Minnesota Budget Bites

In an author’s amendment added to the House omnibus tax bill on Monday during the floor session (HF 3149), Rep. Lenczewski made some significant changes to the Homestead Credit State Refund in response to several concerns that have been raised about this proposal since its introduction.

As a reminder, this proposal would take the resources currently going to the Property Tax Refund for homeowners (the circuit breaker), the Market Value Credit and the income tax deduction for real property taxes, and put those dollars into the Homestead Credit State Refund, which is structured as a greatly expanded Circuit Breaker. Households whose property taxes exceed 2% of their incomes and with incomes below $200,000 would be eligible for the Homestead Credit State Refund.

The amendment contains two major changes to the Homestead Credit State Refund, compared to how the provision came out of committee:

1. Instead of phasing out the Market Value Credit completely over five years, the amendment would leave 100% of the Market Value Credit in place for 2009, and reduce it by 40% in 2010 and leave it at that level in future years. This responds to a concern that, with current rates of participation in the Circuit Breaker, not all the resources allocated for the Homestead Credit State Refund would be distributed in the form of property tax reductions.
2. The amendment also responds to a concern that the Homestead Credit State Refund would shield homeowners from property tax increases, and therefore would stimulate increases in local property taxes. The amendment includes levy limits on local governments that would go into effect in 2010 only if statewide city or county spending in 2009 would increase more than a measure of growth (similar to levy limits used in the past, and less restrictive than the levy limits the Governor has proposed.)

One other big change in the tax bill: another floor amendment exempts military pensions from the income tax - this provision would phase in over four years. This provision is paid for by eliminating the state’s Political Contribution Refund - a refund of $50 for individuals or $100 for married couples for donations to qualifying candidates and political parties. These are similar to provisions that were in the Governor’s budget proposal.

-Nan Madden

Alert - Massive understatement of the day ahead!

Policy concerning property taxes can be controversial.

But the Senate has a property tax proposal in its tax bill that we can all get behind - better and more comprehensive information on how the property tax affects individual households. The Senate tax bill would resurrect the “Voss database” (see Article 16, Sect. 2 in the bill). Named after Gordon Voss, a legislator who retired in 1989, the database connects income data with home values. The result? A research tool that can help answer a range of very important questions. For example, how are households with different incomes affected by a particular property tax proposal? 

The database went defunct in the 1990s. Now, more than ever, policymakers and the public would benefit from being able to model the impact of a property tax change on different kinds of households. And all it costs is $200,000. Last night, the tax chairs indicated their support for funding the Voss database. The Minnesota Budget Project is all for it as well.

And kudos to the Minnesota Taxpayers Association for highlighting this obscure policy proposal, deemed by them to be “The Best $200,00 the State Can Spend” in their latest newsletter (only available to subscribers).

-Katherine Blauvelt

The end of session is drawing near, and much of the focus is on what is being decided in the budget conference committee. We just finished up writing an analysis of the Governor, House and Senate proposals that sets the stage for the negotiations going on right now - “Tough Decisions in the 2008 Legislative Session leave even tougher choices for 2009“. The report takes a look at the overall budget challenges facing policymakers this year, the major themes of these three budget balancing plans, and then dives a little deeper into the different budget areas to highlight key changes.

One important theme: all three proposals rely on one-time resources for at least one-half of their budget balancing solutions. That will leave next year’s legislature with plenty of tough choices - and fewer options.

Coming soon…a comparison of the Governor, House, Senate and conference committee (new!) ”targets” for each budget area.

-Christina Wessel

Yesterday morning, the omnibus budget conference committee released the HHS agreement between the House and the Senate. The agreement includes $147 million in general fund reductions to HHS services for the current biennium (compared to the original $526 million by the Governor, $131 million by the House and $147 million by the Senate).

Some of the major components:

• There is about $92 million in reserves available in the Temporary Assistance for Needy Families (TANF) account. The House/Senate agreement ”refinances” about $63 million in TANF dollars to free up general fund resources. They also use another $8.2 million to improve services for low-income families, including increasing work support grants for counties, repealing the family cap for families on MFIP and providing funds for long-term homelessness services.
• No funds are transferred from the Health Care Access Fund
• Transfers $9 million in unspent funds for the Basic Sliding Fee child care program to the general fund…funds which could have been used to reduce the 3,700 families currently on the waiting list.
• There are significant reductions in funding for hospitals and some for pharmacies.
• Nursing home facilities get a cost of living adjustment.
• All grants from the Dept. of Human Services and Dept. of Health are reduced by 1.7%
• The agreement also adopts reductions in services for individuals with disabilities

Of course, these are just a few of the change items in the agreement. I’ve scanned in a copy of my spreadsheet so you can look for any issues that are of particular interest to you. Be warned, the original was dark, so the scanned version is even darker - but the column containing the conference committee numbers is legible. The spreadsheet comes in two parts thanks to technical limitations. Part 1 (pages 1-7). Part 2 (pages 8-12).

However, some of this could change…the committee hasn’t adopted all the components yet and they still have to consider amendments.

Ever helpful, the legislative fiscal staff is also starting to get updated spreadsheets up on the web. While HHS isn’t up as of this morning, most other budget areas are. Visit the Senate Fiscal Analysis and look for spreadsheets with a May date next to them. Of course, you can also visit House Fiscal Analysis, but it’s harder to identify which spreadsheets have been updated recently.

-Christina Wessel

The Minnesota House of Representatives will take a vote on the omnibus tax bill sometime today. Here are some of the major components of this bill (HF 3149).

• The homeowner property tax reform proposal contained in the property tax division report. The proposal would combine the dollars that go to the current Homeowner Property Tax Refund (aka the Circuit Breaker), the Market Value Homestead Credit and the itemized deduction for property taxes, and replace these three provisions of law with a new Homestead Credit State Refund.
• Increasing the June Accelerated Sales Tax from 80% to 85%. June Accelerated Sales Tax is a timing shift whereby retailers must submit some of their June sales tax liability early. This is a further increase on top of what was already passed earlier this year.
• Allowing no additional JOBZ business subsidy agreements after June 1, 2008.
• Significant increases in aids to local government in the next biennium. General state aid is increased $100 million for cities, $40 million for counties and $6 million for townships.
• A few items from Rep. Lenczewski’s corporate tax reform bill (HF 4103).

The total general fund impact of this bill is $106,000 in revenue raised in FY 2008-09 and a $97 million increase in expenditures in FY 2010-11. Rep. Lenczewski has noted in committee that this amount is paid for through the FOC provisions in HF 1812, the House’s Supplemental Budget Bill, currently in conference. HF 1812 contains several significant revenue provisions:

• Repeal of Foreign Operating Corporations and the Foreign Royalty Subtraction. This is the most sweeping of the FOC proposals on the table this year, and raises $186 million this biennium and $363 million in FY 2010-11. The FOC proposals put forward by the Governor and in the Senate omnibus tax bill are significantly smaller.
• Changing the cap on securities registration fees (the Governor has a similar provision).
• Provisions relating to “tax haven corporations”.

It’s still not fully clear where the ultimate fate of the tax items in HF 1812 will be decided: in the conference committee addressing HF 1812, or in a future tax conference committee. It may not matter that much how these items are conferenced, as the ultimate fate of several revenue provisions are likely to be determined as part of a yet-to-be-reached global agreement between the House, Senate and Governor. I would guess that FOCs, the future of JOBZ and increases in state aid to local governments all will be part of the global agreement discussion.

And don’t forget that HF 3201, containing a number of federal conformity items and provisions from last year’s vetoed omnibus tax bill, was also passed earlier this session.

-Nan Madden

While no article of the budget bill is final yet, last night the House and Senate made significant progress towards a final bill. Recommendations from the working groups - including spending increases and cuts - were adopted for most budget areas. Here are some highlights (e-mail me: katherine@mncn.org if you want a copy of the detailed spreadsheet or bill for a particular budget area):

Higher Education:

• MnSCU would be cut by about $6.6 million each year (although there are some small increases to specific programs that slightly offset the reduction). MnSCU told the working group it would not increase tuition above already planned increases.
• U of M system would be cut by $5.2 million in FY 2008 and FY 2009, then $7.7 million per year in next biennium. The Board of Regents still has to vote on final tuition hikes for the year.
• They would cut Governor’s Achieve program by $5.5 million in FY 2009 (leaving $1.5 million) - which is a smaller reduction than what the House & Senate had originally proposed. Rep. Rukavina (chair of the House higher education committee) said it was a goodwill gesture to the Governor.

Agriculture, Rural Economies & Veterans Affairs

• A small net increase in funding for the Dept. of Agriculture and the Dept. of Military Affairs.
• They would increase funding for some services for veterans at the Dept. of Veterans Affairs, paying for it by utilizing a surplus in the GI bill appropriation.

Public Safety:

• In general, 1% cuts to the operating budgets of various court systems (i.e. supreme court, court of appeals, district courts).
• No reductions to crime victims services.

Environment, Natural Resources & Energy:

• Most of the action in this area is on the revenue side: $20.5 million in new money in FY 2009 from a repeal of the mutual fund registration fee cap and more than $17 million transferred from various special funds to the general fund.

Economic Development:

• Once again, the bulk of the action in this budget area comes from transfers from special funds to the general fund. The committee adopted the House & Senate recommendation to transfer $8 million out of the Workforce Development Fund and $10 million from the Workers Compensation Special Fund. They also cancel a $2 million appropriation to the Jobs Skills Partnership. 

State Government:

• 3% reductions to most agency operating budgets, (i.e. legislature, governor, attorney general, secretary of state, Dept. of Administration).
• They agree to raise $15 million in revenues by increasing tax compliance audits by the Dept. of Revenue and another $10 million by matching bank data to track down delinquent taxpayers.

Transportation:

• Not much here, as the Legislature already passed their transportation bill into law earlier this session. Essentially general fund spending is held constant.
• They raise $10.2 million in FY 2009 by increasing the motor vehicle transfer fee from $10 to $20.

Today, the conference committee is going through the Health & Human Services budget area, and will also consider unresolved areas of disagreement and amendments to the budget bill.

-Katherine Blauvelt

Last week the Governor announced his appointments to his 21st Century Tax Reform Commission - mostly people from the corporate world. To recap, Pawlenty has created his own blue-ribbon commission, charging it to “specifically focus on improving our job climate.” The recommendations are due at the end of this year. Here are some reactions, before I give my own:

–Charlie Quimby of Growth & Justice recently blogged about it.

–The Star Tribune published an editorial on it earlier this week.

I agree with Charlie’s & the Strib’s assessment that Pawlenty’s focus on business climate is too limited. It’s the “21st Century Tax Reform Commission”, right? Reworking the tax system to match up with our 21st century economy goes way beyond corporate taxes. For example, the service sector - everything from health care to hairdressers - is now a much bigger part of our economy. Should more services be subject to the sales tax? And what about the recurring volatility of the budget and the aging of the Minnesota’s baby boom generation, both of which have huge implications for our ability to raise revenue? Unfortunately, the Commission will not address these issues, thanks to the Governor’s tunnel vision.

We’ll be following this commission’s work, of course. In the meantime, check out this op-ed on tax policy principles from 2006 by the now-chair of the Governor’s tax commission, Michael Vekich.

-Katherine Blauvelt

This past Friday I attended the annual meeting of the Minnesota Taxpayers Association. They had a line-up of several speakers talking about hot topics in tax policy.

What I didn’t expect - and what I take issue with - was to hear a speaker pronounce that it is a “myth” that property taxes are regressive and, in fact, “property taxes are generally progressive.” This according to Daphne Kenyon of the Lincoln Institute on Land Policy - check out her report on funding education through property taxes. To review tax terms - a progressive tax means that as a person’s income goes up, a larger share of their income goes to paying the tax.

The assertion that the property tax is a progressive tax contradicts what I would consider to be an authorative source: our own Minnesota Department of Revenue. The DOR’s Tax Incidence Study has consistently shown that residential property taxes in Minnesota are not progressive. To quote their 2007 Tax Incidence Study study, “In the absence of property tax refunds, residential property taxes are more regressive than the sales tax.” And while property tax refunds help lessen the regressivity of the property tax - it’s still regressive.

-Katherine Blauvelt

Although the Governor and Legislature still haven’t come up with a global agreement, the supplemental budget conference committee has gone ahead with adopting an E-12 education compromise put together by House and Senate members of the Education working group.

A few major provisions in the agreement include:

• One-time general education aid of $51 per pupil
• Eliminating the subtraction for the Permanent School Fund in the next biennium (this will result in an additional $61 million in unrestricted resources for schools in FY 2010-11 and beyond)
• Placing expansion of the Governor’s Q-Comp program on hold, and rolling the program out of the general education formula and turning it into a grant program
• 4% reduction to the Department of Education

I wasn’t able to find any of the related documents on the web yet, so here is my own PDF of the spreadsheet and the bill summary (you’ll see my notes saying which sections they adopted last week, but they went through yesterday and adopted the remaining sections).

Just to clarify the situation…the House, Senate and Governor have been slowly negotiating (see some of my recent blogs) to decide how to solve the current budget deficit, including what role each area of the budget will play in that solution. In other words, agreeing on the size of the pie, as well as the size of each of the slices. By adopting the K-12 working group decisions, the Legislature is cutting out a slice before everyone has agreed on the pie. This certainly isn’t unheard of, but it could create some tensions in the negotiations with the Governor.

Of course, it actually isn’t necessary for the House and Senate to come to an agreement with the Governor before they complete their budget bill. However, with time running short, it makes sense for the Legislature to send the Governor a budget bill he is willing to sign the first time around.

The Higher Education and Environment, Energy & Natural Resources working groups have also reached agreements. Unlike K-12 Education, the conference committee has only adopted the non-financial items from these compromises.

-Christina Wessel

The legislature presented its first counter-offer to the Governor at 10 a.m….I can’t get a PDF up on the web since I’m stuck in committee, but here is everything it says:

• Spending cuts and non-tax revenues proposed by the Governor and accepted by the House and Senate…for $164 million in budget reductions
• Additional spending cuts and non-tax revenues to be negotiated from the House, Senate and Governor’s proposals… for $40 million in budget reductions
• Debt service to fund a $107 million bonding bill that includes Central Corridor and Veterans Home…$1 million in spending to cover debt service
• Health Care Access Fund used for expanding health care access only, not for balancing the budget
• E-12 Education proposal and increased school funding as agreed to by the House-Senate E-12 working group
• House and Senate agreement to move policy from HF 1812

House leadership also just had a press conference announcing the offer that can be viewed online.

This offer doesn’t exactly include much in the way of compromise…except for adding bonding for the Veterans Home. Commissioner Hanson was on hand in the conference committee once again to represent the Governor, but did not really offer any reaction to the Legislative proposal since they just received it this morning. However, the ball is once again in the Governor’s court to present the next offer.

Representative Rukavina did point out that including any bonding provisions in the final bill will require 81 votes in the House…a bit of a hurdle.

-Christina Wessel