Tax conferees face big challenges

House, Senate bills feature little common ground

If it’s springtime, then that must be the omnibus taxes conference committee holding court in Room 15 of the state Capitol. And if the many discrepancies between the House and Senate versions are any guide, conferees are likely to find themselves spending a lot of quality time together before they reach any agreement on a conference report.

The two bills are long on prime election-year issues like tax relief for businesses and families. One of the core facets of both is a phase-out of the statewide tax on business property. But House Taxes Chairman Greg Davids, R-Preston, noted that the two chambers differ markedly on how to come up with the money to make that happen.

“We just took very different approaches,” Davids said. “We came up with our best ideas. The Senate believes they came up with their best ideas. They took a different approach. That’s what conference committees are for.”

The conferees were scheduled to hold their first hearing Wednesday evening after press time to review the contents of both bills.

The tax packages passed the House and Senate on party-line votes. Neither chamber appointed any DFLers to serve on the conference committee. Rep. Ann Lenczewski, DFL-Bloomington, the DFL lead on the House Taxes Committee, assailed the House bill and said the business property tax provisions would have little impact on job creation.

“It’s a purely political bill,” Lenczewski said. “They’re looking at their base of support for campaigning, and they know perfectly well the governor won’t sign it.”

Business property tax differences

The Senate bill, which passed Friday night, would freeze the business property tax until 2016 and then phase it out over 10 years. Another key feature of the Senate bill, which isn’t a part of the House bill, is eliminating the so-called marriage penalty.

The House bill, which passed on March 21, freezes the statewide business property tax for one year at a cost of $56 million. It then phases out the tax over a period of 12 years starting in 2014.

The House is proposing to pay for the short-run costs by cutting the renter’s property tax refund program by $70 million in 2013 and $158 million in the 2014-15 biennium.

Davids said the renter’s credit is currently too rich, calling it a “renter’s credit on steroids.” He said the credit should be in the neighborhood of 14 percent. It’s currently at 17 percent.

“It begs the question, why are we calling this a renter’s credit rather than just a wealth transfer mechanism if it’s going to be more than what the actual property tax of rent is?” Davids said.

Senate Taxes Chairwoman Julianne Ortman, R-Chanhassen, cautioned against making cuts to the renter’s credit in light of cuts to the program enacted in last year’s budget agreement.

“You want to minimize the impact” from renter’s credit reductions, Ortman said. “When you’re talking about the folks that do receive that, it has such a huge impact in their lives when you make that change. So then you want to be extra careful.”

Senate bill would tap budget reserves

Instead, Ortman’s bill directs the Minnesota Management & Budget department to make cuts. If they fall short of finding the money, the bill authorizes the use of dollars from the state’s recently replenished budget reserve account. She said state officials should not need the Legislature to set spending priorities and find the cuts to pay for the proposal.

“I really resent that we have to introduce a bill and get a fiscal note in order to get the state government and its bureaucrats to save in the budget on behalf of the residents. I resent that,” Ortman said.

For his part, Davids said his leadership didn’t authorize him to advance a bill that uses reserves.

The House bill, unlike its Senate counterpart, also excludes from the business property tax 70 percent of the first $150,000 of value on commercial property.

That exemption reflects a difference in tax philosophy and underlying political pressures between the two legislative chambers. The House approach, which Davids is touting as a benefit to small and large businesses alike, is especially popular in greater Minnesota. For businesses in rural Minnesota, where property values are lower, the proposal could knock off half to two-thirds of some firms’ property tax bills. Urban areas would still get the same tax break in actual dollar terms, he noted.

“That’s going to help our main street businesses so much,” Davids said. “It’s every business in the state. It doesn’t matter if it’s Big Bob’s Café in Spring Valley or Medtronic. It’s treated the same.”

Ortman — who, unlike Davids, represents a suburban area — noted that the proposal doesn’t have the same effect throughout the state.

“It adds another level of complexity,” she said, “and I think it only applies in certain areas. Generally speaking, those aren’t good policy changes, from my point of view, but I certainly understand why [Davids] is trying to build support in his caucus. He’s got a bigger challenge with twice as many members.”

The House and Senate have an easier time agreeing on property tax relief for individuals. Both bills increase the targeted refund for homeowners who experience large property tax increases. The current refund for homeowners is 60 percent of the increase in taxes. The bills refund 90 percent when there is either a $100 increase or at a least 12 percent increase, whichever is greater.

Differences over FOCs, more

One point of contention between the House and Senate concerns foreign operating corporations (FOC). The current law gives a sizeable income tax break to qualifying companies on their foreign earnings. Over the years, the Gov. Rudy Perpich-era law has inspired conflicting accusations, with critics decrying them as tax shelters and business groups supporting them as a perk to help Minnesota companies compete against large multinational firms. The FOCs have come under fire for offering tax breaks to companies with few physical ties to Minnesota.

Davids is proposing to eliminate the traditional FOC tax breaks and instead give a similar tax break to companies based on the amount of state property tax they pay. That would remove firms with FOCs that don’t have property in the state. At the same time, the bill increases the state research and development tax credit.

“The money is being used for research and development, which our businesses are very excited about,” Davids said. “With the FOCs, we’re not changing foreign royalties, but we do change the FOC program so that if you do have bricks and mortar in the state, you can get the real estate credit up to the amount you would have received in FOCs.”

Tom Hesse, vice president for the Minnesota Chamber of Commerce, said the statewide business group is neutral on the House FOC proposal.

“We still think there is value in the FOC structure,” Hesse said. “The tax policy is still valid today. We want to treat corporations similarly no matter where they have their foreign operations incorporated.”

The Senate will need some convincing if they’re to agree to the FOC provision in conference committee.

“Those provisions in the corporate income tax are already complicated enough without adding another layer of complexity,” Ortman said. “I am not supportive. [The Senate Taxes Committee] has not been supportive. But in fairness to Rep. Davids, we have not heard them, either. In this conference committee we may have every opportunity to hear what they are thinking, and we’ll keep an open mind.”

One item that’s not included in either tax bill is the issue of collecting sales taxes on online purchases. Gov. Mark Dayton and a number of business groups have supported the so-called Amazon tax that would require online retailers with brick-and-mortar affiliates in Minnesota to collect sales tax. The move, which is controversial among anti-tax conservatives, would raise nearly $4 million in 2013. Although it’s not in his bill, Davids said he favors enacting the affiliate nexus legislation.

“This is not a tax increase,” he said. “It’s collecting an existing tax. That would be very beneficial to major retailers such as Best Buy and Target, and I think we should proceed forward with it.”

Ortman said that the issue is a matter of interstate commerce and that federal lawmakers should enact a nationwide policy.

“It definitely is Congress’ place to act and not ours,” Ortman said.