As the Legislature passes budget bills to invest in our kids, our workers and our communities, legislators also need to figure out how to fund those investments, address the deficit and share the responsibility for funding public services fairly.
The House passed its plan to meet the need for fair and adequate revenues last week in its omnibus tax bill, House File 677, authored by Tax Committee Chair Ann Lenczewski. Below are the primary mechanisms in the tax bill to raise revenues and make the tax system less regressive.
Income tax. The House omnibus tax bill includes a new permanent income tax rate of 8.49 percent on taxable income above $400,000 for married filing joint filers, taxable income above $340,700 for heads of households, and taxable income above $226,200 for single filers. The House's "fourth tier" income tax bracket has a lower rate and applies to a smaller number of households than Governor Dayton's fourth tier proposal, and as a result only raises $282 million in FY 2014-15. House File 677 also includes a temporary 4 percent surcharge on taxable income above $500,000 to pay back the school funding shifts used in prior years as a short-term budget-balancing maneuver.
Property tax refunds and aids to local governments. The House has put a high priority on reducing property taxes, and the omnibus tax bill increases property tax refunds for homeowners by $157 million and for renters by $15.5 million in FY 2015. Around 80,000 currently eligible renting households would receive an average $152 increase in their property tax refunds, and some additional households would become eligible. Around 424,000 households would benefit from the increases to homeowner property tax refunds, which would increase an average of $219. Local Government Aid to cities is increased by $80 million in FY 2015, and County Program Aid will see a $30 million boost.
Tobacco taxes. The House tax bill raises $434 million in tobacco taxes, primarily through a $1.60 per pack increase on cigarettes. Governor Dayton and the Senate omnibus tax bill have increases of 94 cents per pack.
Alcohol excise taxes. These taxes would be raised by $347 million, roughly the equivalent of 7 cents per drink. Minnesota's alcoholic beverage excise taxes are set at a certain number of cents per unit, not as a percentage of the sales price. Minnesota's alcohol excise taxes have not been updated for inflation since 1987.
Corporate taxes. The bill raises $316 million in FY 2014-15 by ending a number of corporate tax preferences, including those for corporations with overseas activities. Similar but not identical proposals are found in both Governor Dayton's budget and the Senate omnibus tax bill. The House bill also requires that corporations report income from their activities in "tax haven" countries for purposes of calculating their corporate taxes, and changes the Research and Development tax credit so that the credit amount does not exceed the amount owed in taxes.
Sales tax. The House omnibus tax bill makes few changes in the sales tax, which would be reduced by $94 million in FY 2014-15 but remains largely unchanged in the following biennium. The largest item replaces a cumbersome refund process for business purchases of capital equipment with an exemption at the time of purchase. The bill also increases taxes on car rentals, includes a tax on sports memorabilia, and applies the sales tax to box seats and suites at professional sporting events.
The House bill contains several components focused on closing the gap between the share of income that most Minnesotans pay in state and local taxes and the smaller share of income paid by the highest-income Minnesotans. These components include the fourth tier, the income tax surcharge and increases in property tax refunds for homeowners and renters described above. The bill's provision to update Minnesota’s Working Family Credit to reflect recent federal changes affecting married couples is another important step in making the tax system less regressive.
The largest and most progressive component of the bill - the income tax portion - raises one serious concern. Too much of the House's targeted income tax increases are temporary. Larger permanent changes are needed to make the tax system less regressive beyond the FY 2014-15 biennium. As policymakers work out final tax legislation, they should adopt a permanent targeted income tax increase, similar in size to what's been proposed by Governor Dayton and the Senate omnibus tax bill.