House passes tax bill with $2.1 billion in increased revenues

Taxes Chairwoman Ann Lenczewski (Staff photo: Peter Bartz-Gallagher)

The House passed a tax bill that includes just over $2 billion in tax increases by a 69-65 vote early Monday morning. The legislation, which now heads to the Senate, is the linchpin of the budget deal needed to conclude the legislative session.

The tax bill fulfills Gov. Mark Dayton’s signature promise of raising taxes on the state’s wealthiest residents. It creates a new fourth-tier income tax rate of 9.85 percent, 2 percentage points higher than the current top rate. Couples who make more than $250,000 in taxable income and individuals who earn more than $150,000 – roughly 2 percent of state residents — will have to pay the new fourth tier rate. The average increase is projected to be $7,200 per filer and will raise a total of $1.1 billion.

When enacted, Minnesota will have the fourth highest income tax rate in the country. Only Oregon, California and Hawaii currently have higher rates.

Increases in tobacco taxes will raise $430 million in additional revenue. That works out to a $1.60-per-pack increase. Republicans criticized the proposal because it’s a regressive tax. “It hits the poor much harder than it does the upper middle class or the rich,” said Rep. Glenn Gruenhagen, R-Glencoe.

But Rep. Ann Lenczewski, DFL-Bloomington, chair of the Taxes Committee, defended the tobacco taxes as sound financial and health policy. “I view it as a public health imperative,” Lenczewski said. “That tax does not begin to recoup the cost to all of us for the use of that substance.”

The additional revenue will be used to close the state’s $627 million deficit and boost spending in key areas. The budget includes $485 million in additional spending for schools and a $250 million boost in higher education spending. In addition, there are tax aids and credits that DFLers argue will reduce property taxes by $400 million.

Another significant change involves exempting cities and counties from paying sales taxes, at a cost of nearly $200 million for the next biennium. To pay for that change, the sales tax will be levied on some business-to-business services, most notably warehouse costs. Republicans criticized that provision as potentially harmful to farmers.

More broadly, Republicans argued throughout the more than five-hour debate that the tax hikes will hit every Minnesota resident and prompt individuals and businesses to flee to neighboring states. “You said you were going to tax the rich,” said Minority Leader Kurt Daudt. “Turns out rich means — to you — they’re breathing.”

Rep. Kurt Zellers, R-Maple Grove, suggested that the projected revenue streams won’t materialize. “You will never ever get all you expect out of this,” Zellers said. “People with income and mobility will move.”

But Lenczewski countered that the tax increases are necessary to balance the state’s books and make crucial investments. “There is no joy or glee in doing the difficult work of raising revenue,” Lenczewski said.

The bill also includes funding for the Mayo Clinic’s estimated $5.5 billion “destination medical center” project.  The state could ultimately contribute up to $400 million for infrastructure costs associated with the project over two decades. That was one of the few provisions in the bill praised by both Republicans and DFLers.

Rep. Tina Liebling, DFL-Rochester, praised Lenczewski’s leadership in shepherding the project. “The city of Rochester should give her the golden key, because she absolutely made this happen,” Liebling said.

Four swing district DFLers – Reps. Ron Erhardt (Edina), Paul Rosenthal (Edina), Laurie Halverson (Eagan) and Yvonne Selcer (Minnetonka) — joined all Republicans in voting against the bill.

The bill is expected to be taken up by the Senate when it reconvenes at 11 a.m. Monday. the Legislature is slated to adjourn at midnight.