Federal Affordable Care Act to Impact Minnesota Tax System

Minnesota is projected to see tax revenues increase by $48.2 million from fiscal years 2011 through 2015 under the provisions of the federal Affordable Care Act.
(Published Jul 25, 2012)

The federal Affordable Care Act will have a significant impact on the Minnesota tax system and state revenues because the 2011 Minnesota Legislature enacted conforming changes in the Minnesota tax code. The ACA redefines federal taxable income which, in turn, affects computation of Minnesota individual income tax and corporate franchise tax bases. In addition, the ACA will result in changes in behavior of individuals and businesses that will have an impact on state tax revenues.

The House Taxes Committee convened on July 23 to discuss the taxation issues related to the ACA.

The committee heard a presentation on the impact of the ACA provided by staff from the House Research Department and the House of Representatives Fiscal Staff and based on information compiled from the Congressional Joint Committee on Taxes, the Congressional Budget Office, and the Minnesota Department of Revenue.

Overall, the state is expected to cumulatively net about $48.2 million in additional revenues for the years 2010 through 2015 due to our state’s conformity to the federal definition of taxable income and due to behavioral changes of Minnesotans in response to the ACA.

The major Minnesota impacts are due to several factors, and the fiscal estimates depend upon the implementation dates for various provisions of the ACA. For example, the increase in the threshold on itemized deduction for medical expenses is expected to increase Minnesota general fund revenues by $16.2 million in fiscal years 2014 and 2015. The changes to health pre-tax accounts that will disallow reimbursement for over-the-counter medicines unless prescribed by a doctor is expected to increase state revenues by $14.4 million for fiscal years 2011 through 2015.

The ACA also decreases the maximum amount allowed to be set aside under flexible spending accounts in plans funded by salary reductions to $2,500 (which is then indexed annually), which will increase state revenues by an estimated $27.8 million in fiscal years 2013 through 2015.

Not all of the impacts are positive for the state budget. The Minnesota tax conformity to the extension of health care coverage for adult children through age 26 is estimated to cumulatively reduce state revenues by $21.5 million for fiscal years 2011 through 2015. This is due to the fact that without the state’s conformity on this benefit, employers would have had to compute and report a taxable value for those benefits to persons with children receiving the health care benefit and, therefore, would have otherwise had to pay additional Minnesota income taxes.

View the full House Research presentation on the ACA (pdf)

Read the current issue of the Cities Bulletin