Expect a busy week at the Capitol as the legislature’s tax and budget bills start coming together. The first out of the chute is the House tax proposal, with deep cuts in aids to cities and counties and property tax refunds for low- and moderate-income renters. The House cuts more than is needed to meet the committee’s target for balancing the budget, raising an additional $300 million to pay for new tax cuts.
On Saturday, Representative Linda Runbeck, chair of the House Property and Local Tax Division, released a draft division report with significant cuts to state aids to cities and counties. The bill follows the approach taken in House File 130, the legislature’s “phase one” budget bill that the governor vetoed earlier this year, although in some cases, the cuts go even deeper.
The division report cuts $119 million from the Renters’ Credit, which provides a property tax refund to around 300,000 low- and moderate-income Minnesota households, 28 percent of which include seniors and/or people with severe disabilities. This proposal:
- Cuts the Renters’ Credit by 30 percent from its base funding.
- Has renters provide 14 percent of all the savings in the division report.
- Cuts $13 million more from the Renters’ Credit than in House File 130.
The division report cuts aids to cities and counties by $381 million in FY 2012-13 and $590 million in FY 2014-15, compared to base funding. The largest cuts are:
- $291 million from Local Government Aid (LGA) to cities. That’s $87 million more than in House File 130. The proposal substantially changes how LGA is distributed, and eliminates aid to suburbs by FY 2013 and aid to Minneapolis, St. Paul and Duluth by FY 2015. Cities in Greater Minnesota would continue to receive aid.
- $73 million from County Program Aid.
In the past, local aid cuts have been followed by both cuts in local services and property tax increases. For 2011, property taxes have already been set – aid cuts can only result in cuts to local services and increases in other forms of local government revenues, such as fees. The House division report also freezes property taxes for cities and counties for 2012 at either the previous year’s levy or 102 percent of its 2010 levy. Cities and counties would be exempt from the freeze if they agree not to take state aid, or they can ask their voters to approve an increase over the freeze amount.
The single largest cut comes to the Market Value Credit, which directly reduces a homeowner’s property taxes through a credit on their property tax statements. The state reimburses local governments for the lost revenue…in theory. The state has frequently not fully reimbursed local governments for the Market Value Credit. The division report ends the Market Value Credit and replaces it with a reduction in the tax capacity of homes. Bottom line, it saves the state $365 million in FY 2012-13 because the state will no longer be paying for that reduction in homeowner property taxes.
The division report also ends financial incentives for property owners who engage in sustainable forest management under the Sustainable Forest Incentive Act (saving $31 million for the biennium), and eliminates the Political Contribution Refund ($12 million in the biennium), a component of the state’s campaign finance system that provides refunds for small donations to candidates or political parties.
On Monday, House Tax Committee Chair Greg Davids released a proposed omnibus tax bill (which will include the division report). At a time when the state faces a $5 billion deficit, the proposal cuts taxes on net by $315 million in FY 2012-13 and more than $1 billion in FY 2014-15.
The bill includes two primary business tax cuts: a $72 million increase in the Research and Development Credit and a $50 million cut to the statewide property tax on commercial and industrial properties. These two proposals combined are roughly equal to the cut to the Renters’ Credit.
The proposal cuts state income tax revenues by $221 million in FY 2012-13 and by $786 million in FY 2014-15. The proposal reduces tax rates in the first two income tax brackets over the next three years (see table below). Households with taxable income in the top bracket will receive a tax cut on the portion of their income that falls in the first two brackets.
|Taxable Income (tax year 2011)||Current Rate||2012||2013||2014|
|$0 – $23,100 single
$0 – $28,440 head-of-household
$0 – $33,770 married filing jointly
|$23,101 – $75,890 single
$28,441 – $114,290 head-of-household
$33,771 – $134,170 married filing jointly
|$75,891 and over single
$114,291 and over head-of-household
$134,171 and over married filing jointly
|Taxable income is income after subtracting exemptions and deductions. The sizes of the brackets is adjusted each year for inflation.|
As legislative leaders begin to knit together plans to fix a $5 billion deficit, it is important that they seek a balanced approach of spending cuts and revenue increases, and that overall plan makes the state’s tax system fairer. This proposal fails to take a balanced approach, and in fact makes larger cuts than are necessary in order to pay for unsustainable tax cuts whose price tag grows over time.