Two years after Minnesota Governor Mark Dayton (DFL) shepherded a $2.1 billion taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase through the legislature, the Republican-controlled House of Representatives has passed a $2 billion tax cut plan which, notably, does not attempt to roll back Dayton’s tax increases for top income earners. While the Democratic-controlled Senate and Governor Dayton are unlikely to embrace the House legislation in its current form, should a tax reform package pass this year—which is increasingly plausible, given the state’s projected $1.87 billion surplus—it will mark the third time in as many years that Minnesota has enacted significant tax legislation.
House File 848, which passed the House yesterday, would (1) reduce income tax burdens by increasing personal exemptions, allowing the subtraction of Social Security income, and expanding educational credits; (2) reduce corporate property tax burdens by exempting (once fully phased in) the first $500,000 in assessed value; (3) use tax credits to reduce the agricultural share of school debt taxes; and (4) extend and expand existing job credits.
These proposals do not exist in a vacuum; they were designed to offset the new burdens of 2013, although the reductions would have a dramatically different incidence than the taxes hiked two years ago.
In 2013, Governor Dayton secured passage of a tax package that, among other things, accomplished the following:
- Creating a new top income tax bracket for single filers making over $150,000 and joint filers making over $250,000, with a rate of 9.85 percent. The prior top income tax bracket was 7.85 percent. Minnesota’s top marginal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate is now the fourth-highest in the country.
- Hiking cigarette taxes from $1.23 to $2.83 a pack, an increase of $1.60 a pack. The tax now stands at $2.90, ranking seventh-highest nationwide and highest in the region. Taxes in neighboring states range from 44 cents a pack in North Dakota to $2.52 a pack in Wisconsin. You can read about the link between high cigarette taxes and cigarette smuggling here.
- Instituting a new gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. on all gifts valued at more than $14,000 a year, including those to immediate family members.
- Expanding the “wheelage tax”—imposed on vehicle ownership—allowing counties to levy it across the state instead of just in the Twin Cities.
- Imposing taxes on digital audio and video downloads.
- Reformulating and expanding the homeowner refund to provide homestead credits to homeowners in households earning between $19,500 and $105,000 in annual income.
- Including business inputs in the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . Although the Governor’s original base-broadening plan was scaled back, some expansion to select business-to-business transactions was retained. This necessarily leads to tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. .
A few more promising elements of the plan, including a corporate income tax rate reduction, were dropped by the Governor partway through the 2013 legislative session.
Last year, Minnesota enacted a tax reduction package that included the following:
- Rolling back the imposition of the sales tax on business inputs like warehousing, telecommunications equipment, and equipment repair and maintenance;
- Expanding the sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for capital equipment, albeit with a delay to the up-front exemption from September 1, 2014 to July 1, 2015;
- Raising the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. exemption from $1 million to $2 million over five years;
- Mirroring some of the changes to federal taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. embodied in the American Taxpayer Relief Act;
- Eliminating the marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. ; and
- Expanding the refundable Working Family Credit, extending eligibility to taxpayers earning up to $47,000.
Some of these income tax changes may be good policy, and pairing the state’s income tax calculation with the federal calculation can help simplify tax compliance, but the legislature failed to repeal the prior year’s rate hikes and instead chose to carve away at the base.
That brings us to 2015, where the lower chamber passed House File 848 on a 74-58 vote yesterday. Among the bill’s features:
- A new $1,000 personal or dependent tax exemption, though only for the next two years;
- A subtraction for Social Security income, phased in until fully exempt as of 2019;
- A property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. exemption for the first $500,000 in assessed value of commercial and industrial property, to be phased in over six years;
- The further phase-up of the estate tax exclusion, to reach the federal amount of $5 million by 2018;
- Expansion of existing educational credits and income subtractions to cover prekindergarten;
- A property tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. equal to 50 percent of the tax on agricultural property attributable to school district bonded debt levies; and
- Extension of the angel investment credit through tax year 2018, with an increase in the biennial allocation from $15 million to $18 million.
Notably, the legislation does not roll back the state’s high income tax rates, which was very intentional:
House Republicans are trying to provide relief after the tax increases Democrats enacted two years ago.
But House Taxes Committee Chairman Greg Davids said it would have been pointless to propose rolling back the income tax increase on top earners that was DFL Gov. Mark Dayton’s priority issue in 2013.
“I want to get a bill signed, and I don’t think you start off by going after one of the governor’s prime positions,” said Davids, R-Preston.
Henry Clay coined the term omnibus, referring to a bill containing “all sorts of things and every kind of passenger.” Unfortunately, this omnibus is notable for what’s missing: a reduction in Minnesota’s high statutory tax rates. Although the package would succeed in reducing overall tax burdens, which can be quite important in and of itself—especially in a high tax state like Minnesota—it does so by carving out exemptions rather than tackling bigger structural concerns. Whatever becomes of this bill, structural reform looks like it will have to wait.
You can read our initial analysis of Dayton’s 2013 tax proposal here, and an overview of the 2014 tax package here. More on Minnesota here.
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