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Amy Monahan, a University of Minnesota law professor, has an article out on federal conformity and its effects on state income taxes. Her article is well worth reading for anyone interested in state income tax policy. Amy B. Monahan, State Individual Income Tax Conformity in Practice: Evidence from The Tax Cuts & Jobs Act, 11 Columbia Journal of Tax Law (1) 57 (2020).

One of the biggest challenges for state income tax policy makers is how to adapt to or coexist with federal tax policy. All state individual income and corporate taxes are intertwined with their counterpart federal taxes – either directly by law or as a practical administrative matter. When Congress changes the counterpart federal tax – whether in major ways as with the TCJA or in more minor changes like the regular passage of extender legislation – states have little choice but to respond. And regular, virtually annual, federal changes – often near the end of the year and effective for that year – are now the reality. For a state, it is like sleeping with a restless elephant – the best strategy to get a good night’s rest and avoid being crushed is not obvious. I know, since I spent more time than I care to remember helping legislators think through and act on these issues, often with little success.

Professor Monahan’s article uses state responses to the 2017 enactment of TCJA to gain insight into these issues. She focuses on the responses of “tight conformity states” (her term for states that link their laws to federal taxable income or FTI, rather than federal adjusted gross income or FAGI) to two of TCJA’s major changes in individual income taxation – its repeal of personal and dependent exemptions (replaced with a more generous child credit and expanded standard deduction) and enactment of the pass through deduction (I.R.C. § 199A).

Tight conformity states provides a small sample – Colorado, Idaho, Minnesota, North Dakota, South Carolina, and Vermont. They were the only states directly affected by the two TCJA provisions that Professor Monahan focuses on, since they both occur “below-the-line” (after calculation of AGI). Two of the states are dynamic conformity states (Colorado and North Dakota) that automatically adopt federal changes while the rest are static conformity states that must positively enact conformity legislation because their laws are tied to a version of federal law as of a specific date.

Professor Monahan does an intensive qualitative look at these states – examining both the legislative history and popular press coverage. The article contains nice state-by-state tables on the details – fiscal effects, political complexion, what was done, and so forth – in addition to the usual law review narrative descriptions. There is a wealth of interesting information on the states she covers.

As an aside, having done many multistate comparisons over the years, I understand the impulse to limit the analysis to a few states when doing in-depth, qualitative analysis as she did. But it would have been interesting to see the contrast in responses of dynamic versus static AGI-linked states on some of the other TCJA features (i.e., business base expansions) and the propensity of states to adopt auto tax increases that Professor Monahan observes for FTI-linked dynamic conformity states. Her intensive state-by-state analysis would have been daunting to do for the large number of AGI-linked states and her obvious interest is in average (non-business) taxpayers, rather than businesses affected by TCJA’s myriad “above-the-line” provisions.  It is also more difficult to mine the popular press, as Professor Monahan does, for insights on business changes.

Monahan’s Findings

To oversimplify, some of her findings are:

• All the states linked to federal law on a static basis enacted conformity legislation (i.e., they updated their references to the I.R.C. to include TCJA’s changes) and made compensating, revenue neutral changes to avoid increasing taxes. Minnesota, of course, took two years to do that. In addition, all of them enacted some sort of state-specific family size adjustment and only one of them (Idaho) adopted the new pass-through deduction.
• By contrast, the two states linked dynamically to federal law (Colorado and North Dakota) both failed to enact changes, allowing the TCJA’s changes to go into effect without compensating state changes. That resulted in a tax increase in Colorado and an individual tax increase in North Dakota, but an overall tax cut when TCJA’s business tax changes are considered. A second effect is that conformity changed the distribution of the tax burden – raising taxes on larger families with the repeal of exemptions and reducing taxes for some taxpayers with pass-through income. Those two states and Idaho were the only states to adopt the new pass-through deduction – a provision that most neutral experts consider at best ill-conceived and at worse an abomination.
• The Colorado and North Dakota experience (again, the two dynamic conformity states) concerned Professor Monahan. Both states stood silently by and let their dynamic conformity laws raise individual income tax revenues and materially change the burden of the tax. To make matters worse, it did not appear that there was much of a legislative debate or even acknowledgement of what was occurring. Professor Monahan concludes this was likely due to a desire for more state revenue. (pp. 93 – 94). I’m not as sure.  But the clear and natural implication is that dynamic conformity laws can undercut democratic accountability of state officials for tax policy decisions.
• Professor Monahan is concerned about the apparent lack of information and consideration of TCJA’s distributional changes by five of the legislatures (other than South Carolina): “One clear finding from the study is that state legislators often did not have the type of detailed information one would hope would guide tax policy decisions.” (p. 83) Below, I will attempt a partial defense of Minnesota’s practice – I do not think the Minnesota practice raises concerns about whether decision makers are sufficiently informed, although Minnesota’s process does raise transparency concerns.

Her recommendations

The final section of the article recommends how states can adapt to the challenge of federal conformity. I think this is really one of the biggest, below-the-radar but important challenges facing state tax policy makers. Professor Monahan frames it well: “[H]ow can [a state with an income tax] create an efficient, administrable system that is consistent with its values without suffering the negative consequences of conformity?” (p. 54)

She notes her recommendations are limited to individual, nonbusiness taxpayers. As an aside, given how the individual income tax applies as a unitary tax to both individuals with simple situations (e.g., lower and middle income wage earners who take the standard deduction) and very complicated ones (e.g., high income owners of pass-through business entities with operations in multiple states), separately dealing with the two situations may not always be clean or easy.

Some of her suggestions or recommendations include:

• Conform on the “practically nonseverable” provisions (Professor Ruth Mason’s term) – this seems obvious; Professor Monahan lists realization rules, accounting rules, partnership (and the simpler S corps rules I assume too) allocations. I would add most of the retirement account rules and fringe benefit taxation rules involving valuation issues. It simply is not practical for states to deviate from these federal rules, even though they occasionally try to do so, usually temporarily, in Don Quixote fashion.
• Use federal definitions, if not treatment –she uses home mortgage interest as her example. I think this mainly pertains to tax expenditure provisions.
• Minimize adding record keeping requirements – this is a big deal for multi-year business tax provisions (even though that is outside of what the article is about), such as bonus depreciation and § 179.
• Give up on tax expenditures – good advice but swimming upstream politically as I suggest below.
• Add institutional safeguards – e.g., statutory process changes for enacting tax legislation; I am skeptical as I will discuss below.

Her suggestions are sensible and worth considering.  A few observations about a couple of them follow.

Give up on tax expenditures

This is a great idea. The article succinctly makes the case why state tax expenditures are typically poor policy: “It seems unlikely that many state-created tax expenditures would be worth the costs involved both in terms of expenditure design and added complexity to the tax system.” (p. 90)

Unfortunately, that is like advising an alcoholic to lay off the sauce because it’s bad for her/him. Good advice, but unlikely to be heeded. Strong political winds are blowing in the opposite direction:

• The Republican Party has an extreme and growing case of tax aversion, represented by the Grover Norquist “No New Taxes” pledge and all that. This manifests itself as a fixation on “tax cuts” as their default policy in practically all situations. I still am amazed by the 2011 GOP-controlled House’s budget that proposed a tax cut in the face of a $6 billion budget gap. That spoke volumes to me about their fealty to tax cuts in all seasons. Philosophically, one assumes it reflects a quasi-libertarian view of government. Norquist colorfully expressed it as seeking to shrink government until it was small enough to drown in a bathtub.
• But the reality is that only few Republicans, including legislators, are actually libertarians. Most Republican legislators, in my experience, run for office to do things beyond shrinking government. Even if they ran on a platform of shrinking government, constituent complaints and requests and other legislative experience lead them to broader agendas, typically involving some government intervention in the market. Most of them want to use government to fix stuff, but party ideology makes it difficult to do that.
• That combination – tax aversion mixed with a desire to address problems/constituent requests – makes tax expenditures the go-to option for Republican legislators. Enacting tax expenditures allow them to appear to be true to their tax cutting principles, while still addressing problems with government intervention in the private market. In the last decade, I would expect (without attempting to verify it) that the overwhelming majority of Republican tax bills introduced in the Minnesota legislature proposed new or expanded tax expenditures, rather than rate cuts. That was certainly true of the 2017 tax bill, the one bill the all-Republican legislatures of the last decade succeeded in enacting. Its income and sales tax cuts were all new or expanded tax expenditures. Only the reduction in the state general tax (a property tax provision) and the repeal of indexing of the cigarette excise tax rate were tax rate cuts. By contrast, the bill enacted ten new income tax expenditures and expanded two existing ones, while repealing one minor, rarely used one. See the list below.
• DFLers, the pro-government party, are willing to go along with tax expenditures, if that is how they can obtain needed Republican assent to address problems. This is the classic triangulation strategy. DFLers are more than happy to work on designing tax credits or other features to address their favored problems and, then, attempt to sell them to Republicans as tax cuts.

Where that leaves us, is that it is extraordinarily difficult to “give up on tax expenditures” laudable as that goal may be. The prevailing political winds blow the tax system ship to the tax expenditure shoals of complexity, inefficiency, and ineffectiveness.

As an aside, it is a chimera that tax expenditures reduce the size of government. See here and here for more on that. They do that only if your benchmark is the nominal dollars of revenue collected. But taxpayers who do not benefit continue paying the higher rates. For them (most of the population), the size of government remains unchanged; they’re paying the same tax price they always were. If the forgone revenue otherwise would have been used for a rate cut, the size of government has gone up, not down. Most Republican legislators simply do not want to acknowledge or fail to recognize this inconvenient economic reality.

Note on the 2017 GOP tax bill’s tax expenditures:

The following are lists of the 2017 tax bill’s new income tax expenditures and its expansion of existing income tax expenditures; these lists exclude changes that conform to federal tax expenditure changes. 2017 Minn. Laws 1st sp. sess. ch. 1.  They help to explain Professor Monahan’s observation (p. 68) that despite Minnesota previously being a tight conformity state, it required 41 lines of adjustments to FTI to determine Minnesota taxable income. The 2017 bill’s tax expenditures added five of the lines; it also added 5 credits which appear on separate forms. Each tax bill seems to add more tax expenditures and rarely repeals any. This dynamic also helps to explain and validate Professor Pomp’s colorful observation how state taxes become like “a garbage pail that is never emptied.” (p. 101)

New income tax expenditures

• Subtraction social security benefits
• Subtraction discharged student loan debt
• Subtraction 529 plan contributions
• Subtraction first-time homebuyer program
• Credit beginning farmer asset acquisition
• Credit beginning farmer management
• Credit student loan debt
• Credit 529 plan contributions
• Credit subject area masters degrees for teachers
• Refundable credit for taxes paid to Wisconsin that are greater than Minnesota liability

Expansion preexisting income tax expenditures

• Research credit
• Working family credit

Repeal of tax expenditures

• Greater Minnesota internship credit

Institutional safeguards

Professor Monahan suggests protecting the tax system using “institutional safeguards” that make it more difficult to complicate the state’s tax code (pp. 100 – 101).  She spends little time explain how to do this beyond some general suggestions to add a statutory super majority requirement to pass tax expenditures or requiring preparation of pre- or post-enactment information on legislation that would complicate the tax system.

Since she is suggesting that the super majority requirement be done by statute there is a question whether one legislature can entrench another by imposing such a requirement without resort to a constitutional amendment.  I was required to write a legal opinion on that over 20 years ago and concluded it probably could not, although there is surprisingly little direct case authority as I recall. See Eric A. Posner and Adrian Vermeule, Legislative Entrenchment: A Reappraisal, 111 Yale L. J. 1165 (2002) (pro) and John C. Roberts and Erwin Chemerinsky, Entrenchment of Ordinary Legislation: A Reply to Professors Posner and Vermeule, 91 Cal. L. Rev. 1773 (2003) (con) for a discussion of some of the issues.

Putting that aside, one needs to be careful about unintended consequences of those sorts of process changes. For example, I assume that the supermajority requirement to pass bonding bills in the Minnesota Constitution was intended to constrain borrowing. Instead, it often has two contrary effects: (1) assembling larger bills with more projects to attract the necessary votes to obtain supermajority approval and (2) use of “non-debt” appropriation bonds, which require simple majority approval only but pay an interest rate penalty because their credit is less secure than general obligation bonds (e.g., the $500 million Vikings stadium bonds are an example).

In addition, such a requirement will present the usual “line-drawing” challenges and disputes about how to define a tax expenditure – e.g., what is part of the reference tax base and what is a direct versus a tax expenditure. I alluded to some of these issues in a previous post on a TPC Report (State tax expenditures). That could lead to a lot of staff work and floor debates that are probably more distracting than productive in terms of policy making.

For her suggested mandate of additional analysis and information, that would be a good thing. But my experience with a simpler provision (Minn. Stat. § 3.192) requiring the legislature to state the purpose(s) for newly enacted or expanded tax expenditures is that the legislature is prone to simply ignore statutory requirements of these types. Despite regular prompting from staff, legislators actively resist explicitly stating purposes for their proposed tax expenditures and the tax chairs and committees often regarded the requirements as illegitimate restrictions on their prerogatives and explicitly refused to require compliance.  Alternatively, it is simply delegated to staff to generate the required statements, often with little input from members. As a result, the requirements were honored more in the breach than in practice. Of course, that is not as much a problem if an analysis or information mandate is put on legislative staff or DOR who do routinely follow statutory requirements.

Dynamic conformity issues

Professor Monahan’s most surprising findings (to me anyway) relate to what occurred in the two dynamic conformity states, Colorado and North Dakota. Minnesota is a static conformity state, thanks to the Wallace case. Thus, to adopt dynamic conformity would require amending the Minnesota constitution (see here for Missouri’s example of how to do that). When I was a tax legislative staffer, no one expressed in any interest in doing that to me. As a result, I didn’t give much thought to the implications. Professor Monahan’s article and retirement leisure prompted me to do so.

The Colorado and North Dakota TCJA responses are mildly surprising. It is somewhat surprising that both states allowed their taxes’ family size adjustments to go away. (How can anyone conclude that two families with the same incomes, one a childless couple and the other with multiple dependent children, have equal abilities to pay?) For many legislators in the current political environment, party politics (tribal in nature) have become so important that they trump policy niceties.  For most Republican legislators (at least enough to dictate caucus positions), implacable opposition to anything that smacks of a tax increase is a given. That reality dictates a great many budget considerations and tactical legislative moves by both party caucuses. I suspect it is the background behind the actions in the two states. Even though Republicans did not control any of the relevant entities in Colorado, TABOR codified a version of that view in its constitution.

Professor Monahan found little evidence of a public debate in either state as whether or how to respond to TCJA; she recognized that neither legislature was likely to independently enact legislation with the effects of allowing TCJA’s changes to take effect. That, of course, reflects the power of the status quo in the legislative process. For North Dakota, it also seems unlikely that its legislature would have independently decided to enact a business tax increase to fund an income tax reduction for individuals with large families. Undoing the auto conformity effect of TCJA’s enactment would have had that effect – if revenues from TCJA’s business expansions were used to fund an exemption replacement and TCJA’s higher standard deduction. Dynamic conformity changes the default rule and that is powerful – both institutionally and for political purposes by changing what is a “tax increase.”

In Colorado’s case, doing nothing may have been the fiscally cautious approach (i.e., removing the inherent uncertainty involved with estimates of TCJA’s revenue effects – we considered that a big deal in Minnesota) as well as being the path of the least political resistance (the point that correctly troubles Professor Monahan from an accountability perspective). Colorado’s TABOR provision likely complicates this further. Professor Monahan attempts to game these effects out. Having spent many hours on TABOR because a fair number of Republican legislators wanted to propose it as a Minnesota constitutional amendment, I am less confident than she is in predicting how it affects decisional dynamics.

The CARES Act reveals another effect of dynamic conformity – the potential for large negative exogenous budget shocks at the worse times. Her article was likely written before Congress passed the CARES Act in March 2020, which modified some of TCJA’s base expansion provisions – specifically the new NOL rules and the excess business loss provisions – as well as making other revenue losing changes in FAGI and FTI. The CARES Act provisions, like many of the TCJA provisions, are temporary but they are retroactive and will reduce state revenues for a dynamic conformity state, probably substantially. For example, DOR estimates Minnesota’s conforming to the CARES Act provisions would reduce its revenues by over $325 million, almost all of in fiscal year 2021. If Minnesota were a dynamic conformity state, that would be layered on top of the impact of the recession.  Minnesota Management and Budget estimates the recession will reduce biennial revenues by $3.6 billion.  Conformity to the CARES Act would cause that projected shortfall to rise by almost 10% and to exceed the budget reserve and cash flow accounts.

Dynamic conformity, thus, would increase the state budget pain of the recession. (Colorado’s decision not to enact offsetting changes may have been fiscally prescient, since TABOR reductions may not have been triggered by initial conformity.) That, of course, is not a random effect. Congress’s routinely responds to recessions by adopting deficit financed tax cuts to stimulate the economy. A dynamic conformity state can only hope that those tax cuts are delivered via rate cuts or credits. Unfortunately, the business components of stimulative tax cuts often involve provisions, like enhanced loss carrybacks and more generous cost recovery deductions, that reduce both AGI and FTI.

Negating those effects may not be politically possible given the current tribal Republican aversion to tax increases of any kind, never mind that it was the state of affairs until Congress acted. One can question, as I have done, the policy wisdom of the CARES Act excess business loss provisions. But for a dynamic conformity state, the only fair characterization of a bill to reverse its effects is that it is a tax increase, an all but political impossibility in many states.

Putting aside the rare cases of big policy changes, like TRA86 or TCJA, dynamic conformity surely erodes state income tax revenues. The revenue effect of federal conformity is typically negative (e.g., the almost annual enactment of federal extender legislation reduces aggregate AGI); TCJA was an unusual exception. When was the last time Congress enacted a tax increase or more precisely an increase in FTI or FAGI other than TCJA? I believe the answer involving any meaningful increase was the Balanced Budget Act of 1993. So, one effect of dynamic conformity’s default rule is likely to put a downward bias on state income tax revenues, I would speculate (something Professor Monahan does not discuss because she is focused on big changes like those in TCJA). Distributional effects are a total wild card, but the business tax changes in the extenders probably slightly favor higher income taxpayers (business owners). Dynamic or auto conformity must put a high value on simplicity and ease of compliance and administration, as compared with revenue and distributional interests.

A mild (partial) defense of Minnesota’s practice

A principal concern of Professor Monahan is that state legislatures do not have adequate information to evaluate the impact of federal changes:

One clear finding from the study is that state legislators often did not have the type of detailed information one would hope would guide tax policy decisions. Despite the clear distributional impacts of the TCJA, few states had robust estimates of those impacts in the legislative record, nor did the distributional impacts receive much media attention. In Minnesota, for example, the Department of Revenue and the House Research Department provided good overviews of the issues involved in conformity, but there were no official estimates of the distributional effects of either fully conforming to the TCJA or for the ultimately passed legislation that decoupled from various provisions in the TCJA. The most significant estimate of distributional impact from an official source was a simple statement by the Minnesota Department of Revenue that “[o]ver 200,000 returns would receive tax relief in 2019” under the proposed conformity legislation. The statement did not, however, specify which returns would receive such relief.

p. 83

Disclosure: I worked full-time as the House Research tax team leader during the 2018 legislative session when a TCJA conformity bill was initially passed (Governor Dayton vetoed it), and I worked part-time in the 2019 session when conformity legislation was ultimately enacted. So, the following is self-serving and should be taken in that light.

I have no knowledge of the practices in the other four states, but in defense of Minnesota’s practice I would respond on two levels:

• “Mechanical conformity” (i.e., simply adopting the federal changes to FTI – specifically the two provisions Professor Monahan focuses on, the repeal of exemptions and adopting the pass-through deduction – without making other changes) was never serious considered by Minnesota policymakers. As a result, it made little sense to develop extensive distribution analyses of the effects.
• Analyses of the distributional effects are routinely prepared for House members of proposals that they are considering – this is typically done in the bill development process. It is fair criticism that this information is not routinely made public, as an institutional practice, when proposals go through the legislative process. That is done only sporadically when legislators request it. In 2019, it was done for the governor’s tax proposal, but not for the legislature’s bills.

Distributional analyses are generally prepared only for proposals to change Minnesota tax law.  As a result, a distributional analysis would rarely be prepared on the abstract idea that the legislature would mechanically conform to changes in federal law, such as the TCJA.  This reflects the practical reality that these analyses compare a baseline (current law) with a proposed change in the law (typically a specific proposal made by the governor, DOR, or a legislator in an introduced bill). DOR routinely prepares revenue estimates of the effects of mechanically conforming to changes in federal tax law before anyone considers whether or how to conform. These are the estimates, showing the gain or loss in tax revenue from conforming, that Professor Monahan describes. They are the first step in assembling an actual conformity proposal. For major federal tax changes, like TCJA, ACA, EGTRRA, and so forth, House Research will also present background information describing the federal changes to the House Taxes Committee.

For the two provisions that Professor Monahan tracked, the reality was that no Minnesota policymakers that I was aware of seriously considered conforming to them. For repeal of the exemptions, the possibility of enacting a conformity bill that left the Minnesota tax without a family-size adjustment was simply a policy no-go. The only issue was whether to provide an exemption replacement (i.e., a subtraction from FTI or AGI) or to revert to Minnesota’s pre-1987 practice of using personal and dependent credits. Given that, it made little sense to analyze the distributional effects of options that did neither.

Conforming to the pass-through deduction received slightly more consideration by policymakers. Business groups officially supported it, but that support was tepid. The weak support reflected the big revenue loss of conforming, the weak policy arguments for it (as Professor Monahan notes, quoting Professor Shaviro’s trenchant description), as well as the greater importance to business of conforming to other provisions (e.g., § 179 and bonus depreciation). Privately among legislators it was a foregone conclusion that conformity to § 199 would not happen, even if a few would have liked to do so. As a result, a distributional analysis of its effects was never considered. An additional consideration was that programming the microsimulation model to calculate the deduction would have been extremely difficult and the results subject to a wide confidence interval of reliability. (DOR staff spent innumerable hours just validating the revenue effects of conforming to § 199 without attempting to distribute the reductions – from S corp and partnership information returns to 1040s for which the model has income and demographic data. Moving data from partnership information returns to 1040s is very difficult because of the proliferation of tiered partnerships, many with out-of-state partners, and other complications.)

In short, I don’t think it would have been a prudent use of limited resources to prepare distributional estimates of mechanically conforming to TCJA’s changes.  Mechanical conformity to the two provisions was simply not a viable alternative in Minnesota.  Obviously, different considerations apply in a dynamic conformity state. In that case, the criticism is apt; federal legislation changes state law and so the effects should be analyzed and presented to legislators as the baseline tax system.

Distribution analyses of bills conforming to some of TCJA’s provisions were prepared, but most of them were not made public.  Professor Monahan’s criticism is valid regarding the lack of “official estimates” of the distributional impacts to extent that refers to documents required by law to be published (i.e., DOR revenue estimates) or regularly published in practice (i.e., House Research bill summaries). But estimates of the distributional effects of many of TCJA’s changes were prepared for both executive branch and legislative decision makers by DOR and House Research.

The microsimulation model used to estimate the revenue effects of income tax policy changes (the House Income Tax Simulation or HITS program, also used by the Senate and DOR) automatically shows in various tables the change in burdens by income class and filer type, size of increase or reduction, and so forth – albeit limited to the effects that can be calculated from existing tax return data. It also computes incidence indices, such as the Suits index changes under a proposal. This output was routinely provided to those formulating TCJA conformity proposals – both when the Republicans were in control in 2018 and when the Democrats were in control in 2019. These tables, however, are only rarely incorporated in public documents. Thus, the useful information that they include is not routinely made available to the public or to all legislators unless they specifically request it from House Research or committee chairs provide it to them.

The failure to routinely publish this information is a flaw in the process, but it is a practice that key legislators prefer (reduces the available information that can be used to criticize their proposals) as well as the responsible staff (reduces the need to be very careful in presenting the data so that it does not appear to favor or disfavor one or the other of the two parties by nonpartisan staff and to explain its limitation for “off-model” changes, and so forth). Both House Research and DOR staff do not routinely put out distributional information on proposals, because this information is so sensitive politically and subject to use and misuse (frankly) in partisan attacks. (An additional consideration for me anyway is that some DFL members tend evaluate the merits of tax proposals almost exclusively based on whether they increase or decrease the progressivity of the distribution of the tax burden. Other tax principles, such as horizontal equity, neutrality, and so forth, tend to be ignored or given little consideration. Regularly including distributional information, particularly the progressivity indexes the model calculates, is likely to become pass-fail grading for these members. That’s probably inappropriate elitist thinking on my part.)

There are some exceptions to this practice. The law authorizes chairs and ranking minority members of the legislative tax-writing committees to request what are called “incidence analyses” of proposals. The statute provides:

At the request of the chair of the house of representatives Tax Committee or the senate Committee on Taxes and Tax Laws, the commissioner [of revenue] shall prepare an incidence impact analysis of a bill or a proposal to change the tax system which increases, decreases, or redistributes taxes by more than $20,000,000. To the extent data is available on the changes in the distribution of the tax burden that are affected by the bill or proposal, the analysis shall report on the incidence effects that would result if the bill were enacted. The report may present information using systemwide measures, such as Suits or other similar indexes, by income classes, taxpayer characteristics, or other relevant categories. The report may include analyses of the effect of the bill or proposal on representative taxpayers. The analysis must include a statement of the incidence assumptions that were used in computing the burdens.

Minn. Stat. § 270C.13, subd. 2.

For major tax proposals by the governor or the majority caucuses of either legislative body, requests for these incidence analyses are routinely made, typically by the opposing party/caucus. That was done for the 2018 proposal by legislative Republicans that was vetoed by then Governor Dayton. Here is a link to the analysis on DOR’s website. Professor Monahan likely did not consider it relevant because it was published after the legislative process was completed (i.e., it is dated August 30, 2018). It may have been requested to generate data to use in the 2018 election campaign – i.e., against Republican legislators who voted for the vetoed legislation?

These requests under section 270C.13, subdivision 2, however, can be and are made during the legislative session to provide fodder for debate.  During the 2019 session that was done (by Republicans, I assume) for the governor’s conformity proposal, as well as his gas tax increase and other tax changes, and was available during the session (i.e., it was released in April 2019, link here). The resulting analysis shows the combined effects of all these changes and does not isolate or separately analyze the distributional effects of the conformity changes or individual elements of conformity. The income tax changes are reported separately in some tables, so one could infer some of the effects. These public incidence impact analyses are created using a different, more comprehensive data base than typical income tax revenue estimates. This is the data base used for biennial study of tax incidence. It accounts for shifting or indirect effects of taxes on business entities, effects on taxpayers who are not subject to income taxes (important for TCJA’s corporate changes), and so forth. As a result, preparation of these estimate is time and resource intensive, compared with just analyzing a proposal with the HITS microsimulation model. That, of course, is no excuse for failing to do more of them, just that it will require allocating budget resources to do so.

Final Note

Professor Monahan’s article focuses on the challenges created by major federal changes, like TCJA. They are rare events, occurring once a decade or less frequently, depending upon your characterization of “major.”  My general observation is that regular enactment of minor changes, such as extender legislation, almost always near the end of the calendar year and affecting that year, create equal or greater challenges for state tax systems, particularly static states which regularly are out of conformity when the filing season begins. The subject of the article is like the acute illness or accident (e.g., a broken leg) that happens only occasionally, while the congressional tax legislative process is like a constant chronic illness (e.g., ongoing arthritis) for a static state’s income tax. To me, the effects of chronic arthritis is more debilitating than the occasional broken leg. But that’s probably just me – the doctor who was constantly fielding complaints about the pain of arthritis.

This post has already gotten far too long. I may write a separate one that explores that issue and possible ways to deal with it. I worked on legislation to address it in my last few years at House Research.  Although there was interest in the proposal at DOR and it passed the House once, it came to naught largely because of opposition from MMB and lack of interest by the Senate.  I also have some thoughts on a more radical overall solution involving restructuring the individual income tax on business income for which I have not worked through the technical challenges (they may be insoluble) or thought through the politics.