All tax plans on the table raise revenues: the difference is how much and who benefits

Nan Madden
May 17, 2019

The negotiations to reach a budget deal this session have at times been characterized as a debate between raising taxes or not raising taxes. But in fact, all the plans on the table raise revenues. The real differences are in how much revenues they raise and whether those revenues are spent on building a prosperous future for all Minnesotans.

Budget decisions are being made in the context of a projected state budget surplus that does not continue beyond the next two years, a state economy in which prosperity does not reach all communities and parts of the state, and against the backdrop of a 2017 federal tax bill that provided the largest benefits for profitable corporations and high-income households.

Governor Tim Walz’s budget proposal and the House tax and budget plan raises revenues needed to meet current commitments and fund investments in broader economic security. Their general fund tax increases are paid largely by those who saw the most benefit from federal tax cuts, and by reversing past state tax cuts that have proven unaffordable. Their tax plans also include tax cuts focused on everyday Minnesotans, including those who aren’t yet taking part in Minnesota’s economic success.

The Senate, on the other hand, raises less general fund revenue overall, and instead of using those revenues to fund essential services, they pay for tax cuts that leave out many Minnesotans. Not raising enough revenue in the Senate’s tax plan translates into falling short in their budget bills. For example, the Senate budget includes only a 0.5 percent per year increase in funding for schools through the general education formula – not enough to even keep up with inflation. In contrast, Walz’s and the House budgets provide a 3 percent increase in FY 2020 and another 2 percent in general education funding in FY 2021.

This blog takes a closer look at how the different tax plans raise general fund revenues and who benefits from proposed tax cuts.

Tax conformity on businesses

The House, Senate, and Walz tax plans all have a substantial focus on “tax conformity,” which is when the state decides how to update the tax code in response to federal law changes. Policymakers need to respond to the 2017 federal tax bill, which goes by the acronym TCJA. The federal tax bill provided large, permanent tax cuts for corporations – including a 40 percent cut in the corporate tax rate – and at the same time, it also “broadened the base” by expanding the share of business profits that are taxable.

All three tax plans raise state revenues by adopting some of these base broadeners. Given that businesses received substantial federal tax cuts, it makes sense at the state level to recapture a portion of the federal tax cuts through conformity. When combined with TCJA conformity items that cut taxes for businesses, Walz’s tax conformity plan raises $945 million from corporations and pass-through businesses in FY 2020-21, the House raises $1.1 billion, and the Senate $458 million.

The fact that the Walz and House tax plans raise much more from business conformity than the Senate is explained by their different approaches to multinational corporations. The TCJA sought to address the issue of untaxed corporate profits held in overseas subsidiaries, and both Walz and the House follow the TCJA’s lead by adopting provisions that tax foreign income. The Senate does not have any provisions to address untaxed profits held overseas or other kinds of foreign income.

Reversing past state tax cuts

Walz and the House also raise revenues by reversing tax cuts made in Minnesota’s 2017 tax bill whose cost is growing over time. The Walz and House tax plans contain similar provisions that reverse or freeze these cuts: by undoing the freeze on the statewide property tax paid by businesses, reinstating inflationary adjustments on tobacco taxes, and freezing the amount of an estate that is exempt from tax at current levels, rather than allowing it to rise further. These provisions raise about $76 million in FY 2020-21 and over $231 million in FY 2022-23.

In contrast, the Senate does not include these reversals and instead would cut the statewide property tax further, reducing taxes on businesses and cabins by $78 million in FY 2020-21 and $100 million in FY 2022-23.

Tax changes for individuals and families

In terms of changes for individuals and families, another key area of contrast between the tax plans is who benefits from proposed tax cuts and who pays more from proposed tax increases. Below are some examples.

On net, the governor’s tax plan would cut income taxes on individuals and families by $136 million in FY 2020-21. His tax plan includes a roughly $50 million per year increase in the Working Family Credit, a tax credit for low- and modest-income workers and families. He would create a long-overdue expanded Working Family Credit for families with three or more children, as well as boost the credit for workers and families that currently qualify for the credit.

The House bill includes $336 million in tax reductions for individuals and families in FY 2020-21. That includes expanding the Working Family Credit by about $41 million a year; their expansion proposal is particularly strong for the two family types that are less well-served by the credit as it is currently structured: workers with no dependent children, and families with three or more children. Modest- and middle-income Minnesotans are among those who would see tax reductions from House provisions creating a higher standard deduction and increasing the size of the first tax bracket. And the House would increase property tax refunds for renters by $22 million and for homeowners by $23 million in FY 2021.

In addition to these tax cuts, the House also includes a targeted tax increase on higher-income households. It raises $381 million in FY 2020-21 and $319 million in FY 2022-23 by assessing an additional 3 percent income tax on net long-term capital gains and dividends over $500,000, on top of the existing income tax rate. These kinds of income are primarily received by high-income households and often subject to a special lower federal tax rate.

The Senate also has a combination some provisions that raise taxes and some that cut them. The Senate is unique among the three tax plans in that it raises significant revenues ($146 million in FY 2020-21) in its conformity plan for individuals and families – primarily from limiting itemized deductions (such as union dues, uniforms, and other work-related expenses) and through adopting chained CPI. Chained CPI is a slower-growing measure of inflation, and adopting it reduces the value of exemptions, credits, and other features of the tax code over time.

The Senate tax bill also cuts taxes, primarily by lowering the income tax rate in the second tax bracket from its current 7.05 percent to 6.8 percent in 2019 and to 6.67 percent in 2022. But nearly half of all Minnesotans, especially low- and middle-income households, would see no benefit from this rate cut, according to analysis from the Institute on Taxation and Economic Policy. For example, only about half of middle-income Minnesotans (incomes $50,000 – $79,000) would see any benefit, receiving an average $44 tax cut in the first year of the proposal. In contrast, nearly all households with incomes above $259,000 would benefit, and they receive a much higher average tax cut of more than $250.

While in total the Senate tax bill cuts taxes for individuals and families by $301 million in FY 2020-21, that doesn’t mean that everyone benefits. Those who pay more from its approach to conformity won’t necessary benefit from the tax cuts. Lower-income Minnesotans, for example, will pay more in income taxes because of the change to chained CPI, but see no benefit from the Senate income tax rate cut. The House also includes chained CPI, but avoids this outcome because lower-income people are included in tax cuts like Working Family Credit expansion.

Policymakers also face key questions about dedicated funding sources

This blog has focused on the general fund tax changes contained in the omnibus tax bill proposals. Other important questions are whether the state will maintain the provider tax, which is an essential funding source for affordable health care, and raise the gas tax and other dedicated funding sources to boost funding for roads, bridges, and transit.

The harm caused by not maintaining dedicated funding sources is clear. For example, the Senate’s health and human services (HHS) budget allows the health care provider tax to expire, leading to a loss of about $700 million a year in health care funding. Even before the full impact of the loss of the provider tax is felt, the Senate’s HHS budget would cut dental and vision coverage for lower-income Minnesotans.

It’s not a question of whether to raise taxes or not. It’s whether we are raising the revenues needed to invest in our common future, and whether our tax decisions also support the goal of building prosperity that reaches all Minnesotans.

-Nan Madden