Senate tax bill sets up showdown

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The final budget dance has begun.

On Tuesday, Senate DFLers unveiled their tax bill, including revenue hikes of $1.9 billion, putting in place the final piece for budget deliberations at the Capitol in the coming weeks.

The Senate, House, and Gov. Mark Dayton all seek to spend in the vicinity of $38 billion, but they get there through widely divergent tax schemes. The differences between the Senate and House plans are particularly stark.

The Senate proposes boosting the state’s current top tax rate from 7.9 to 9.4 percent. That would hit single filers with taxable income above $80,000 and married filers with taxable income above $140,000 — or roughly 7 percent of state residents.

House Majority Leader Erin Murphy suggested that the Senate’s broader increase in income taxes goes too far. “The House has been pretty clear,” Murphy said. “And I think there probably isn’t a lot of support inside the caucus for what we’re hearing out of the Senate. But there is a lot of work left to do in the month ahead of us.”

By contrast, House DFLers limit their income tax hikes to just the state’s wealthiest 1 percent of earners. They would add a new top tier rate of 8.49 percent. But the House bill would also impose a temporary 4 percent surcharge on incomes over $500,000. While it was in effect, that move would give the state the third-highest income tax rate in the country.

Sen. Rod Skoe, DFL-Clearbrook, chair of the Taxes Committee, expressed concern about that distinction, even on a temporary basis. “I’m a little nervous about the rate that the surcharge is being imposed at,” Skoe said. “I’m not opposed to a blink-off mechanism if the state’s fiscal house is in order and things are paid back as they need to be. But we tend to look for more stable revenue sources.”

Split on sales tax

Senate DFLers also proposed a significant overhaul of the state’s sales tax system. They want to lower the rate from 6.875 to 6 percent, but apply the tax much more broadly. Under the Senate plan, clothing, car repairs and many other personal services (such as haircuts and tattoos) would be newly taxed. Applying the tax to car repairs, for instance, would raise $278 million in the next biennium.

To balance the broader sales tax base, the Senate plan also proposes exempting local units of government from paying the tax, at a cost of $200 million to the state in the next biennium. In addition, businesses would receive an upfront sales tax exemption on capital investments, as opposed to having to seek a refund, as under current law. Overall the Senate sales tax plan would generate about $90 million in additional revenues for the next two-year budget cycle.

“It does bring the rate down on everything else that we currently pay sales tax on,” said Sen. Ann Rest, DFL-New Hope, chair of the Tax Reform Division. “So I think, on balance, lowering the rate and broadening the base is just sound policy.”

Indeed, Senate DFLers generally earn plaudits from nonpartisan tax analysts for attempting to make systemic changes to the tax code that could reduce volatility in future years.

“Generally speaking, the Senate ideas that they’re trying to build off of score quite well with respect to principles of good tax policy,” said Mark Haveman, executive director of the nonpartisan Minnesota Center for Fiscal Excellence (formerly the Minnesota Taxpayers Association).

But changes to the sales tax system aren’t included in the budget plans currently supported by Dayton or House DFLers. Of course, Dayton initially rolled out a budget plan that included an ambitious overhaul of the state’s tax system. But after noisy opposition from business interests — particularly over the governor’s plan to tax business-to-business services — Dayton backed down. Since then he’s voiced reluctance to even consider an expansion of the sales tax.

Senate DFLers largely follow the governor and House’s lead on tobacco taxes. They propose a 98-cent-per-pack hike on cigarettes, with total new revenues of $360 million. That’s almost $50 million more than the governor’s proposal, but $75 million less than the House’s plan.

House DFLers, however, are on their own in supporting a hike in alcohol taxes. Their budget proposes $350 million in new taxes — or roughly 50 cents per bottle of wine. It would mark the first increase in alcohol taxes in more than two decades.

Altogether the Senate looks to raise $1.9 billion in additional taxes. That’s slightly more than the governor’s revenue target, but about $700 million behind the House’s plan.

Not coincidentally, that’s almost the exact sum needed to pay back the remaining K-12 schools shift. That was a key campaign promise for House DFLers, and they remain committed to meeting it — despite the fact that many school districts aren’t exactly clamoring to have that money immediately paid back.

GOP, business groups blast plans

Republicans were, not surprisingly, unimpressed with the Senate proposal. “I think this is a shameful bill,” said Senate Minority Leader David Hann. “This is a budget that the people of Minnesota, the hardworking taxpayers of Minnesota, cannot afford.”

The DFL budget plans are unlikely to do much to assuage business interests. Earlier this month, United for Jobs — a coalition of business groups that includes the Minnesota Business Partnership and the Minnesota Chamber of Commerce — began running ads attacking Dayton and DFL lawmakers for their purportedly spendthrift ways.

If anything, the Senate bill is likely to exacerbate those tensions. In addition to the sales tax extension, it raises revenues from the statewide business property tax by $170 million. The Senate bill also captures $190 million in tax revenues from Minnesota-based companies that do significant business oversees. That’s about $125 million more than the House relies on from such revenues.

Haveman, of the Minnesota Center for Fiscal Excellence, also cautions that none of the proposed DFL budgets seem very concerned with another hallmark of sound tax policy — competitiveness. “That’s also a good tax principle that deserves consideration,” Haveman said. “Some amount of revenue increase is a mortal lock.”

The Senate bill passed out of the Taxes Committee on Wednesday morning. The House taxes bill was being debated on the floor as this story went to press. That means the competing proposals are likely headed to a conference committee next week.

Although the Senate is on its own in seeking a significant overhaul of the state’s sales tax system, Skoe thinks they have a solid chance of getting such a proposal into the final tax bill. “Many times one of the three branches will bring the item to conference committee for discussion and prevail,” Skoe said. “We’re going to see if we [can] convince the governor and the House of the merits of our sales tax provisions.”