House debates tax conformity bill as filing deadline looms

The Minnesota House is scheduled to debate a bill Thursday that would realign state tax policy so that it conforms with federal tax law.

Although "federal tax conformity" might sound like a dry subject to some, it's an issue that touches hundreds of thousands of Minnesotans. Unless the state makes the change it could leave some people facing tax bills in the tens of thousands of dollars.

Among those carefully watching negotiations over the tax bill is Karri Hansen. Hansen and her husband were forced to declare bankruptcy in 2011 as a result of the recession. Her husband's construction-related business lost significant income at that time.

Throughout the process, the couple had to restructure their finances and sell their home in a west Twin Cities suburb for less than they owed on it. In 2013, the bank forgave the $143,000 difference, which the federal government does not consider taxable income. However, Minnesota does. Hansen says the difference would result in a higher tax bill of up to $20,000.

"Anybody who has had to short sale their home is not going to have the money to pay state taxes on actual money that they never received even though the state counts it as income," Hansen said.

Since December, Hansen has been urging legislators to pass a bill that would conform the state's tax code to the federal code. She said she's caught in a waiting game — waiting to see whether the Legislature changes the law before the April 15 tax deadline.

"It's extremely nerve wracking because we're just getting back on our feet, and at age 60 we don't have 20 or 30 years to recoup that kind of money," she said.

Hansen is just one of many taxpayers who would benefit from a federal tax conformity bill. Married couples, students with tuition expenses and hundreds of thousands of others would see tax breaks ranging from a few dollars to thousands. The delay is also causing headaches for certified public accountants who are urging the House and Senate to act quickly.

"March 14 would be great," said Todd Koch, a CPA at John A. Knutson and Company in Falcon Heights. "March 13 would be even better. Sooner is better than later."

Koch is telling some tax filers to wait to file their state taxes. He said the uncertainty is troubling some of his clients.

"If we know what's going to happen, we can at least prepare people and relieve the stress," he said.

The wait could be frustrating for some taxpayers. Legislators disagree over how quickly they should act.

The House is poised to pass a $517 million tax bill that repeals several business taxes and links the state tax code to the federal code.

State Rep. Ann Lenczewski, chair of the House Tax Committee, wants the bill passed and signed by the governor by mid-March to help taxpayers who are in the process of filing their returns.

"It makes us just line up with the tax code federally so people have certainty, they have trust in the tax system," said Lenczewski, DFL-Bloomington. "They see it as credible and they're not just pulling their hair out, trying to figure out 'Why did I get a tax cut when I filled out the federal form but had to add back that tax cut I got but I really didn't get it.'"

House Democrats pushed to include federal tax conformity in last year's budget but dropped it after facing resistance from Governor Dayton and Senate Democrats.

Dayton, who is joining the push for conformity, said the recently projected $1.2 billion budget surplus means there's enough money for the state to do it. Dayton is calling on lawmakers to send him a tax bill by March 14.

But Senate Democrats aren't operating with the same urgency.

Senate Tax Committee Chair Rod Skoe said a bill that deals with conformity will be introduced in the Senate today. He said the mortgage issue and other measures will be included.

But Skoe is also being cautious when it comes to cutting taxes when it will cost the state budget hundreds of millions of dollars.

"We went through a stage under [Gov.] Jesse Ventura where we had 'Jesse checks' and other tax cuts and we immediately went into deficit," said Skoe, DFL-Clearbrook. "And we are going to make sure that doesn't happen again."

Skoe said the Senate's priority is to increase the budget reserve to help when the state faces another deficit.

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Editor's note: This story has been updated to correctly the reflect the amount of taxes the Hansen's would owe the state of Minnesota.