Tuesday marked the first day of income tax filing season. It also turned out to be the unofficial beginning of the filing period for income tax legislation. Over the course of roughly two hours, three markedly different plans emerged for how the state should cut taxes in light of the projected $1 billion surplus.
After one round of exchanges, the issue is essentially this: Gov. Mark Dayton doesn’t oppose giving a tax cut to businesses, and would like to cut the burden on the state’s aging population. But he’d rather give the benefit to working families.
Dayton announced his tax credit proposal during a press conference Tuesday morning, putting forth a package that would expand the existing child care credit to the tune of nearly $100 million over the next budget cycle. The plan would make an additional 92,000 Minnesota families eligible for a rebate currently available to about 38,000 households. Families with combined household income of up to $124,000 could benefit from the proposal, provided they have multiple children; at present, married tax filers who make more than $39,000 combined are ineligible for the targeted relief.
Dayton said the idea, which he pushed unsuccessfully during the 2014 session, is the most significant tax-related piece of his budget.
“This is the major tax reduction that I’m proposing this session,” said Dayton, who also hinted that increased child care spending would be part of his overall budget package.
At more or less that very moment, House Republicans were weighing a tax cut notion of their own. The House Taxes Committee held an initial hearing on Tuesday to discuss a bill from Rep. Sarah Anderson, R-Plymouth, that would reduce the maximum income tax rate on business-related income for sole proprietors to 7.85 percent — a full 2 percentage points lower than the 9.85 percent fourth-tier income tax bracket approved in 2013. The cut would affect “pass-through income” for businesses filed as “S corporations,” an elective designation used by some small business owners.
Anderson said the new top tax bracket had caused “growing pains” for individuals and was hindering the state economy. She was backed up in that position by representatives of the Minnesota Chamber of Commerce and the state chapter of the National Federation of Independent Businesses (NFIB), who were on hand to offer support of the bill.
Less supportive was Rep. Ann Lenczewski, DFL-Bloomington, who wondered about the usefulness of pushing a bill that undercuts a fourth-tier income tax that Dayton had advocated since he first took office. Only about 4 percent of income tax forms filed in Minnesota are classified as S corporations, Lenczewski said, arguing that the financial impact — the bill would slash about $350 million in state revenue in the biennium — was not worth it, especially without any incentives for those affected to reinvest the tax cut in their businesses.
“They could do anything,” she said. “They could buy a yacht. They could put it into a vacation. They could put it back into the company.”
Anderson countered that Dayton had shown a willingness to be responsive to business, as when he agreed to repeal business-to-business service taxes one year after signing them into law. She said her tax cut would make the state’s overall business climate more appealing.
The House committee took no action during Tuesday’s hearing, instead laying it over for possible inclusion in an omnibus tax bill. Anderson’s Senate companion bill is chief authored by Sen. Terri Bonoff, DFL-Minnetonka, and lists Commerce Committee leader Sen. James Metzen, DFL-South St. Paul, as a co-author.
Asked during his own press conference about the prospect of a business-oriented cut, Dayton said Republicans’ priorities were misguided.
“That’s directed towards businesses, which are increasingly profitable,” Dayton said of the GOP bill. “Mine is directed toward working families, who are increasingly hard-pressed by the economics of child care.”
The governor’s press conference featured positive statements from working mothers who would benefit from the child care rebate, including one woman who said she had quit her job as a part-time physical therapist because her income was essentially negated by the costs of day care for her two sons.
Dayton also cited a recent New York Times article that found Minnesota to be the third most expensive state for child care relative to median income. Dayton’s plan would offer an average tax reduction of $481 for families that qualify, and could cut up to $2,100 for some families.
By apparent coincidence, Dayton’s announcement came just hours before a similar federal tax credit was proposed by President Barack Obama, who outlined his plan during the State of the Union address. Dayton said that his administration had only become aware of Obama’s plan days earlier and that staff had not yet calculated the net effect if both measures were adopted.
Last, and probably least — considering their minority status — came a pitch from Senate Republicans, whose “Retire in Minnesota Act” would ultimately exempt Social Security payments from income taxes. The bill would phase out those taxes over a 10-year period; the minority caucus said the move would affect 383,000 Minnesotans.
Dayton, for his part, said seniors are a priority for him, too, but that he had chosen to focus his tax relief on children and families instead.
“I would hate to see seniors pitted against children,” Dayton said. “I hope that’s something we can avoid this session.”
Dayton also denied that the idea had any relation to the recent law that would allow unionization for home day care workers. The controversial new policy, passed in 2013, has yet to take effect and is still being held up by a lawsuit challenging its legality.
Said Dayton: “I don’t think there’s a connection at all, because it hasn’t happened.”