Governor Pawlenty’s supplemental budget proposal, like his 2009 budget proposal, has two main components: a package of tax cuts and a set of cuts to aids to local governments and property tax credits (particularly the Renters’ Credit). The Governor also asks the legislature to “ratify” components of his unallotment plan, which would make them permanent.
Most of the fiscal impact of the proposed tax cuts is in future years, since most of the provisions phase in over time. The tax cuts total $20 million in FY 2010-11, $333 million in FY 2012-13, and an estimated $800 million in FY 2014-15, according to a preliminary estimate by House Fiscal staff. Some of the tax cuts include:
- A 20 percent reduction in the corporate tax rate. The cut is phased in over four years; the impact is a $10 million tax cut in FY 2011 and a $150 million reduction in the next biennium.
- An Angel Investment Credit – a 25 percent tax credit for investments in new and emerging businesses.
- Minnesota Business Investment Company Credit – an 80 percent tax credit for insurance companies investing in small businesses (this is sometimes called CAPCO).
- Changes to the Research and Development Credit, including increasing the amount of credit, making it refundable and allowing flow-through entities to take the credit.
- TechZ – tax free zones in both the metro area and Greater Minnesota that provide tax benefits including a two year sales tax exemption, a five year job creation tax credit on net new jobs and exemptions from property and income taxes.
The other major component of the Governor’s budget is cuts to the “aids and credits” portion. As in the past, the Governor proposes significant cuts to state aids to cities and counties. The state provides aids to local governments with the goals of keeping property taxes lower than they otherwise would be and so that all local governments can provide a certain level of services, regardless of their level of property tax wealth. The $250 million per year reduction is proposed to be made across the three primary methods that the state provides general aid to local governments: Local Government Aid (for cities), County Program Aid and Market Value Credit reimbursements. All cities and counties will see a reduction. The Governor’s budget also proposes making the local aid cuts under unallotment permanent. The combined impact of the proposed cuts and making the unallotment cuts permanent are an average 11 percent reduction of levy plus aid for cities and 7 percent for counties, according to the Governor’s budget. The total impact of unallotment and these new cuts is a $900 million reduction in FY 2012-13.
The Governor’s budget assumes that the reduction in local aids will result in higher property taxes, even though he does propose that levy limits be made permanent, which would limit how much local property taxes would grow. His budget also proposes that local governments would only be able to raise 50 percent of the lost aids back in increased property taxes. Even with these limits, an increase in property taxes is expected to impact the state’s budget in two ways: a projected $14 million increase in property tax refunds to be paid in FY 2012-13, and a $14 million reduction in income taxes (because of an increase in the amount of property taxes deducted by those who itemize on their income tax forms.)
The Governor also proposes to make his 27 percent cut to the Renters’ Credit permanent, a $106 million reduction in FY 2012-13. This proposal impacts nearly 300,000 low- and moderate-income Minnesota households. In the House tax committee this week, the members heard eloquent testimony about how struggling Minnesotans use their Renters’ Credit to pay for basic needs. (More about the impact of these cuts and how you can join the efforts to oppose the cuts at the Renters’ Credit at Risk web site.)
-Nan Madden
It is discouraging to see that Minnesota may be emulating Iowa by expanding the Research and Development Credit, and making it refundable. Iowa currently is one of only five states with a refundable research credit, and this feature makes it very expensive. On a per capita basis, Iowa spends over twice as much as Minnesota on the credit. In fact, 92 percent of Iowa’s research credit dollars are in the form of so-called refunds: payments to corporations who have already had their state corporate tax eliminated.
What has this very generous credit produced for Iowa? Not much. The Iowa Department of Revenue, in a study of Iowa’s credit, concluded that they could find no evidence that it had produced a greater level of research activity in the state (see http://www.iowa.gov/tax/taxlaw/IDRTaxCreditEvalJan2008.pdf). A study by researchers at Iowa State University found that Iowa has been a laggard in R&D spending and in R&D jobs for a long time, and the existence of one of the most generous research credits in any state does not appear to have done anything to improve this (see http://www.econ.iastate.edu/research/webpapers/paper_13152.pdf).
Most of the R&D credit in Iowa goes to a very small number of large and profitable firms,and most of that is in the form of “refunds.” This led the governor’s Tax Credit Review Panel to recommend recently that refundability be eliminated for large firms. This would retain the full benefit of the credit for small, innovative new firms (the original intended beneficiaries of the credit), and still allow large firms to eliminate their state tax, while dramatically reducing the revenue losses to the state.
If Minnesota does decide to expand the credit, they should at least avoid the refundability trap, an expensive and wasteful diversion of state revenues to a handful of large profitable firms who need to do research to survive anway.