We’ve been digging into the details of Governor Dayton’s budget proposal, and I’ve been looking at the tax portion. It follows familiar themes from the Governor’s previous tax efforts: focusing on the concerns of middle-class families and building ladders into the middle class, and raising revenues to fund investments in the state’s economic success.
The two primary pieces of the Governor’s tax package are: increasing transportation funding and helping Minnesota families with the high cost of child care.
Dayton proposes a $100 million expansion in the state’s Child and Dependent Care Tax Credit, which seeks to make affordable child care available to more Minnesota families. Child care can be one of the largest expenses that families with children face. The Dependent Care Credit provides a tax credit based on what a family pays for child care so that parents can work or look for work. However, it hasn’t kept up with the rising costs of child care. Under Dayton’s proposal:
- The maximum income at which a family can qualify for a credit would go up to $112,000 for families with one dependent and up to $124,000 for families with two or more dependents. It’s currently at $39,000.
- The maximum amount of credit a family can receive would go up to $1,050 for families with one dependent, and up to $2,100 for families with two or more dependents.
An estimated 110,000 Minnesota families would benefit from this proposal by an average of $429, including 92,000 families who don’t currently receive the credit. This tax credit can also be used for care for elders and people with disabilities, as long as they are claimed as dependents by the taxpayer and the care is so the taxpayer can work or look for work. That would continue to be true under Dayton’s proposal.
The Dependent Care Credit expansion and Dayton’s proposed increase in funding for Basic Sliding Fee Child Care Assistance are two important steps to help Minnesota families with the cost of child care. Policymakers should follow Dayton’s lead in making affordable child care a priority this session. We recommend making the Dependent Care Credit proposal more targeted by not raising the income ceiling quite as far. We’d also put additional resources into Basic Sliding Fee, which is a better mechanism to reach the families that struggle most to afford child care.
The other major component of Dayton’s tax proposal seeks to address the state’s transportation needs by raising an additional $2.2 billion in FY 2016-17 in revenues dedicated to transportation and transit. This includes:
- A 6.5 percent gross receipts tax on gasoline;
- An additional half-cent local sales tax in the 7-county metro area for transit; and
- An increase in vehicle registration fees (commonly called “tabs”).
These funding sources are all regressive taxes, which means that low- and moderate-income Minnesotans pay a higher share of their incomes on those taxes. Given this fact, and the role that transportation plays in access to jobs and economic opportunity, meeting the transportation needs of low-income persons and economically struggling communities should be an important factor in decisions about where to invest in transit and transportation.
A less prominent but also important piece of Dayton’s budget is a package of initiatives to close tax loopholes used by a relatively small number of corporations, and thereby create a more level playing field for all business taxpayers.
The backdrop for this year’s tax debate is the 2013 tax reform bill. That bill raised revenues to end the cycle of frequent budget deficits, and it made the tax system more fair. This was followed by tax bills passed in 2014 that cut taxes in FY 2016-17 by about $1 billion.
Through actions taken in 2013 and 2014, Minnesota has shrunk the gap between what most Minnesotans pay in state and local taxes (measured as a share of their incomes) and the smaller percentage that those with the highest incomes pay.
This year, we should continue the progress for a fair tax system and sustainable budget choices through limited tax cuts focused on the needs of Minnesotans. The larger tax cuts that some have proposed would make it harder to invest in our schools or make child care and higher education more affordable, as Dayton does in his budget. As we learned in the 2000s, large tax cuts in the good years make it harder to respond to the next economic downturn, and put a whole range of critical state services, from schools to nursing homes, at risk.