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Minnesota Taxes And The 17.6 Billion Dollar Surplus Thumbnail

Minnesota Taxes And The 17.6 Billion Dollar Surplus

No one likes paying more taxes than they’re legally required too. It doesn’t make you any more patriotic. You don’t win an award or get any special treatment. Unfortunately, depending on what state you live in will determine how much you are forced to pay. Eight states in America have zero personal income tax. Minnesota is not one of those. Only eleven states tax social security benefits. Minnesota is one of the eleven. Only two states levy an additional social security tax that uses the same income thresholds for taxing as the federal government. You guessed it, Minnesota is one of the two (Utah). So, is it fair to say that Minnesota is one the tax happiest states in America? Yes, but how bad is it really? Let’s explore.

Minnesota Taxation

First, there are many ways Minnesota applies taxation. Some of the most common are a 9.80% corporate tax rate, a 6.875% state sales tax rate, a max local sales tax rate of 2%, and an average state and local tax rate of 7.49%. (Tax Foundation) In addition to those, Minnesota also has a maximum income tax rate of 9.85%. It’s no surprise that residents of Minnesota feel they are getting suffocated with taxes. It feels even worse when you compare Minnesota to other nearby states in the Midwest. For example, let’s use our neighbors to the west, South Dakota and North Dakota. South Dakota does not impose a state income tax while North Dakota’s maximum is only 2.9%. South Dakota doesn’t tax social security benefits and as of 2021 neither does North Dakota. So, if you’re preparing to retire with a traditional 401(k), social security benefits, and a pension, you better be prepared to share that wealth with the state of Minnesota.

In October of 2022, Janelle Fritts and Jared Walczak of the Tax Foundation ranked Minnesota 45th overall on their State Business Tax Climate Index. The only states ranked lower were Maryland, Connecticut, California, New York, and New Jersey. Minnesota does not have the same high cost of living that you would find in those east coast states and doesn’t provide the same climate benefits as California. But we still get taxed similarly. What gives?

Minnesota Budget Surplus

At the end of 2022, our beloved state also announced that it had a projected 17.6-billion-dollar budget surplus. What will the state end up doing with that? We’ll find out on January 24th when Governor Walz plans to release his budget proposal. But it’s easy to see how we got there. It was a combination of strong tax collections and lower-than-projected spending.

If I were governor with a budget surplus of that size, I’d lower Minnesota’s income tax rates and eliminate taxation of social security benefits immediately. Families deserve their money back and this would be a great start. This would also allow me to direct more state resources to help with the high cost of childcare and the skilled care facility labor shortage.

Bottom Line

It doesn’t matter where the state spends its money, so long as it can do so in a balanced way that doesn’t leave the residents of Minnesota holding the bag. Minnesota families shouldn’t be the ones having to sacrifice their livelihoods in the form of taxation so the state can continue to spend with unbridled authority. My hope is that taxation changes are made in the future. In Minnesota, we’ve given ourselves the nickname “The Bold North.” If things don’t change, we may have to start calling ourselves “The Heavily Taxed North” instead.

Derek Delaney is a Minnesota (Minneapolis / Rochester area)  Fee-Only financial advisor serving clients across the country. PharmD Financial Planning provides professionals and families with financial planning and investment management with a focus on tax-efficient retirement planning.

As a fee-only, fiduciary, and independent financial advisor, Derek Delaney is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

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