Balanced tax bill should be the goal; Legislature’s tax bill has a ways to go

Nan Madden
May 17, 2017

There’s more to be done to get to a tax bill that takes a balanced approach between tax cuts and state investments, and is balanced in terms of who is included. The tax bill the Legislature sent to Governor Mark Dayton’s desk earlier this week falls short (House File 4).

Expanding economic opportunity should be a priority for tax and budget decisions this year. House File 4 has taken some steps to include Minnesota workers and families, but there’s more work to do.

On the positive side, the Legislature’s tax bill includes the Child and Dependent Care Tax Credit. The bill would update the size of the maximum tax credit for which families can qualify, and would make the credit available to more families, providing an additional $36 million to families over the two-year FY 2018-19 budget cycle. Expanding this tax credit is an investment in building the state’s workforce for today and tomorrow. A greater ability to afford child care not only allows parents to go to work, but also employers are better able to find and retain the employees they need. The bill takes a good first step; moving further toward the governor’s version would be an even stronger commitment to addressing the child care needs of Minnesota families.

However, the bill’s most glaring omission is its failure to include an expansion of the Working Family Credit. When workers receive this tax credit, they are able to gain traction in the workforce because they can better afford reliable transportation and other things they need to succeed, and they can save a little to deal with temporary setbacks.

The Working Family Credit also provides positive effects for children. Research on similar credits finds they improve children’s chances of success in school and later as working adults. A final strength of the Working Family Credit is that it effectively reaches households all across the state: 48 percent of those receiving the credit live in Greater Minnesota and 52 percent in the seven-county metro area.

House File 4 takes a step forward by addressing barriers to accessing the credit faced by some Native American members of our communities. But policymakers should also enact an expansion like what was in the Legislature’s 2016 tax bill and is proposed in Dayton’s budget. This would benefit an estimated 372,000 Minnesota workers and families by increasing the credit and including more Minnesota workers, particularly by lowering the age requirement for workers and married couples without children from 25 years old to 21.

Fortunately, House File 4 does not include the House’s proposed cuts to the Renters’ Credit, which would have cut into the property tax refunds received by Minnesota seniors and people with disabilities living on fixed incomes, as well as families living paycheck to paycheck.

However, the Legislature’s tax proposal takes up more than two-thirds of the state’s projected surplus for FY 2018-19. This heavy emphasis on tax cuts means that the Legislative budget also cuts funding for affordable health care for Minnesota families and fails to make needed investments. Big tax cuts, and especially ones that grow over time, are particularly unwise given that federal policymakers are considering proposals that could cost the state billions of dollars in funding.

It’s beyond the scope of this blog to look comprehensively at everything in the 385-page bill, but here’s a quick take on the five items with the largest cost in FY 2018-19.

The largest provision would exempt more Social Security income from the income tax, a $218 million reduction in FY 2018-19 and $242 million in FY 2020-21. Over the past several years, we’ve pointed out that such proposals provide no benefit to the lowest-income seniors, whose Social Security benefits are already exempt. In fact, House Research finds that only about 35 percent of Social Security benefits are subject to income tax.

The Social Security provision in House File 4 is more targeted than prior iterations; it provides an exemption that gets smaller at higher income levels. But its cost remains a concern, and will grow in future years as seniors make up a larger share of the state’s population. Policymakers should beware of tax cuts that grow dramatically over time, and thereby threaten the state’s ability to sustainably fund the services that seniors count on, from community-based services to high quality nursing home care.

The second largest item in the bill is a dramatic reduction in the estate tax. This proposal for $162 million in tax cuts in FY 2018-19 and $195 million in FY 2020-21 benefits only a small number of taxpayers – about 1,100 of the highest-value estates. It would be a dramatic reversal from Minnesota’s recent progress toward a tax system that is more equitable across income levels. In addition, it creates further inequities among taxpayers, because it would allow a greater amount of unrealized capital gains in large estates to fully avoid being subject to taxation.

Rounding out the top five are three tax cuts for businesses:

  • Exempting up to $150,000 of each commercial/industrial property’s value from the statewide property tax, and freezing the total amount the tax raises;
  • Expanding Section 179 expensing; and
  • Expanding the Research & Development Tax Credit.

Combined, these three items total up to about $300 million in FY 2018-19 – more than one-quarter of the entire tax bill. Their cost grows to $424 million in the next biennium, particularly because of the freeze on the statewide property tax.

The Legislature’s tax bill is an agreement between the House and Senate majorities, and provides the baseline for their ongoing negotiations with the governor.

Dayton has already vetoed this tax bill, in part because of its provisions related to private schools. One would allow families to include what they pay for private school tuition as eligible expenses towards the K-12 Education Credit, and the other would create a new 70 percent tax credit primarily for donations to organizations that provide private school scholarships to low- and middle-income families. Organizations including the Minnesota Council of Nonprofits have raised concerns about singling out donations to just one kind of organization for special tax benefits, rather than providing equal treatment for all charitable donors and charitable organizations.

There’s not much time left and a ways to go to reach a balanced tax bill, but the way to get there is clear: making everyday Minnesotans a stronger priority within the tax bill, and significantly reducing the size of the tax bill so that we can invest in our schools, our families, and our communities.

-Nan Madden