Pawlenty: No New Taxes?

I’ve generally been a supporter of Tim Pawlenty. This one kinda stinks though. This one can’t be called a fee, it’s clearly a tax, no way around that one. Perhaps they’ll call it an Old Tax since its on old money? Or maybe they can call it a Re-Clarification of a tax?

Governor Pawlenty recently signed New legislation regarding taxes on deferred compensation. Prior to this legislation the state taxed deferred compensation when it was paid. If you worked in Minnesota in 2005 you’d pay taxes to the State of Minnesota on the wages that you earned and were paid in that year. If as part of your pay you were also promised some stock options by your company and told that you could collect on that promise at some point in the future you might well decide to wait until after you retire to hold them to that promise. This way you’ll have that little bit of income for retirement and you may pay lower taxes as well since your overall income will likely be lower.

If you chose to move to a retirement community in another state you got an extra benefit. Under current law you’re responsible to pay taxes on this income when it is paid to you and to the state you currently reside when it’s paid. If you’d retired to any of the multitude of states with lower taxes than Minnesota you gained some benefit in lower taxes. If you retired to one of the states like Florida who have NO state income tax you got a big benefit in that, like other residents of Florida, you didn’t have to pay any income tax on this income.

This new Minnesota tax law changes this. This new law says that regardless of when you collect on that promise of stock options or where you live at the time, that if you were working in Minnesota when that promise was made then you have to pay taxes on it to Minnesota. Other than that I don’t like high taxes nor new taxes, this is legal and legit.

This isn’t just a new law going forward though, this new law says that it’s retroactive. They’re saying that if you were promised some stock options in 1980 when you worked for Dayton’s (remember them?) and you now live in Florida or Paris or London or anywhere, and you collect on that promise - you have to pay taxes back to Minnesota.

There are some practical problems relative to Pawlenty’s New Tax. First is that some corporations who made and keep these promises will be required by the State of Minnesota to withhold taxes correctly according to the new law. Besides considerable confusion over a number of state mandates on this regarding what constitutes having worked in Minnesota and similar issues, many companies will also have to spend considerable money and effort to revamp payroll systems to figure out when to or not withhold tax on someone who may not have even worked for the company for 2 decades.

The second problem is for the retirees. Many made decisions 5, 10, or 20 years ago based on the tax laws in place when they earned their income and when they were made promises by their employers. Many of these may face financial problems having to pay higher taxes than they’d expected. They expected to pay a certain amount of tax based on the laws in place when they earned their money. Now some may find themselves loosing homes or having to make other lifestyle changes because of this.

It’s one thing for the Pawlenty to go back on his No New Taxes pledge and add a new tax for future earnings. That’s bad enough. But for him to add a new tax retroactive to past earnings is slimy.

Even though it seems to me like it would be unconstitutional to place a new tax on old earnings retroactively, I assume that Pawlenty’s folks researched that before passing this to avoid the embarrassment of facing a constitutional challenge. Things are getting smelly.