Tax bill spends too much, delivers too little
The Senate Republican tax bill passed in early April and contains many priorities that have received bipartisan support in the past. However, the bill spends $900 million of the state’s one-time budget surplus on ongoing tax expenditures that balloon in future years. It leaves little room to invest in education, health care, and other priorities important to Minnesota, and it gives away too much tax relief to wealthy businesses and individuals.
Similar concerns exist with the House version of the bill, which spends $1.35 billion – nearly all of the state’s existing one-time surplus. The conference committee will begin meeting after the recess to negotiate a compromise with the Governor, whose tax proposal invests $280 million in tax relief that is much more targeted to average, working Minnesotans. (SF 2255)
DFL concerns with the Senate bill:
- Future spending: The bill has $1.1 billion in ongoing costs, which grows even larger by 2022-2023. Freezing the statewide business property tax rate alone will cost the state $1.2 billion over the next 10 years, and 53% of that relief goes to out-of-state building owners, not Minnesota businesses.
- Vouchers: The tax bill contains controversial tax credits for private-school scholarship donations. This diverts $35 million per year to wealthy foundation donors – money that could be used to fund public schools or improve already existing education tax credits that are available to almost all Minnesota families.
- Little bang for the buck: The signature piece – a first-bracket rate cut – spends $400 million but only amounts to an average savings of $2.15/paycheck. The estate tax cut only affects about 1,000 taxpayers and amounts to about $116,000 savings per taxpayer once fully phased in.
What’s missing from the tax bill:
The bill is silent on several middle-class priorities that are proven tools to lift up working families. Key items missing from the bill include:
- Working Family Credit increase: This tax credit is a proven tool to lift low-income working families into the middle class. At least 346,000 households receive the credit. In Greater Minnesota, 13.8% of tax-filing households receive the credit, compared to 11.8% in the seven-county metro area. Of the total credits paid out, 52% go to greater Minnesota taxpayers.
- State aid to cities and counties: The bill adds $6 million to County Aid and $12 million to Local Government Aid to cities but actually may do more harm than good, since it is a one-time payment that may penalize some municipalities when it is rescinded one year later. Also, 50 counties have fallen off the county aid formula since 2005, and this bill does nothing to address that need.
Direct property tax relief:
Key provisions included in the bill:
- Social Security: Nearly half of Minnesota households do not pay taxes on their Social Security benefits currently, but those that do now would qualify for up to a $2,500 tax subtraction ($1,955 single). Married couples earning up to $115,300 in provision income and single filers earning up to $90,100 could qualify.
- Equity and Opportunity in Education Tax Credits: The bill provides $35 million per year of tax credits for corporations and individuals that make donations to nonprofit foundations for the purpose of providing low-income students scholarships to private or religious schools. The credits equal 70% of the donation, up to $21,000 for married filers and $105,000 for corporations. This credit does not go directly to parents. The tax benefit goes toward the individual or corporation making a donation to a nonprofit foundation; the nonprofit then allocates scholarships to low-income students of their choosing. Public education advocates stress this diverts state revenue from supporting schools to supporting wealthy donors. A better option would be to increase the state’s current K-12 education subtraction and K-12 credit, which are available to most parents and directly defray the cost of providing children a quality education.
- Student loans: Graduates working to pay off student loans are eligible for a new, $700 tax credit – a first-in-the-nation credit that Senate DFLers designed last year. Teachers and those serving in public service jobs are eligible for a higher benefit. This is important for recent graduates as well as businesses looking to recruit a highly skilled, young workforce.
- A first-bracket tax rate cut from 5.35% to 5%: The first-tier rate is paid on all income up to $37,500 for married-joint filers. The proposal costs significant money ($400 million) but results in a relatively small per-paycheck tax savings. Married filers would see a maximum $2.15 savings on each paycheck if this rate cut is imposed.
- Estate tax: Minnesota’s estate tax exemption threshold is increased from $2 million to $5 million. About 1,000 taxpayers are subject to the estate tax. Small businesses and farmers already have a $5 million exclusion in current law so this bill does not provide additional relief beyond what’s already available to those taxpayers.
- Agricultural Bond Property Tax Credit: DFLers designed this tax credit last year, which will provide real savings to farmers who are impacted by local school bond referenda. Now, the state will pick up 40% of the property taxes linked to local levies.
- Statewide business property tax: The first $100,000 of commercial/industrial market value is excluded from the statewide business property tax, a proposal developed by DFLers last year. In addition, the annual inflation factor is removed. According to the Minnesota Tax Incidence Study, 53% of the statewide business property tax is paid by non-resident corporations, meaning most of the tax benefit of eliminating the levy would go to companies not headquartered in Minnesota.
- Disabled Veterans Property Tax Exclusion: More surviving spouses are allowed to qualify for the current property tax exclusion and for the entire time they remain living in their home, rather than being subject to the current eight-year limit.
Federal tax conformity
Congress typically makes several changes to federal tax code toward the end of most tax years. Until states take action to update their tax codes to match federal law, taxpayers face confusion and, often times, higher tax bills. This year, DFLers worked with Republicans early in January to pass a conformity bill that delivered $21 million in tax relief to at least 220,000 Minnesotans.
This year’s bill was particularly important because it included updates from Tax Years 2015 and 2016. Taxpayers filing 2016 tax returns this spring don’t need to act – the updates are included in state tax forms. Constituents that may be affected by Tax Year 2015 updates will be contacted by the Department of Revenue later this year. No one will owe more taxes, but as many as 178,000 taxpayers will be owed additional refunds. In most cases, no action will be required by taxpayers to receive this money.
Some of the groups most likely to see additional refunds include taxpayers with tuition costs, educators with classroom expenses, homeowners paying mortgage insurance premiums, business owners, and taxpayers receiving the Working Family Credit. (HF 2)