House tax proposal focuses on balance in the tax system

The House tax committee saw the draft omnibus tax bill Monday.  Representative Lenczewski described the goals that the bill, available from the committee’s web page, attempts to meet. First, in order to meet House targets, the bill must raise $1.5 billion in the FY 2010-11 biennium and make $275 million in spending reductions. And it seeks to improve balance in the tax system. She noted that, even with these revenue increases, the House is making significant reductions to spending elsewhere in the budget.

Here are some of the bigger pieces:

  • New income tax bracket. The bill creates a new income tax rate of 9% on taxable income above $300,000 for married joint filers. This raises $468 million in FY 2010-11.
  • Reform of income tax expenditures. A whole range of tax deductions and credits would be eliminated from the income tax, including many itemized deductions. In return, new credits related to mortgage interest, charitable giving, and low-income families with children are proposed. These credits would benefit more taxpayers than just those who itemize, but less would be spent in total on these “tax expenditures.” The net impact is $489 million raised in FY 2010-11. (These provisions are similar to Rep. Lenczewski’s tax expenditures bill, HF 1782.) The Minnesota Council of Nonprofits is evaluating the potential impact of the proposed reduction in tax incentives for charitable giving.
  • Eliminate business tax preferences. The bill would repeal Foreign Operating Corporations and some other special corporate tax provisions, but would provide new tax cuts for larger businesses by speeding up the state’s transition to Single Sales Factor apportionment and for smaller businesses through conforming to Sec. 179 expensing. The net impact is $123 million raised through corporate tax changes.
  • Increase alcohol and cigarette taxes. The bill would raise $209 million for the biennium through increasing the gross receipts tax paid at the retail level and increasing the alcoholic beverage taxes by about a penny a drink for most kinds of alcohol and about three cents a drink for distilled spirits. Taxes on cigarettes would increase by 54 cents a pack, which, combined with some other changes to tobacco taxes, raises $204 million for the biennium. These are smaller reductions than proposed in bills heard on these issues last week.
  • Cut to aids and credits. The bill largely includes the property tax division report, which sought to cut aids to local governments and property tax credits by $275 million, make the property tax more based on ability to pay and recognize the challenges faced by local governments by giving them more flexibility. While aids to cities and counties are cut, the bill would allow counties the option to raise a 0.5% sales tax.

The House tax committee is hearing additional testimony tonight and amendments to the bill on Tuesday, and then it needs to pass a floor vote,  so the details could change. After that, it’s off to conference committee to reach a compromise with the Senate. We’ll see the Senate’s omnibus bill Tuesday as well, so stay tuned.

-Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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2 Responses to House tax proposal focuses on balance in the tax system

  1. Mike Madden says:

    I had another thought here. Let’s consider the use of “faith based” organizations by government – that is, a recognition that services need to be provide but the government doesn’t want to be in that business. If we think of taxes in the same way – ways to fund services that need to be provided – then whatever is done for deducting taxes should be done for charitable giving to organizations that provide [those] services. I think this might cut out some of the non-profits from the eligible mix (example here might be the Arboretum).

  2. Mike Madden says:

    While the charitable giving is a considerable percent of my itemized deductions, I’d like to believe the reason I give is because it is the right thing to do. Charitable giving is a form of “social justice” and “stewardship”, that is, people give their “riches” (money, goods, time, etc.) to those that are disadvantaged or to organizations that serve the disadvantaged (e.g., church, PROP, etc.). The tax advantage certainly makes giving less painful, but it’s probably not the reason most folks donate.

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