Phasing Out the Individual Income Tax in Minnesota
Author: JT Thompson
Bill Type: Tax Reform / Economic Competitiveness
EXECUTIVE SUMMARY
This proposal establishes a phased, fiscally responsible plan to eliminate Minnesota’s individual income tax over a ten-year period. The plan modernizes Minnesota’s tax structure by shifting from taxing work and income toward consumption-based revenue, while protecting essential public services, preserving Minnesota’s credit rating, and providing targeted relief to low- and middle-income households.
POLICY OBJECTIVES
- Improve Minnesota’s economic competitiveness and workforce retention
- Encourage job creation, entrepreneurship, and in-migration
- Reduce tax volatility during economic downturns
- Maintain stable funding for education, infrastructure, and public safety
- Ensure fairness and protections for lower-income Minnesotans
KEY PROVISIONS
1. Phased Income Tax Reduction
- Gradual reduction of individual income tax rates over 10 years
- Immediate elimination of the lowest income tax bracket
- Annual rate reductions for middle and upper brackets
- Final elimination contingent on revenue and economic triggers
2. Revenue Replacement Strategy
- Broaden the sales tax base to include selected services and digital goods
- Maintain exemptions for groceries, rent, and basic necessities
- Modest, phased sales tax rate adjustment (if needed)
- Expanded excise taxes on luxury goods and select discretionary items
3. Fiscal Safeguards
- Automatic pause in tax reductions during economic downturns
- Cap annual state spending growth at inflation plus population growth
- Sunset review of tax credits and exemptions
- Preservation of Minnesota’s bond rating
4. Taxpayer Protections
- Expanded refundable credits to offset sales tax impacts
- Increased property tax refunds for low- and middle-income households
- Transitional rebates during implementation period
5. Business & Economic Growth Measures
- Alignment with corporate tax reforms to encourage investment
- Simplified tax compliance for small and pass-through businesses
- Workforce development and licensing reform incentives
6. Long-Term Safeguards
- Statutory or constitutional protection preventing reinstatement of the individual income tax without supermajority approval and voter consent
- Revenue neutrality requirement for future statewide tax changes
FISCAL IMPACT
- Revenue neutral over the full implementation period
- Initial impacts offset through base broadening and controlled spending growth
- Long-term growth expected to expand overall tax base
(Fiscal note to be prepared by Minnesota Department of Revenue)
ECONOMIC IMPACT
- Increased household disposable income
- Improved regional competitiveness with no-income-tax states
- Enhanced attractiveness to remote workers, retirees, and small businesses
IMPLEMENTATION TIMELINE (SUMMARY)
- Years 1–3: Eliminate lowest bracket; increase deductions and credits
- Years 4–6: Reduce middle brackets; broaden sales tax base
- Years 7–10: Phase out top rate; eliminate individual income tax
CONCLUSION
This proposal delivers responsible tax reform that strengthens Minnesota’s economy, protects public services, and rewards work—without risking fiscal instability. By phasing out the individual income tax and modernizing revenue sources, Minnesota can secure long-term growth while maintaining its commitment to fairness and opportunity.