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House DFLers’ tax proposal includes breaks on PPP loans, jobless benefits; adds fifth income tax bracket

The ranking Republican on the House Taxes Committee, Rep. Greg Davids, said the plan would be ‘dead on arrival’ in the state Senate. 

House Speaker Melissa Hortman
House Speaker Melissa Hortman: “We’re raising sustainable, progressive revenue in our tax bill to make sure we can back up the commitments we’re making to students and families and workers today.”

They’re getting smaller. But the tax hikes proposed by DFLers at the Minnesota state capitol are still around, despite a run of pretty good news about revenue and the economy over the last three months. 

Gov. Tim Walz’s first budget request came with $1.6 billion in proposed tax hikes. Portraying the increases as a tax on the wealthy, Walz said the money was needed for a series of ongoing programs that would help the state following the COVID-19 recession. That plan came before several changes to the state’s finances, though: tax collections — and forecasts of future tax collections — have steadily improved; projected deficits have been replaced by surpluses, and the federal government has passed yet another stimulus package that will send billions of dollars to Minnesota’s state and local governments.

In March, that $1.6 billion tax hike request became a $670 million tax hike, with Walz using some of the tax-the-wealthy tax revenue to reduce taxes due on COVID-19 benefits like paycheck protection plan loans and enhanced unemployment insurance while keeping most of his tax hikes on high earners and corporations.

Monday, it was House DFLers’ turn to present a plan. Their tax proposal is smaller than the governor’s first try — or his second. In fact, on paper, it is a zero dollar increase, at least for the upcoming two-year budget, due to the presence of both tax hikes and tax cuts. But since the additions are permanent, and many of the cuts are one-time only, the future impact on revenue will be an increase.

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Gone from the House DFL plan, for example, is the Walz proposal to increase the rate of the state tax on corporate profits and a hike in the capital gains tax. Still around is a new fifth income tax tier, this one applying to residents earning $500,000 or more and couples earning $1 million or more. It is similar to Walz’s plan though it has higher rates and would raise $563 million over two years compared to $400 million under the Walz plan. 

The House would also raise $400 million by taxing corporate income when it is brought back to the state from other countries. That increased revenue is spent in the next budget on tax forgiveness on most PPP loans and the first $10,200 in the COVID unemployment insurance top off.

The House DFL tax plan also has a series of other smaller cuts and tax credits. It expands the working family tax credit; increases the refund for property taxes paid by lower-income renters and homeowners; conforms with the recent federal change to allow a flat $300 charitable deduction; and would allow a tax refund to restaurants for the costs of abiding by COVID guidelines.

Despite having different methods and different amounts, DFL lawmakers’ messaging about the proposal has been similar to Walz’s on his: the COVID recession hit different income groups differently, and those who did okay should be helping raise revenue for programs to help those who fared worse. It is the “fair-share” narrative that is being used by Democrats in states across the U.S., including President Biden in his pitch for an infrastructure plan. 

House Speaker Melissa Hortman, DFL-Brooklyn Park, referred to the tax increases as “progressive revenue.”

“We’re raising sustainable, progressive revenue in our tax bill to make sure we can back up the commitments we’re making to students and families and workers today,” she said.

State Rep. Ryan Winkler
State Rep. Ryan Winkler
Rep. Ryan Winkler, the House DFL majority leader from Golden Valley, said that those who “are rich and well connected and who are just plain fortunate” are doing better, despite the recession. “They can afford to be part of the long-term investment that Minnesota needs,” he said.

“Minnesotans understand that the biggest corporations and the wealthy have done extremely well during this pandemic, so the House DFL has put together a tax bill that levels the playing field and pays for important investments in people,” said Rep. Paul Marquart, the House Taxes Committee chair from Dilworth.

Hortman didn’t exactly dismiss the projected $1.6 billion surplus for the next biennium, the $2.24 billion rainy day savings account or the $2.6 billion in flexible money flowing directly to the state from the federal American Rescue Plan. But she called such funds “one-time dollars” that couldn’t be counted on to pay the ongoing costs of the House DFL budget bills.

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The proposal would increase the state distribution of funds to school districts by 2 percent for each of the next two years (Walz had proposed 1 percent the first year and 2.5 percent the second). It also maintains funding for voluntary pre-kindergarten enrollments for 4,000 students and increases money for community schools and mental health counseling in schools. In higher education, the proposal would increase funding for financial aid and keep tuition the same at Minnesota State campuses

State Rep. Paul Marquart
State Rep. Paul Marquart
The child care budget would increase reimbursement rates for child care providers, increase early learning scholarships and increase payment rates for the subsidized Child Care Assistance Program.

Yet except in the case of the child care budget, which benefits from specific funding in the federal American Rescue Plan, the House DFL budgets will not spend any of the $2.6 billion in direct cash to the state. House Ways and Means Chair Rena Moran, DFL-St Paul, said the state is waiting for federal guidance on how the money can be spent.

Lawmakers may come back later in the session with changes if that guidance arrives in time, Moran said. Otherwise, the spending will flow through the existing Legislative Advisory Committee process, which gives most spending authority to the governor. That is how all of the federal funding from the 2020 CARES Act was spent.

Walz and legislative DFLers don’t think the federal funds should change their taxing calculations. But legislative Republicans think it already has. No tax increases was the centerpiece of the 2021 agendas for the House and Senate GOP caucuses — and that was before an improved state economic and revenue forecast and the $1.9 trillion American Rescue Plan.

The Senate GOP budget targets also include a desire to seek budget cuts in each budget area. Republicans have also called for complete PPP tax forgiveness, rather than what Walz or the DFL is proposing: to exempt the first $350,000 in loans. The federal government will not tax PPP loans at all. 

A statement released Monday by the ranking Republican on the House Taxes Committee, Rep. Greg Davids of Preston, sums up the GOP stance on the DFL tax increases. “Democrats don’t seem to understand that we have a $1.6 billion surplus and billions more coming from the federal government,” Davids said. 

He said tax increases will hurt businesses that have struggled over the last year and harm hiring. “Fortunately, these tax hikes are dead on arrival in the Senate, and have no chance of passing this year,” Davids said.