Senate Democrats dropped in the last piece of the state’s budget puzzle Tuesday, releasing a tax bill that calls for $1.8 billion in tax increases and a partial overhaul of Minnesota’s sales tax system.
Their action sets the stage for serious negotiations with Gov. Mark Dayton and their House counterparts on financing much of state government.
The Senate bill includes a $1.1 billion tax hike on nearly 7 percent of Minnesotans, $360 million in increased tobacco taxes and an expansion of the state sales tax to include clothing and some consumer services.
Senate Taxes Committee Chairman Rod Skoe said the measure fulfills the DFL’s goal of balancing the state budget for the next four years.
“We’re pretty pleased with our bill,” Skoe said after its first hearing. “I think it does a lot of good things, and so we’re looking forward to the discussion.”
The governor’s office and DFL leaders in the Legislature have long noted that Minnesota’s wealthiest residents will see an income tax hike. Democrats have framed the tax increases as necessary to fund investments in education, economic development and property tax relief.
Dayton proposed a $1.1 billion fourth-tier increase on the top 2 percent of wage earners that would increase the rate to 9.85 percent. The House, meanwhile, proposed to increase taxes on the top 1.1 percent of Minnesotans — plus an additional “blink off” surcharge for an even smaller sliver of the state’s wealthiest residents to pay back the $850 million the state owes school districts.
But the Senate took a different tack, sliding down the income scale.
Skoe said the Senate income tax hike, which is comparable in overall size to Dayton’s, would directly affect about 6 percent of Minnesotans and some others through the marriage penalty. The increase, aimed at joint filers with an income of $140,000 and single filers who earn $79,000, would bump the rate up to 9.4 percent.
The measure would affect 177,800 Minnesotans, who would pay an average of $2,435 more in income taxes, according to the Minnesota Department of Revenue.
Sen. Julianne Ortman, the lead Republican on the Taxes Committee, blasted Senate Democrats for targeting the middle class for tax hikes after talking about only hitting up the wealthiest Minnesotans.
“They are digging deep into the middle-class ranks,” Ortman told reporters after the hearing. “I would call this Christmas in April for government, but somebody has to shovel all that snow.”
Senate Minority Leader David Hann, who reviewed the proposal as the committee hearing went on, agreed.
“We think it’s shameful. We think they’re out of control,” he said. “This is massive overreach. They’re just loading up the taxes on middle-class Minnesotans across the state.”
But Skoe and Sen. Ann Rest, another lead Democrat on taxes, said their proposal doesn’t even get close to average-income Minnesotans, who sit at roughly $54,000 a year.
“It’s hard to define middle class,” Skoe said, “but if you’re really only impacting 7 percent of Minnesotans, I don’t see that we could be going very far down into the middle class.”
The Senate tax bill also includes other revenue increases, including a 94-cent hike on a pack of cigarettes, which mirrors Dayton’s plan. The House tax plan would raises prices $1.60 and also includes an alcohol tax hike that the governor and the Senate have been cool toward.
A sales tax overhaul to cover clothing and certain consumer services would raise about $90 million over the next two years. The proposal, which shifts around more than $1 billion, is roughly revenue neutral because Senate lawmakers have proposed cutting the rate from 6.875 percent to 6 percent, almost mirroring Dayton’s first budget proposal.
The Senate plan includes a means-tested $67 million income-tax rebate to offset the expansion of the state sales tax to clothing.
Skoe and Rest, who said their bill will pass the Senate by early next week, told reporters they’d advocate for sales tax reform in the final package that comes out of negotiations with the House and the governor.
“We’re going to see if we can’t convince the governor and the House of the merits of our sales tax provisions,” Skoe said.
The House will take up its tax bill Wednesday.
While the governor’s tax plan would raise money by closing loopholes for foreign operating corporations, the Senate proposal would take much of the revenue closing those loopholes to lower the corporate tax rate from 9.8 percent to 9 percent.
The Senate tax plan increases local government and county aid by $120 million, as well as providing $18 million up front for business purchases, $10 million in new money for angel investment and $1.4 million for research and development.
It also includes state incentives for the Mall of America, the Mayo Clinic’s Destination Medical Center and for Baxter International’s potential biopharmaceutical plant in Brooklyn Park.