief to low/middle-income Minnesotans.

The Governor’s veto means Minnesota taxpayers will have a complex tax filing for 2018, and many taxpayers will see a tax increase. Some legislators have suggested calling a “lame duck” session after the elections to consider a scaled-back conformity bill that addresses some of these filing issues. Unless the Governor calls a Special Session, which he has indicated he will not, this issue will be a significant priority when the Legislature reconvenes in January 2019; though it seems unlikely that changes in 2019 could be made in time to be retroactive for the 2018 tax year. Look for a subsequent blog post coming soon with more details on what non-conformity means for businesses/individuals.

Following is a summary of the tax bill that was vetoed by the Governor.

Individual Income Provisions

The bill passed by the Legislature would have changed the starting point for filing Minnesota taxes from Federal Taxable Income to Federal Adjusted Gross Income, which is the same as 30 other states, to keep a simple tax filing system. The bill would have protected 99.8 percent of taxpayers from tax increases, and 82 percent would have seen a decrease. This was achieved primarily by reducing the individual income tax rates for tier one and tier two from 5.35 percent to 5.25 percent and 7.05 percent to 6.85 percent, respectively.

Business Tax Provisions

Businesses would have retained Federal Taxable Income as the starting point for filing Minnesota taxes. The bill provided tax relief by lowering the corporate rate from 9.8 percent to 9.1 percent and removing the corporate AMT. It also fully conformed to Section 179, including removing the 80 percent add back, and included $5 million of one-time funding for the angel investor credit. The bill did not conform to foreign earnings in the TCJA, but allowed deemed repatriation.

Supplemental Budget

A session’s worth of work was largely condensed into one supplemental budget bill that was ultimately vetoed by Governor Dayton. The final bill was almost 1000 pages, spent almost $135 million, and contained numerous of policy proposals. The bill spent about $76 million this year, primarily on education, health and human services, public safety and broadband. Another $58 million was spent on transportation, primarily roads and bridges.

The bill’s wide-ranging policy provisions covered almost every area of state government. It tackled opioids and elder care; it reallocated U.S. Bank Stadium’s stadium reserve account; it enhanced criminal penalties for those intentionally obstructing traffic and child pornography crimes; it prohibited the adoption of new nitrogen rules by the Minnesota Department of Agriculture, and prohibited the MPCA from enforcing the state’s wild rice water quality standard without going through a new rule-making process. And after much debate regarding the “hands-free” bill, the conference committee also adopted an enhanced penalty for texting while driving.

House and Senate conferees spent almost two weeks working to reach agreement while negotiating with Governor Dayton. At one point, Governor Dayton sent conferees a list of 117 objections to the bill. In response, conferees either removed or modified more than half of these items in hopes the Governor would be inclined to sign the bill into law. During the final week of session, Governor Dayton repeatedly pledged to veto the supplemental budget bill if it contained policy provisions he could not accept and certain agency cuts were not restored. He also asked that some shared priorities — like opioids, elder care and school safety legislation — be negotiated separately and sent to him as stand-alone bills. These requests were not accommodated and the Governor vetoed the supplemental budget bill.

Transportation Constitutional Amendment

In the final days of session, House Republicans passed a proposed constitutional amendment allocating all sales tax revenues from motor vehicle parts and repairs (about $300 million annually) to the state’s highway construction fund. A portion of these sales taxes were statutorily dedicated last session. Prior to 2017, they were funneled into the state’s general fund. The bill passed a number of Senate Committees, however, it was not brought up for a vote on the Senate floor due to concerns with the impact on the general fund and whether it was appropriate for the Legislature pass this issue on to voters to decide. As a result, it will not be on the ballot this fall.

Sexual Harassment

Prior to session, two legislators resigned following highly-publicized sexual harassment allegations, which led to discussion on the culture and structure for reporting sexual harassment claims at the Capitol. Governor Dayton and House GOP Leader Joyce Peppin (R-Rogers) agreed on a proposal to address the issue, including a new legal standard for what constitutes harassment, by removing the statutory requirement that harassment must be “severe and pervasive.” However, the Senate GOP declined to vote on the bill before adjournment. While there was consensus by many on the changes, the Minnesota Chamber and other stakeholders raised concerns that broadening this definition would lead to a windfall of lawsuits.

Childcare

The legislature passed a bill that will provide some immediate regulatory relief/flexibility for child care providers and require the Department of Human Services to report on its progress in making broader reforms to regulations by next year. This bill is awaiting a decision by Governor Dayton. Grants for child care providers was also included in the supplemental funding omnibus bill that was vetoed.

Health Care

The Legislature passed and the Governor signed a bill that would heighten price transparency for health care services. Health care costs are raising out-of-pocket costs for health insurance policyholders, forcing them to be better consumers of health care but often with incomplete information about cost. This bill would strengthen existing law, requiring providers and insurers to disclose the cost of medical procedures upon request and within 10 days. It also requires a posting of the costs for basic procedures and the disclosure of any facility fees or other charges to be paid by patients.

Pension Reform

The very last bill passed in the 2018 Session, less than 15 minutes before adjournment, was the Omnibus Pension and Retirement Bill. It makes several changes to the public employee pension system to shore up it’s fiscal stability going forward.

Looking Forward to November

With the legislative session completed, all eyes will focus to the 2018 election, where voters will decide on a number of different races, including two U.S. Senate seats, all eight congressional seats, the Governor’s Office, the state’s other constitutional officers and the Minnesota House of Representatives. The Minnesota Senate is not up for re-election until 2020. However, Senate President Michelle Fischbach announced her retirement from the Minnesota Senate to become Minnesota’s next Lieutenant Governor, a vacancy created when Senator Tina Smith was appointed to fill the vacancy created by Senator Al Franken’s resignation late last year. With Senator Fischbach’s resignation, the Minnesota Senate is now split 33-33 between Democrats and Republicans. A special election to fill this vacancy will occur concurrently with the general election in November and will determine control of the Minnesota Senate in 2019.