Income, sin taxes highlight legislation’s revenue raisers
In announcing their omnibus tax proposal this week, House Democrats sounded like they were back on the campaign trail.
The bill is in one sense an expensive I.O.U. to last fall’s voters. House Democrats are proposing to raise about $2.6 billion in new taxes over the next two years through a permanent increase in the state’s income tax rate for top earners, a temporary income tax surcharge, the abolition of some corporate tax exemptions and an increase in taxes on cigarettes and alcohol. The money would help balance a projected $627 million budget deficit and fulfill two big campaign promises: Reduce property taxes across the state and pay back the debt owed to school districts.
“We told Minnesotans last year that the DFL would be on the side of the middle class. We told them we would balance our state books once and for all and in a responsible way, and we told them we would pay off the debt owed to schools and make needed investments in education and jobs and property tax relief,” House Speaker Paul Thissen said. “The bill we are talking about today is how we live up to those promises.”
The school shift repayment — noted as a top priority by Thissen — would be achieved by a temporary top-bracket income tax surcharge that would give Minnesota the third-highest top bracket in the U.S. for two years. But the proposal appears to have no support in Gov. Mark Dayton’s office or with Senate Democrats. In fact, Democrats in the upper chamber signaled last week a plan that would revamp the state’s sales tax by lowering the rate and extending it to some previously exempt services — an idea that go no lip service from House Democrats this week.
“We don’t believe the conversation about sales tax is ripe right now,” Thissen said. “That is not what we talked about on the campaign trail, and we think to do that kind of work we need to have that conversation with Minnesotans and we don’t think that’s happened.”
Republicans in the House held little back in their criticisms of the bill as it worked its way through the House Taxes Committee this week. The bill will reach its final stop in House Ways and Means by Friday. “This is a disturbing bill that is very concerning,” said GOP Rep. Pat Garofalo. “I think a lot of us had expectations that, with you guys in total control that there would be additional revenue, and there would be additional taxes on the wealthy and corporations, but never did we think it would be this large and this big.”
According to House Chairwoman Ann Lenczewski, it would be “irresponsible” for House Democrats to start spending in other budget areas before they come up with a plan to deal with the school shift. “We are really committed to [the school shift] because we are providing new spending initiatives,” she said, “and we have said we don’t want to do new spending initiatives until we pay back the debt and deal with the structural problems. For us to start spending in other areas without addressing that seems irresponsible.”
Income tax increases, by the numbers
The most significant money raised in the new tax bill comes from a pair of changes to the state’s income tax that would make Minnesota’s top bracket rate of 12.49 percent the third-highest state for income tax rate in the nation for two years, behind only California and New York.
First, Democrats proposed a permanent change to the state’s income tax modeled on the compromise crafted between President Barack Obama and House Speaker John Boehner in Washington. The proposal would raise the state’s income tax rate from 7.85 percent to 8.49 percent, hitting the top 1.1 percent of earners in Minnesota, or joint filers earning $400,000 or more and single filers earning $226,200 or more. That proposal would raise approximately $280 million over two years, considerably less than a similar income tax hike proposed by Dayton. Under Dayton’s plan, the income tax would increase by 2 percent for the top 2 percent of earners in the state, raising north of $1 billion in new revenue.
But for two years, that increase will be coupled with an additional 4 percent income tax surcharge on Minnesotans earning higher than $500,000 a year for joint filers and $250,000 for single filers. That temporary surcharge would raise more than $1.2 billion during tax years 2013 and 2014 and be used to pay off about $850 million remaining on the state’s remaining school shift. Lenczewski notes that the money would also be used to pay for a handful of other one-time tax changes, including an upfront capital equipment sales tax exemption that has been gummed up in the legislative process for years.
Thissen stressed that the temporary surcharge would blink off after the remaining school shift debt is repaid. At that point, the permanent 8.49 percent top bracket would give Minnesota the 12th-highest state rate in the U.S.
“It will blink off completely, as every other income surcharge in the history of this state has, in two years,” Thissen said. “Closing the deficit and paying back our schools is, in our view, the first order of business.”
Sin taxes play big role in House bill
Two major revenue raisers in the House tax bill didn’t come up much on the campaign trail.
Democrats in the House are proposing to raise taxes on wholesale alcohol and cigarettes to raise $789 million in new revenue. A $1.60-per-pack cigarette tax increase, a minimum tax on moist snuff and including “little cigars” under the cigarette tax will raise $434 million over two years, according to House Research.
A handful of alcohol tax increases would raise about $349 million for the biennium. The increase would amount to about 84 cents on a 12-pack of beer, 47 cents per bottle of wine, and $1.58 per bottle of liquor. The bill also includes a tax credit for small breweries and wineries, and a technical amendment to the bill will exempt microbreweries from any tax increases.
Thissen said these taxes will deter people from smoking and drinking, thus saving the state millions of dollars associated with related health care and public safety costs. But he added that none of the money raised by these taxes will be dedicated to programs to reduce smoking or drinking. Alcohol taxes haven’t been raised since 1987, and Lenczewski said an increase is long overdue.
A powerful lobbying contingent of Ward Einess, former revenue commissioner under Gov. Tim Pawlenty, and Minnesota Licensed Beverage Association lobbyist Joe Bagnoli pleaded to the House Tax Committee to drop the sin taxes in the bill. “It’s a very volatile, unreliable revenue source,” Einess said of tobacco taxes, adding that the change could send business over to neighboring states. “We will be surrounded by four states that have materially lower cigarette taxes if this tax is imposed.”
Bagnoli, in arguing against the alcohol tax increases, said the House Democrats are “imposing the most regressive tax to one industry… . This is an extremely regressive tax, by its very definition.”
Property taxes, Viking stadium and more
In addition to eliminating the school shift, DFL leaders highlighted the property tax relief in their omnibus tax bill, which they say totals about $250 million.
House Democrats achieve their property tax relief through the Homestead Credit Refund, a revamped renters’ credit, and increased aid to cities and counties. Cities will get about $80 million more in local government aid next year (per an amendment from DFL Rep. Jim Davnie to match the governor’s proposed funding) and $30 million more in county aid. The bill also includes an historic agreement between city associations on a new LGA funding formula that would increase the share of aid flowing to aging inner-ring metro suburbs.
The bill also includes state subsidies for three major expansion projects in the state — the Destination Medical Center in Rochester, 3M in Maplewood and Mall of America in Bloomington. A new provision came to light Tuesday that stemmed from secret negotiations between the state and Baxter Healthcare Corp., a Fortune 500 biopharmaceutical company interested in expanding its operation to Minnesota.
DFL Rep. Melissa Hortman, who lives in the Brooklyn Park district where the company wants to move, introduced a bill to provide a sales tax break on construction equipment and a $5 million loan to entice the company — whose identity was initially concealed from legislators and the public — to build in Minnesota. In committee Tuesday, Hortman touted the plan, which would bring a purported 200 jobs to her district.
But Garofalo criticized the timing, saying House Democrats were passing a bill to lure a major company into the state while proposing tax increase that would send other businesses out of the state.
The omnibus tax bill also proposes a solution to lagging revenues from the electronic pulltabs that were supposed to finance the state’s $348 million share of Vikings stadium construction costs. Lenczewski introduced a bill last week that would expand the sales tax to professional sports memorabilia and box and suite rentals at sports facilities to help make up for a shortfall. The Senate is carrying the same provisions in a tax reform proposal.
House omnibus tax bill
(All numbers reflect projected 2014-15 revenue hikes, rounded to nearest million; parentheses indicate spending or loss of revenue)
TOTAL NEW REVENUE
INDIVIDUAL INCOME TAX
$282M 4th tier (8.49% starting at $400k/yr, joint filers; $226/yr, single filers)
$1.23B Temporary 4% surcharge (incomes over $500k/yr)
$44M Charitable contributions deduction changed to credit
CORPORATE FRANCHISE TAX
$44M Foreign operating corporations repeal
$66M Foreign royalties reduction (from 80% to 50%)
$46M “Definition of Minnesota sales”*
$84M Make R&D credit non-refundable
$37M Tax havens
($140M) Capital equipment sales taxexemption
$316M Net business taxes increase
$10M Solicitor nexus (so-called “Amazon tax”)
$15M Car rental tax increase (from 6.2% to 9.2%)
$16M Pro sports memorabilia (Vikings stadium funding)
$5M Pro sports suite rentals (Vikings stadium funding)
($157M) Homeowner property tax refund changes
($58M) Local government aid (LGA) changes
($29M) County program aid (CPA) changes
$434M Cigarettes/tobacco ($1.60 per pack increase, moist snuff and “little cigar” provisions)
$349M Alcohol (increases of .84/12-pack of beer; .47/bottle of wine; $1.58/bottle of liquor)
$42M Mineral taxes (taconite, frac sand)
$78M Estate tax
(Source: 2013 House omnibus tax bill spreadsheet)
* This provision would extend the reach of Minnesota sales taxes on goods sold by affiliates outside the state.