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Feds drop a tax bomb on Minnesota
By Michael Khoo
Minnesota Public Radio
March 15, 2002

The budget-balancing act at the state Legislature has just gotten a little trickier. The federal economic stimulus package enacted last week could swell Minnesota's deficit by another $240 million. Tax breaks contained in the federal law could translate into smaller state revenues as well - unless lawmakers allow the state's tax code to diverge from the federal code. That would dodge the budget bullet - but according to tax experts, could create serious headaches for Minnesota taxpayers.

State lawmakers are working overtime to fill a $439 million deficit in the current budget cycle. That's on top of nearly $2 billion already erased over the governor's objections earlier this month.

Now comes the federal stimulus package. Meant to jump start the national economy, it could also pinch states - like Minnesota - attempting to balance their budgets. Assistant State Revenue Commissioner Jenny Engh says the timing couldn't be worse.

"Because here we are, we're struggling. I know the legislators are...kind of anxious to get out of here. They're struggling over the budget. The governor, certainly, would like to see a long-term solution. And then we get handed this," says Engh.

The federal package offers a significant boost in the depreciation deduction for equipment and property purchased after the Sept. 11 terrorist attacks. The benefit lasts through Sept. 11, 2004.

Minnesota, like most states, models its tax code on the federal system. If lawmakers continue that policy, the federal tax cuts would translate into a state tax cut - to the tune of $240 million.

House Tax Chair Ron Abrams, R-Minnetonka, says it's too early to predict how lawmakers will respond. But Abrams says the federal change poses real headaches.

"I certainly understand the desire of Congress to help the recovery go farther. But it would have been very helpful if the federal government had also appropriated the dollars to the states, in order to deal with the hole that the economic stimulus package has delivered unto us," says Abrams.

The state routinely amends its tax code to reflect changes in federal law, simplifying the overall tax system for corporate and individual filers. Lawmakers do have the option, however, of leaving Minnesota law as is. Taxpayers would still receive the breaks at the federal level, but would continue to pay state taxes under the former system.

But coming in the middle of the tax filing season - corporate returns are, in fact, due Friday - and because the federal deduction is retroactive to Sept. 11 - separating the state and federal tax codes will create unwanted complexities.

Senate Tax Chair Larry Pogemiller, DFL-Minneapolis, says there's something ironic about the timing. Pogemiller says Senate leaders are considering tax increases to patch the state budget - meanwhile the federal government has slid a potential tax cut under the door.

"It's really pretty hard to de-couple the state's tax code from the fed's in this area. But obviously we'll consider that," says Pogemiller. "The federal stimulus just accentuated the challenge and the deficit in Minnesota, as it has in all states."

There is precedent for so-called "de-coupling." Commissioner Engh says the state still isn't in complete conformity with changes to the estate tax enacted by the federal government last year.

Tax expert Jim Daleiden says the state faced a similar situation in the early '80s. Daleiden is an Edina-based CPA. Then, as now, the state was facing significant budget woes. Dalieden says the Reagan tax cuts contained a provision that, if enacted at the state level, would have darkened the picture.

"There were a number of years in the interim where they wouldn't go along with that. And it really was a bookeeping nightmare for quite a while, because they didn't automatically adopt these changes," Daleiden says.

In fact, Commissioner Engh says the state didn't fully adopt the 1981 Reagan tax changes until last year. Engh says the Ventura administration is consulting with other states that find themselves in the same situation. She says she expects several options to emerge sometime next week.

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