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Minnesota’s new tax laws decidedly lacking in reform

Minnesota House of Representatives Public Information Services
After conducting forums in more than 50 cities around the state and raising expectations, the Dayton administration offered a tax plan that contained surprisingly little reform.

Minnesota’s DFL legislative leaders say their adopted $38 billion budget for the coming two years represents “progress,” but they haven’t made a lot of claims about it representing “reform.”

The so-called “linchpin” of the budget – the $2.1 billion tax bill approved by the two houses – is decidedly lacking in reform. And Gov. Mark Dayton can share in the blame.

After conducting forums in more than 50 cities around the state and raising expectations, the Dayton administration offered a tax plan that contained surprisingly little reform. Indeed, it included a terrible idea for providing property tax relief – a flat $500 rebate for homeowners regardless of their income or the size of their tax bill.

It’s curious that a DFL governor driven to raising income taxes on the rich also wanted to send them a $500 property tax refund.

The most important reform in Dayton’s tax plan was his proposal to expand the sales tax to clothing and services, and lower the tax rate from 6.875 percent to 5.5 percent. This would have modernized the tax to recognize our transition to a service-oriented economy and made the sales tax a more stable source of state revenue.

But Dayton abruptly yanked that proposal from the table after business leaders convinced many legislators and members of the public that taxing business-to-business services was a bad idea.

Hidden taxes

They argued that it would result in hidden taxes on Minnesota goods and services, make them less competitive with out-of-state businesses and result in higher prices for consumers.  Minnesota Revenue Department studies have shown that business taxes passed along to consumers are the state’s most regressive taxes – that is, the most burdensome for lower income taxpayers.

The Senate DFL leadership sought to retain the expansion of the sales tax to clothing and some consumer services, but Dayton wouldn’t support it in the absence of a tax on business-to-business services.

In the final bill, the two houses did extend the sales tax to three new types of business transactions – the purchase of telecommunications equipment, warehousing and storage, and maintenance of business equipment. These provisions are expected to generate more than $300 million in additional revenue.

Bill Blazar, senior vice president of the Minnesota Chamber of Commerce, says just the tax on telecom equipment will have a huge impact. “Most businesses replace telecom equipment nearly as often as they replace computer equipment,” he says.

Of course, the biggest revenue raiser in the bill is Dayton’s signature proposal to increase income taxes on the upper 2 percent of Minnesotans.  As Dayton proposed, the bill establishes a new top tax rate of 9.85 percent for single filers with taxable income of more than $150,000 and married couples with income of more than $250,000. This will generate more than $1.1 billion in the coming biennium

Under the bill, Minnesota’s income tax ranking will rise from 11th to fourth for single taxpayers with $250,000 of income, from 12th to fifth for married taxpayers with $500,000 of income, from 11th to fourth for married taxpayers with $1 million in income and from seventh to fourth for single seniors with $250,000 in income, according to the Minnesota Center for Fiscal Excellence.

Blazar says he is worried about the impact of the increase on 20,000 small business owners who pay individual income taxes on their business income. He says the chamber proposed an exemption for a portion of this business income, but DFL legislators “chose not to do that.”

Mark Haveman, executive director of the Center for Fiscal Excellence, says his biggest concern is the impact of the increased income tax on Minnesota’s ability to attract new business and jobs.

How many CEOs are “going to look at a 9.85 percent income tax rate and decide this is probably not the best place to expand?” Haveman says. “We think this bill is a very big bet on the irresistibility of Minnesota as a place to do business.”

The other big revenue raiser in the bill is a $1.60-a-pack increase in the cigarette tax, which is projected to bring in another $408 million in the next two years.

Property tax relief

DFL legislative leaders claim their tax bill will provide $400 million in property tax relief over the next two years. This total includes $80 million in additional aid to Minnesota cities and $40 million in aid to counties. In addition, the bill repeals the existing sales tax on purchases by local governments, saving them another $172 million.

Historically, over the last four decades, property tax relief provided in the form of increased aid to local governments has been eroded quickly by increases in local spending.

Haveman says the best study of the impact of local government aid (LGA) was done by the nonpartisan Legislative Auditor’s office in 1990. “It found that cities used 82 percent of the additional aid to finance increased spending and 18 percent to reduce property taxes,” he says.

To ensure that Minnesotans see some property tax relief next year, the bill imposes a one-year limit on local property tax levies. Cities and counties will not be permitted to raise their levies more than 3 percent, minus the additional state aid they receive.

At the insistence of House DFLers, the bill also provides $135 million in additional aid to homeowners and renters through the current Property Tax Refund (PTR) program, which provides refunds based upon the taxpayer’s income and the size of their property tax bill (or, in the case of renters, the amount of rent that is presumed to go for property taxes).

Tax experts generally agree that the PTR program is the most direct, efficient and equitable way of providing property tax relief to the people who need it most.

About three-quarters of currently eligible households will see an average $219 increase in their refund and another 112,000 households will now qualify for a refund, according to the Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits.

Perhaps the most important reform in the budget is that it erases a projected $627 million shortfall and balances the books without the kind of one-time accounting shifts and other gimmicks that have been used over the last decade.

“We have re-set the clock in Minnesota,” says Senate Majority Leader Tom Bakk, DFL-Cook, and put the state on a “stable budget path.”

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Comments (11)

  1. Submitted by Jeff Klein on 05/22/2013 - 09:33 am.

    Can we stop repeating this nonsensical argument?

    Can we all just stop and realize for once that the tired argument, repeated here, that income taxes hurt businesses makes no sense and never has? Whenever it’s presented it’s always intentionally vague, but I can see only a few specific claims that are being made.

    – It will hurt “small businesses”. This is apparently because those making the argument are counting on us not to distinguish between gross and net income. If we can’t distinguish those two in our tax code we’re not even trying.

    – “Businesses will decide not to expand.” Why? Because they care how much money their employees take home at the end of the day? Since when? Businesses will pay their employees as little as they can get away with. If people choose to live here for the better quality of live our taxes pay for, then businesses will relocate here to find employees. Which they do.

    – And finally, the “high tax” states are consistently better places to live by any stretch of the imagination and any conceivable metric than the “low tax” states. In this country, our “high tax” states include places like New York, California, and Massachusetts – places where people are well-educated, healthy, and have good incomes. Our “low tax” states are the Alabamas and Texases, places that should seem decidedly third-world to a Minnesotan. Whoever is making the case for conservative tax policy better be ready to explain why we should want to model ourselves after Alabama.

    • Submitted by Steve Titterud on 05/22/2013 - 02:00 pm.

      The “policy entrepreneurs” who espouse the crap in the…

      …theses you’ve culled from this column will never adequately explain anything. They have no sound explanations. They don’t need no lousy explanations !! They do no real research subject to peer reviews and adequate analysis – but they sure like a good headliner !

      Mr. Dornfeld is a frequent water-carrier for these “policy entrepreneurs”, who are actually political operators whose followers like to mis-characterize them as think tanks, an insult to all genuine independent think tanks.

      Mr. Dornfeld features these outfits and their tired mantras in his columns – such as the renamed Minnesota Center for Fiscal Excellence, which pretends to compare complex state taxation systems by focusing on a simple specific subset of data (a real load of crap), and another is the Center of the American Experiment, which recently opined that people and incomes are absolutely fleeing out of Minnesota in a quest to find lower taxes. Trouble is, their argument won’t hold even a teaspoonful of water.

      The idea that income taxes hurt the business environment has about the same integrity as the argument that lowering taxes creates new jobs. In other words, zero integrity, near as I can tell.

      • Submitted by Logan Foreman on 05/22/2013 - 10:59 pm.

        Dornfeld – no need to call your favorite

        Sources – we already know what they will say. Check out Small Business MN though, you may learn something.

    • Submitted by Eric Andersen on 05/23/2013 - 08:55 am.

      Study from Missouri that proves your point

      http://www.mobudget.org/files/Business_Location_Decisions_and_State_Tax_Policy_Jan_2013.pdf

      “ The average unemployment rate is virtually identical in states with the highest
      corporate tax rates and states that do not levy corporate income tax.
       States with relatively high corporate tax rates have a higher average median
      income than states that do not levy corporate income tax.
       The average number of Fortune 500 companies located in states with high
      corporate tax rates surpasses that of states that do not levy a corporate income tax.”

      “..survey of consultants who help businesses determine new or expanded site locations. The state corporate tax rate did not even rank within the top ten selection factors.”

      “The survey also found that the quality of public schools was the number one factor among quality-of-life indicators that business consultants consider when recommending a location.”

      Wisconsin schools are now experiencing serious brain-drain as their quality teachers flee the state. We are definitely seeing it in our hiring up here in northern Minnesota. Give it a few years and you will see businesses fleeing Wisconsin also as Walker’s policies turn Wisconsin into another Mississippi. Crummy schools, crummy infrastructure, crummy services, high poverty and LOW TAXES! isn’t a very effective sales pitch to anyone including businesses.

  2. Submitted by Bill Gleason on 05/22/2013 - 10:12 am.

    The title of this post does not seem to be in agreement with

    its punchline:

    “the most important reform in the budget is that it erases a projected $627 million shortfall and balances the books without the kind of one-time accounting shifts and other gimmicks that have been used over the last decade.”

    If this isn’t a reform, I don’t know what is.

    Facing up to the fact that we have a revenue problem is what the voters wanted. And further reforms were blocked, mostly, by exactly whom?

    • Submitted by Tom Anderson on 05/23/2013 - 09:14 pm.

      Sadly

      “the most important reform in the budget is that it erases a projected $627 million shortfall and balances the books without the kind of one-time accounting shifts and other gimmicks that have been used over the last decade.”

      This is, of course, untrue. The $860 million school shift is not being paid back with this budget, nor are the $800 million of tobacco bonds being repaid. Same exact shifts and gimmicks.

      Don’t even start with the Republicans blocking reforms, they didn’t have the votes (witness same-sex marriage).

      The worst “reform” is that now the State is even more dependent on fewer people for it’s revenue.

  3. Submitted by Greg Kapphahn on 05/22/2013 - 10:18 am.

    Fixing the Unholy Mess Left Behind by Republicans

    After a decade of dishonest budget shifts, carefully-hidden cuts in spending for necessary infrastructures and cuts in taxes for 1%ers, cost shifting (onto local property tax payers), and continuous (carefully designed by Republican leadership) budget “crises,”…

    though that’s really a misnomer, since EVERY “crisis” was quite purposefully created as an excuse to punish the poor, the teachers, and unionized state employees and disable government agencies that enforced existing regulations,…

    I NEVER expected that the Democrats in this single legislative session would be able to do anything but re-balance our state’s budget along the old, massively-successful traditional lines,…

    without the Republican’s favorite dishonest, B.S. budgeting games.

    That in itself is a miraculous accomplishment,…

    (despite the Republican leadership’s trip around the state, once again throwing their tangled spaghetti of ideas, now rendered by experience to be useless and unpalatable;…

    once too undercooked to stick, but now after ten years of repetition and experience rendered so old, rotten, slimy and foul-smelling, that when they throw that same spaghetti against the wall it just slides and slithers down to the floor where even the custodial staff feels they need full hazmat suits when they come in to clean it up,…

    but as a testament to their dysfunctions, this crop of Republicans can’t conceive of anything else).

    Reform WILL COME later,…

    and will be fought by the Republicans every step of the way.

    • Submitted by Steve Titterud on 05/23/2013 - 09:33 am.

      Ted Kennedy once said about Republican economic policies…

      …”As they say in the circus, it’s a big job cleaning up after a big elephant !”

  4. Submitted by Jeffrey Peterson on 05/22/2013 - 05:22 pm.

    tax reform

    Real tax reform is painful and difficult because it creates winners and losers in shifting revenue sources to achieve goals such as looking at the fairness of tax expenditures, transparancy of taxes or the stability of revenue generated from certain taxes over time. It is much easier to simply stick with the basic elements of property/income/sales and elevate the level of “progressiviity” to generate the amount of revenue someone decides you need to accomodate some level of spending, in this case substantially more. If you have the votes and play to your base, you needn’t look beyond that for the balance true reform would require. I would also wonder with all the discussion about “jobs, jobs, jobs” what the net outcome of the tax increases and increased spending will have on job creation. If there is much of any it would seem to be minimal when this should be a higher priority for economic recovery.

  5. Submitted by Bill Gleason on 05/23/2013 - 06:56 am.

    Job creation?

    I am always a little suspicious whenever anyone claims that job creation should be of higher priority. I’d argue that there is plenty of it in the latest budget. To give a non-trivial example, who is going to do all that all day K teaching? And about that money being spent in Rochester for infrastructure, no jobs there, right? I could go on.

    So what, Mr. Peterson, are your ideas for job creation? The usual tax cuts for business that will – according to the GOP – lead to enormous increases in jobs? Or do you have some other creative job creation strategies? The GOP could really use some help in this area. Their current song and dance did not sell well last election.

    Look to the East at the unemployment mess in “low tax” Wisconsin. And then explain why this is happening.

  6. Submitted by Kevin Watterson on 08/16/2013 - 12:17 pm.

    For a program that gets as much attention as LGA you’d think there’d be a more recent study than 1990.

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