Minnesota Legislature Debates Tax Changes
Minnesota's House and Senate Tax Committees are currently debating changes to the state's tax conformity with federal laws. The outcome could directly affect tax filing obligations and financial planning for new contractors and small businesses in the state.
A key focus of the debate is the Pass-Through Entity (PTE) tax, which expired at the end of 2025. There is strong bipartisan support to extend this provision, which allows partnerships and S-corporations to be taxed at the entity level, saving business owners an estimated $400 million in federal taxes at no cost to the state. The House Tax Committee is scheduled to hold a hearing on the extension bill, HF 3127, on March 3. Lawmakers are also weighing conformity with the federal "One Big Beautiful Bill Act," which includes several major changes. Since Minnesota's tax code is currently aligned with the Internal Revenue Code as of May 1, 2023, these federal changes are not automatic and require legislative action. The decision to adopt or reject federal provisions involves balancing tax filing simplification against the potential impact on state revenue. Significant debate surrounds provisions that would eliminate state income tax on overtime and tip income, mirroring federal changes. Adopting these measures would reduce state revenue by a combined $492 million for the 2026-27 biennium, a figure that concerns DFL Senate Majority Leader Erin Murphy, while Republican House Speaker Lisa Demuth has promoted conformity as a way to improve affordability for Minnesotans. Another major financial consideration is whether to conform to the federal reversal of a Tax Cuts and Jobs Act (TCJA) provision regarding Research and Experimental (R&E) expenditures. Reinstating the ability for businesses to fully expense these costs in one year, a 60-year precedent, would come with an estimated $592 million price tag for the state in the current biennium. The backdrop for these discussions is a newly enlarged state budget surplus. Minnesota Management and Budget announced in its February forecast that the surplus for the current 2026-27 biennium has grown to $3.7 billion. For construction trades specifically, recent changes to worker classification laws are already in effect. As of March 1, 2025, a new, more stringent 14-factor test is used to determine if a worker is an independent contractor. Misclassifying an employee as an independent contractor can result in penalties of up to $10,000 for each violation.
