Last week, we evaluated the Legislature’s tax bill and found that it needed improvement. Unfortunately, very little was changed, and the tax bill the Minnesota Legislature passed Sunday contains the same unfair and unsustainable provisions as the version that Governor Mark Dayton vetoed on May 17.
The big tax challenge this year was to respond to the federal tax bill without repeating its mistakes. As the end of session neared, there appeared to be agreement on how to approach the individual income tax: Minnesota would update our tax code in ways that protected Minnesotans – including families with children, seniors, and people with disabilities – from the tax increases they would see if Minnesota simply conformed to federal tax changes. That consensus is included in the new tax bill, House File 947.
But House File 947 includes other provisions that undo some of the good done by that agreed-upon approach to conformity. Plus, the bill’s tax cuts leave out the Minnesotans who are struggling the most to get by, and it is not fiscally sustainable.
Minnesotans would see tax increases over time under this bill because it would switch to “chained CPI”, a slower-growing measure, to make yearly inflation adjustments across the tax code. As a result, the standard deduction, family exemptions, the Working Family Tax Credit, the Child and Dependent Care Tax Credit, and other tax benefits would be worth less over time. Minnesotans would only be protected from tax increases from conformity decisions temporarily. Minnesotans would pay $60 million more in the FY 2020-21 budget cycle from the change to chained CPI, and its impact will grow larger each additional year.
Those Minnesotans who struggle most to make ends meet will pay more over time, but will not benefit from the bill’s tax cuts. That’s because an estimated 1 in 5 Minnesota households don’t benefit from the bill’s income tax rate reductions because they don’t have enough taxable income after subtracting their deductions and exemptions. And to get the maximum amount of tax cut, a family of four would need to earn about $180,000, which puts them in the highest-earning 10 percent of Minnesota households.
The bill would cut Minnesota’s corporate tax rate by 0.7 percentage points, on top of the 40 percent rate cut corporations received in the federal tax bill. Both the income and corporate tax rate reductions “phase in” over time, which means they take several years to fully take effect, masking their ultimate cost. In addition, the bill would create additional future problems by using some temporary revenue increases – such as provisions related to “deemed repatriation” that end after eight years – to help pay for permanent tax cuts.
Mostly what’s different about House File 947 are its components related to the funding challenges many Minnesota school districts are facing. Unfortunately, the only additional money for schools in the bill is $50 million that comes out of the state’s budget reserve. This “rainy day fund” is where the state sets dollars aside so that in the next economic downturn, Minnesotans can still count on essential services. In good times, states should build their reserve funds, and despite good progress over the past number of years, Minnesota’s reserve isn’t yet at the recommended target. The budget reserve shouldn’t be tapped into whenever a short-term need comes along. It’s worth remembering the kinds of financial and other pressures Minnesota families, seniors, and children faced during past recessions when the state had inadequate budget reserves.
The bill has other short-comings as well. The lack of any expansion of the Working Family Credit is one. But I suspect if Dayton vetoes this bill, as he has suggested, it will be because of what is in the bill, not only what’s missing.