Governor Dayton, the House and Senate all made commitments this year to tax plans that would resolve the state's budget deficit, fund investments and make the tax system less regressive. They had different priorities for how to get there, but they've agreed to an omnibus tax bill, House File 677, that maintains their commitment to those crucial goals.
By increasing reliance on an income tax based on the ability to pay, and reducing what low- and middle-income Minnesotans pay in property taxes, the omnibus bill makes progress toward fairness. It also raises adequate revenues to address the deficit without deep cuts, and to invest in schools, affordable college education, workforce development and other public services that are crucial for a strong future.
Fourth tier income tax: The tax bill includes a new "fourth tier" income tax rate of 9.85 percent on taxable income above $250,000 for married filers, above $200,000 for head of household filers, and above $150,000 for single filers. That's a 2 percent rate increase that affects the 2 percent of Minnesotans with the highest incomes. It raises $1.1 billion in FY 2014-15, and helps narrow 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.
Property tax aids and credits: The omnibus tax bill includes $411 million in additional funding for property tax refunds and aids to local governments.
The bill improves property tax refunds, starting with refunds filed in 2014:
- Property tax refunds for low- and moderate-income renters (the Renters' Credit) will increase by $15.5 million in FY 2015. More than 79,000 currently eligible households will receive an average $152 increase in their property tax refunds, and some additional households will become eligible.
- Property tax refunds for homeowners will increase by $120 million in FY 2015. About three-quarters of currently eligible households will see an average $219 increase in their refunds. Another 112,000 households will now qualify for a refund. The bill also includes a one-time effort in 2014 to reach out to homeowners who may be eligible for a property tax refund of at least $1,000 but have not applied.
In addition, the bill increases Local Government Aids to cities by $80 million in FY 2015 and County Program Aid by $40 million, and provides $10 million in aid to townships. It also includes $86 million in FY 2015 for changes in education finance, primarily by increasing equalization of operating referendum levies.
Corporate tax: The omnibus tax bill raises $424 million in FY 2014-15 through several corporate tax changes, such as repealing two provisions for corporations with overseas activities (Foreign Operation Corporations and the Foreign Source Royalty subtraction); no longer allowing the Research & Development credit to be refundable; and increasing minimum fees for businesses for the first time since 1990.
Tobacco taxes: The bill raises $408 million in FY 2014-15 by adopting the House's proposal for a $1.60 per pack increase in cigarette taxes, and makes related changes to taxes on other tobacco products. In FY 2014, $26.5 million of the increase raised through the cigarette tax will be dedicated to the reserve account related to funding for the Vikings stadium.
Sales taxes: The bill modernizes the sales tax through several changes, including: taxing all paid television services the same (replacing a current disparity between cable and other kinds of TV service delivery), taxing some digital goods, and requiring some online retailers to collect sales taxes on purchases made by Minnesotans.
In addition, the bill applies the sales tax to business purchases of warehousing and storage, electronic and commercial equipment repair and maintenance, and telecommunications equipment.
These sales tax expansions pay for sales tax cuts, which include exempting cities and counties from paying the sales tax; allowing an exemption for business purchases of capital equipment at the time of purchase, which replaces a cumbersome refund process; and exempting purchases of construction materials for a number of economic development projects.
In total, the sales tax changes raise $59 million in FY 2014-15. Another provision of the bill raises $15 million through the motor vehicle rental tax.
Estate and gift taxes: The bill raises $78 million in FY 2014-15 through updates in the estate tax and by using a gift tax to back up the estate tax.
Reversing the school funding shifts: The omnibus tax bill does not include the House's proposed income tax surcharge to reverse the school funding shifts. Instead, any positive balance at the end of the 2013 fiscal year will be applied to reversing school funding shifts, in addition to the current requirement to use positive balances from future forecasts. This provision is found in the education omnibus finance and policy bill, House File 630.
In past years, the response to budget shortfalls has been deep cuts to services and use of timing shifts to kick the problem down the road. This year's tax bill and budget take a better approach, raising the revenues needed to balance the budget and invest in the future; and reforming our tax system so that we share the responsibility for funding public services more equally.