Some of the Minnesota Senate's tax priorities came into clearer focus yesterday when the Senate Tax Reform Division released its draft division report, authored by the committee's chair, Senator Ann Rest. More tax provisions will be revealed when the omnibus tax bill is released later this month.
The division report raises tobacco taxes, takes a "broaden the base, lower the rate" approach to sales and business taxes, and increases funding for cities. It raises $399 million in revenues for the state's general fund in FY 2014-15, primarily through the tobacco tax components.
Tobacco taxes. The division report increases taxes on tobacco products, including a 94-cents-per-pack increase on cigarettes. It also simplifies Minnesota's existing tobacco taxes: The state would continue to collect the 75 cents per pack that is currently called the Health Impact Fee, but it would stop having a different name from the rest of the tobacco tax, and the funds would go directly into the state's general fund, instead of stopping first in a Health Impact Fund. The net impact of the tobacco tax changes is to raise $376 million in FY 2014-15.
Sales tax. Under the division report, the state's sales tax rate would be lowered from its current 6.875 percent rate to 6.0 percent. A number of items would become newly subject to the sales tax, such as:
- Digital products, including digital books, music downloads and ringtones;
- Personal services, such as haircuts, spa services, tattoos, wedding planning, dating services, and personal instruction in athletics, fitness and dance;
- Auto repair, and repair and maintenance of household goods;
- Warehousing and storage services;
- Over-the-counter drugs;
- Admission to trade shows and professional athletic events;
- Publications, excluding newspapers.
The division report applies the sales tax to a narrower set of items than Governor Dayton's original budget. The division report offsets some of the sales tax increase through a new refundable clothing tax credit for low- and moderate-income Minnesotans. It also creates a more level playing field for Minnesota businesses by requiring some internet retailers to collect sales taxes from Minnesota residents, just as retailers physically located in the state do.
The division report provides a sales tax exemption for purchases by cities and counties, and an upfront exemption for business purchases of capital equipment, replacing a cumbersome refund process. The combined effect of the sales tax provisions is to raise $78 million in general fund dollars in FY 2014-15.
Business taxes. The division report raises revenues by ending several tax preferences in the corporate franchise tax, similar to Governor Dayton's proposal, including preferences for businesses with overseas activities. It also adjusts minimum fees paid by businesses, which have not been updated since 1990.
It then lowers taxes by increasing two existing tax credits for certain businesses and investors - the Angel Investment Credit and the Research and Development Credit - and lowering the corporate tax rate from 9.8 percent to 9 percent. The combined fiscal impact is to raise $32 million in FY 2014-15.
Funding for cities. Local Government Aid to cities would increase by $80 million per year starting in FY 2015, and distributed through a new formula. (Additional funding for counties is expected to be included in the omnibus tax bill.)
The Senate Tax Reform Division will hear testimony, amend and vote on the division report on Tuesday, April 16. The division report then goes to the Senate Taxes Committee to be considered for incorporation into the omnibus tax bill. The omnibus tax bill will include additional provisions to raise the revenues needed to fund new investments, balance the state's budget and make the tax system more fair.
You can find the legislative language and a summary of the division report on the Senate Tax Reform Division's webpage. A spreadsheet is available as well.