1.1                          A bill for an act 
  1.2             relating to taxation; requiring the state to make a 
  1.3             cash investment for each child in the state as an 
  1.4             alternative to tax credits; restricting the use of the 
  1.5             amount invested; providing a subtraction from federal 
  1.6             taxable income of earnings on the investment; 
  1.7             appropriating money; amending Minnesota Statutes 1997 
  1.8             Supplement, section 290.01, subdivision 19b; proposing 
  1.9             coding for new law in Minnesota Statutes, chapter 119A.
  1.10  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.11     Section 1.  [119A.38] [STATE INVESTMENT IN CHILDREN.] 
  1.12     Subdivision 1.  [DEFINITIONS.] (a) As used in this section, 
  1.13  the terms defined in this subdivision have the meanings given 
  1.14  them. 
  1.15     (b) "Eligible educational institution" means: 
  1.16     (1) an institution described in United States Code, title 
  1.17  20, section 1088(a)(1) or section 1141(a); and 
  1.18     (2) an area vocational education school as defined in 
  1.19  United States Code, title 20, section 2471(4)(C) or (D). 
  1.20     (c) "Financial institution" means an office of a bank, 
  1.21  trust company, savings bank, savings association, or credit 
  1.22  union. 
  1.23     (d) "Post-secondary educational expenses" means: 
  1.24     (1) tuition and fees required for the enrollment or 
  1.25  attendance of a student at an eligible educational institution; 
  1.26  and 
  1.27     (2) fees, books, supplies, and equipment required for 
  2.1   courses of instruction at an eligible educational institution. 
  2.2      Subd. 2.  [DEPOSIT AT BIRTH.] Upon receipt of notification 
  2.3   of the birth of a child in the state of Minnesota, the 
  2.4   commissioner of children, families, and learning must deposit 
  2.5   $1,000 in a trust account established for that child. 
  2.6      Subd. 3.  [LATER DEPOSITS.] When any child reaches the ages 
  2.7   of five or ten while a Minnesota resident, the commissioner of 
  2.8   children, families, and learning must deposit $500 in a trust 
  2.9   account established for that child.  If a child is eligible for 
  2.10  more than one deposit under this subdivision and subdivision 1, 
  2.11  the deposits must be made into a single account. 
  2.12     Subd. 4.  [ADMINISTRATION.] The commissioner of children, 
  2.13  families, and learning shall enter into a contract with one or 
  2.14  more financial institutions to maintain the accounts created 
  2.15  under this section, selecting financial institutions that will 
  2.16  provide the highest rate of return on the accounts consistent 
  2.17  with safeguarding the assets. 
  2.18     Subd. 5.  [PERMISSIBLE USES.] Money in the accounts may be 
  2.19  withdrawn only by the individual for whom the account was 
  2.20  created, referred to in this section as "the beneficiary."  The 
  2.21  terms of the account must provide that the financial institution 
  2.22  will permit withdrawal only for the following purposes: 
  2.23     (1) for a beneficiary who is at least 18 years of age, in 
  2.24  order to pay for post-secondary educational expenses; 
  2.25     (2) for a beneficiary who is at least 65 years of age, or 
  2.26  who is totally and permanently disabled to an extent that 
  2.27  precludes the beneficiary from being employed, to be used for 
  2.28  living expenses; 
  2.29     (3) to pay costs incurred for the purchase of the 
  2.30  beneficiary's first principal residence; or 
  2.31     (4) to pay for health care costs incurred by the 
  2.32  beneficiary. 
  2.33     Subd. 6.  [CONDITIONS OF FORFEITURE.] If the beneficiary 
  2.34  dies or ceases to be a resident of Minnesota, the money 
  2.35  remaining in the account forfeits to the state. 
  2.36     Subd. 7.  [APPROPRIATION.] The amount sufficient to pay the 
  3.1   costs of the program established in this section is annually 
  3.2   appropriated from the general fund to the commissioner of 
  3.3   children, families, and learning. 
  3.4      Sec. 2.  Minnesota Statutes 1997 Supplement, section 
  3.5   290.01, subdivision 19b, is amended to read: 
  3.6      Subd. 19b.  [SUBTRACTIONS FROM FEDERAL TAXABLE INCOME.] For 
  3.7   individuals, estates, and trusts, there shall be subtracted from 
  3.8   federal taxable income: 
  3.9      (1) interest income on obligations of any authority, 
  3.10  commission, or instrumentality of the United States to the 
  3.11  extent includable in taxable income for federal income tax 
  3.12  purposes but exempt from state income tax under the laws of the 
  3.13  United States; 
  3.14     (2) if included in federal taxable income, the amount of 
  3.15  any overpayment of income tax to Minnesota or to any other 
  3.16  state, for any previous taxable year, whether the amount is 
  3.17  received as a refund or as a credit to another taxable year's 
  3.18  income tax liability; 
  3.19     (3) the amount paid to others, less the credit allowed 
  3.20  under section 290.0674, not to exceed $1,625 for each dependent 
  3.21  in grades kindergarten to 6 and $2,500 for each dependent in 
  3.22  grades 7 to 12, for tuition, textbooks, and transportation of 
  3.23  each dependent in attending an elementary or secondary school 
  3.24  situated in Minnesota, North Dakota, South Dakota, Iowa, or 
  3.25  Wisconsin, wherein a resident of this state may legally fulfill 
  3.26  the state's compulsory attendance laws, which is not operated 
  3.27  for profit, and which adheres to the provisions of the Civil 
  3.28  Rights Act of 1964 and chapter 363.  For the purposes of this 
  3.29  clause, "tuition" includes fees or tuition as defined in section 
  3.30  290.0674, subdivision 1, clause (1).  As used in this clause, 
  3.31  "textbooks" includes books and other instructional materials and 
  3.32  equipment used in elementary and secondary schools in teaching 
  3.33  only those subjects legally and commonly taught in public 
  3.34  elementary and secondary schools in this state.  Equipment 
  3.35  expenses qualifying for deduction includes expenses as defined 
  3.36  and limited in section 290.0674, subdivision 1, clause (3).  
  4.1   "Textbooks" does not include instructional books and materials 
  4.2   used in the teaching of religious tenets, doctrines, or worship, 
  4.3   the purpose of which is to instill such tenets, doctrines, or 
  4.4   worship, nor does it include books or materials for, or 
  4.5   transportation to, extracurricular activities including sporting 
  4.6   events, musical or dramatic events, speech activities, driver's 
  4.7   education, or similar programs; 
  4.8      (4) to the extent included in federal taxable income, 
  4.9   distributions from a qualified governmental pension plan, an 
  4.10  individual retirement account, simplified employee pension, or 
  4.11  qualified plan covering a self-employed person that represent a 
  4.12  return of contributions that were included in Minnesota gross 
  4.13  income in the taxable year for which the contributions were made 
  4.14  but were deducted or were not included in the computation of 
  4.15  federal adjusted gross income.  The distribution shall be 
  4.16  allocated first to return of contributions until the 
  4.17  contributions included in Minnesota gross income have been 
  4.18  exhausted.  This subtraction applies only to contributions made 
  4.19  in a taxable year prior to 1985; 
  4.20     (5) income as provided under section 290.0802; 
  4.21     (6) the amount of unrecovered accelerated cost recovery 
  4.22  system deductions allowed under subdivision 19g; 
  4.23     (7) to the extent included in federal adjusted gross 
  4.24  income, income realized on disposition of property exempt from 
  4.25  tax under section 290.491; 
  4.26     (8) to the extent not deducted in determining federal 
  4.27  taxable income, the amount paid for health insurance of 
  4.28  self-employed individuals as determined under section 162(l) of 
  4.29  the Internal Revenue Code, except that the 25 percent limit does 
  4.30  not apply.  If the taxpayer deducted insurance payments under 
  4.31  section 213 of the Internal Revenue Code of 1986, the 
  4.32  subtraction under this clause must be reduced by the lesser of: 
  4.33     (i) the total itemized deductions allowed under section 
  4.34  63(d) of the Internal Revenue Code, less state, local, and 
  4.35  foreign income taxes deductible under section 164 of the 
  4.36  Internal Revenue Code and the standard deduction under section 
  5.1   63(c) of the Internal Revenue Code; or 
  5.2      (ii) the lesser of (A) the amount of insurance qualifying 
  5.3   as "medical care" under section 213(d) of the Internal Revenue 
  5.4   Code to the extent not deducted under section 162(1) of the 
  5.5   Internal Revenue Code or excluded from income or (B) the total 
  5.6   amount deductible for medical care under section 213(a); 
  5.7      (9) the exemption amount allowed under Laws 1995, chapter 
  5.8   255, article 3, section 2, subdivision 3; 
  5.9      (10) to the extent included in federal taxable income, 
  5.10  postservice benefits for youth community service under section 
  5.11  121.707 for volunteer service under United States Code, title 
  5.12  42, section 5011(d), as amended; ~~and~~ 
  5.13     (11) the amount of income or gain included in federal 
  5.14  taxable income under section 1366 of the Internal Revenue Code 
  5.15  flowing from a corporation that has a valid election in effect 
  5.16  for the taxable year under section 1362 of the Internal Revenue 
  5.17  Code which is not allowed to be an "S" corporation under section 
  5.18  290.9725; and 
  5.19     (12) the amount earned during the calendar year as 
  5.20  interest, dividends, or other earnings on a children's 
  5.21  investment account as provided in section 1. 
  5.22     Sec. 3.  [EFFECTIVE DATE.] 
  5.23     Section 1 is effective for deposits to be made for children 
  5.24  who are born or attain the ages of five or ten years after 
  5.25  December 31, 1998.  Section 2 is effective for taxable years 
  5.26  beginning after December 31, 1998.