Omnibus Tax Bill

The Minnesota Senate passed a bipartisan omnibus tax bill that provides property tax relief, addresses the statewide workforce housing crisis, and invests in getting unemployed veterans back to work. The bill passed the Senate Floor with a vote of 42-25, but stalled in conference committee due to Republicans’ unwillingness to back off irresponsible tax cuts that would have left a $4 billion hole in future budgets.

While the Senate was unable to pass its tax omnibus this session, the House tax bill was prevented from becoming law. The House bill included large tax cuts for corporations and the very wealthy that would grow over time and included provisions that would reverse Minnesota’s progress toward a fairer tax system. The republican tax bill was larger than the state’s project surplus, paid for in part by cuts in health care, affordable housing, and other critical services.

The Senate omnibus tax bill, which will remain open in conference committee and ready to be acted upon next session, provides $268 million in tax relief and meets a total budget target of $459.8 million for fiscal years 2016 and 2017. Provisions in the bill include:

Property Taxes

Aids to local governments: Since 1972, state aids to local governments have been a critical lifeline for local units of government to provide important services without having to rely solely on property tax payers to support local budgets. During the decade of budget deficits facing Minnesota, state aids suffered dramatic cuts and property taxes skyrocketed. After a decade of cuts, the bill returns Local Government Aid to pre-recession levels and adds stability to county budgets. An additional $54 million investment in aids to local governments helps cities, counties, and townships take pressure off local property taxes while continuing to improve local services.

Property tax relief: The tax bill property tax relief to every type of property in the state. First, homeowners and farmers who have experienced the highest property tax increase will qualify for additional property tax refunds. The threshold to qualify for the Targeting Refund, which is open to every homeowner regardless of income, is decreased from 12% to a 10% annual increase in property taxes. A similar Agricultural Land Targeting Refund is established for farmers who have seen property taxes increase by 8% or $200 over the year.

Business property tax payers will see a projected property tax reduction, partly due to a $93 million reduction in the statewide General Levy.  A small class rate adjustment on these properties helps deliver widespread relief to every property type.  The average property tax reduction will be 2.2% for homeowners, 2.1% for agricultural homesteads, and 4.3% for cabin owners. Smaller business owners will see an average 2.8% cut. The property tax decrease for apartments – a factor in maintaining affordable rents – should be 2.4%.

Railroad property taxes: Increased rail traffic presents new costs and concerns for Minnesota’s cities, counties, and townships. Because they cover so many jurisdictions, railroads must be assessed by the state instead of by local governments. This bill changes how rail property is assessed by updating methodologies to consider the modern rail economy. The tax bill modernizes these assessments by allowing rail cars and rolling stock to be considered taxable property and adds that property to the general levy tax base.

Responsible Governing

Repaying the LGA shift: Local Government Aid payments – which are currently sent in July and December – will be restored to March, July, September, and November. The four-times-per-year payment schedule was removed as a shift to balance a budget deficit, as eliminating the March payment pushed the obligation into the next fiscal year. Restoring the four-times-per-year schedule provides tools for future legislatures facing a deficit and adds responsibility to the state’s budget.

Budget reserve report: This bill changes the timing of Minnesota Management and Budget’s budget reserve report so the most recent legislative changes are taken into effect. This is necessary to ensure November forecast surplus decisions are adequately informed. The bill also increases the state’s budget reserves by $250,000 in order to better prepare for future deficits.

Accelerated sales tax payments: Businesses with annual sales tax liabilities over $250,000 must currently submit 81.4% of their June sales tax liabilities before the close of the Fiscal Year on June 30. This is a budget shift mechanism that has been used several times since the 1980s to artificially balance the state’s budget. The Senate Omnibus Tax Bill reduces this shift percentage to 80%, providing additional cash-flow relief to about 2,300 Minnesota businesses.

Workforce Development

Veterans Jobs Tax Credit: Minnesota has one of the highest veteran unemployment rates in the nation – about 1.5% higher than the state rate of unemployment. Under the Veterans Jobs Tax Credit, employers could claim up to a $2,500 tax credit for each qualified unemployed veteran hired in a year. The credit would be equal to 10% of wages paid to the new employee. The omnibus tax bill also creates a similarly-valued grant program for nonprofits and local governments that hire unemployed veterans.

Research and Development Tax Credit expansion: The tax bill expands use of the state’s current R&D Tax Credit to sole proprietors. It also allows the first $15,000 of qualified expenditures to be refundable – a unique, attractive quality of Minnesota’s credit that disappeared in 2013. The R&D credit has proven to be particularly effective at attracting and creating high-tech, high-paying jobs.

Workforce housing: This bill addresses the statewide workforce housing crisis by allowing cities to create Workforce Housing TIF districts and creating a Workforce Housing Tax Credit for workforce housing projects outside the 14-county metropolitan area. The tax credit is equal to one-third of qualified investments made by project investors and the maximum credit is $1 million. Approved TIF districts must meet housing vacancy standards and be located with 15 miles of a business with 20 or more full-time employees. This provision will help cities provide affordable housing so Greater Minnesota businesses can attract and retain the highly skilled workers they need.

Telecommunication equipment sales taxes: Some machinery and equipment used directly by a telecommunications, cable television, or direct satellite service provider is currently exempt from sales and use tax in Minnesota. The Senate tax bill would expand the exemption to fiber and conduit. These items are especially important in deploying broadband throughout Minnesota. The Governor’s Task Force on Broadband has recommended extending this sales tax relief to modern technology to help reach Minnesota’s ambitious broadband goals.

Income tax reciprocity: This bipartisan proposal provides conditions to reinstate income tax reciprocity with Wisconsin, a condition that has not existed since 2009 when Gov. Pawlenty ended the agreement. Under the reciprocity agreement, residents of Minnesota who work in Wisconsin (and vice versa) pay income taxes only to their state of residence, regardless of where the income was earned. Minnesota would pay Wisconsin for a portion of that state’s lost revenue, and Wisconsin would do the same for Minnesota.

Defining residency: This bill to limits the list of items that may be taken into consideration when determining residency for income tax purposes. The location of an individuals’ attorney, CPA, or financial advisor and the place of business of a financial institution at which the individual applies for a new type of credit or opens or maintains an account may no longer be considered when determining a place of residency. The proposal also defines the terms “financial advisor” and “financial institution.“

Children and Working Families

K-12 Education Credit expansion: The K-12 credit helps families who are paying early childhood and school-related expenses. The expansion will reach 16,800 new families and save the average taxpayer $285 each year. In addition, money paid for Head Start or public pre-K programs is now eligible for the credit, helping working families better afford quality early childhood education.

Minnesota College Savings Plan Credit: Thirty-three other states have tax incentives to help families save for college. Minnesota’s incentive disappeared during past budget deficits, but this bill reinvests in that priority and makes it easier for families to save for college. The omnibus tax bill establishes a maximum credit of $500 per year for qualified contributions to Minnesota’s college savings plan. Families could earn up to 200% of contributions to the savings plan – a percentage that decreases as a family’s income increases, up to $160,000. The credit is not refundable, but any unused portion of the credit is deposited back into the taxpayer’s college savings plan.

Out-of-home placement costs: In 1978, the Indian Child Welfare Act was enacted due to the high number of Native American children being removed from their homes through the social service system. This federal law has financially impacted Minnesota counties with a high number of Native American children. To ease the burden on the counties, this bill authorizes the state to reimburse counties for the cost of out of home placement procedures in accordance with the ICWA.

Business Taxes

Energy Production taxes: Minnesota has spent the last several decades developing policies for energy production taxes. The Senate Omnibus Tax Bill significantly reforms the way electric generation machinery and equipment is valued for property tax purposes, aiming for more clarity and consistency among all utilities. The bill eliminates the personal property tax and the pollution control exemption on personal property that is part of an electric generation system and establishes a new valuation system for electric generation equipment. The bill does not change the way wind and solar production taxes are calculated and assessed.

Business property tax cuts: The Senate tax bill gives business property a $69 million tax reduction through changes in the general levy. The slight class rate increase is what provides property tax relief to all property taxpayers because it takes pressure off homeowners, farmers, and other properties. See the “Property tax” section for more information.

Sales Taxes

Nonprofit sales taxes: Federal statute currently qualifies nonprofits for income tax protection, but it does not necessarily guarantee sales tax-exempt status for 501(c)3 organizations. The Senate tax bill changes Minnesota statute so all federally designated 501(c)3 nonprofit organizations would be exempt from sales taxes.

Tickets to high school events: Admission to high school events has been exempt from sales tax for decades, but post-season tournaments and other Minnesota State High School League-sponsored events were not included in the exemption until 2006. At that time, lawmakers put a sunset on the exemption, which is scheduled to be effective July 1. The activities affected include post-season tournaments for athletics, arts, and activities for public and private schools across the state. MSHSL officials stressed that money saved from the sales tax exemption is returned directly back to the community for programs such as financial assistance for students who find the cost of participating in an MSHSL activity to be prohibitive.

Car seats sales tax exemption: Minnesota’s child passenger safety law requires all children under the age of eight years old or shorter than 4’9” to be fastened in a child safety or booster seat. The fine for not securing children in car seats is $50, but can exceed $100 after other fines are added. The average cost of car seats is $90, and the Department of Public Safety does not recommend purchasing seats from garage sales and re-sale shops. This bill adds car seats to the numerous items for infants that are currently exempt from the sales tax.

Sales tax exemption for bullion: Precious metal bullion sales are treated like other investments and exempt from sales taxes in this bill. Thirty other states offer some type of exemption on these sales, and say Minnesota’s sales tax are harming Minnesota brokerages that are forced to compete against the other states.

STATUS: The Omnibus bill did not become law. (H.F. 848)

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