Senate tax bill cuts funding for cities and counties, renter property tax refunds

Last Friday, the Senate tax committee finished up their work on their omnibus tax bill (Senate File 27), with a goal of contributing $580 million to solving the state’s budget deficit.

As we saw in the House omnibus tax bill, the Senate first digs the deficit hole a bit deeper by enacting new tax cuts that cost $200 million in the FY 2012-13 budget cycle and grow to $435 million in FY 2014-15. The primary tax cuts are:

• The gradual elimination of the state property tax paid by businesses and cabins. The cost of this provision grows over time, starting at $115 million in FY 2012-13 and $282 million in FY 2014-15. The state property tax is fully eliminated in 2024. We don’t have fiscal estimates for that far in the future, but if the state property tax was eliminated in FY 2012-13, it would reduce state revenues by over $1.5 billion for the biennium.
• An increase in the state-paid Property Tax Refund for homeowners, commonly called the Circuit Breaker, by $44 million in FY 2012-13 and $97 million in FY 2014-15.
• An income tax exemption for military retirement pay at a cost of $11 million in FY 2012-13 and $24 million in FY 2014-15.
• Adding private school tuition to the list of authorized expenditures for the state’s K-12 education credit at a cost of roughly $11 million per biennium.

These tax cuts mean that the cuts to services made in this and other budget bills are larger than needed simply to balance the budget.

The Senate omnibus tax bill reaches its target for budget savings through reductions in the “aids and credits” part of the budget, and through fund transfers.

• The Renters’ Credit is cut by 26 percent from base funding, or $106 million in FY 2012-13. Over 300,000 low- and moderate-income households will see their property tax refund cut by an average of $170.
• State funding for aids and credits to local governments is cut by $310 million in FY 2012-13. Cities are given authority to enact local sales taxes with voter approval for certain types of capital improvements, although they must give up a similar amount of Local Government Aid.
• The bill changes the Market Value Credit, which directly reduces homeowners’ property taxes through a credit on their property tax statements. The state is supposed to reimburse local governments for the lost revenue, but has frequently cut the Market Value Credit reimbursement. Under this bill, the reimbursement to local governments is cut by over $100 million in FY 2012 (in addition to the other aid cuts discussed above), and starting in FY 2013, replaces the Market Value Credit with a reduction in the tax capacity of homes, saving the state $261 million from not paying any reimbursement to local governments.
• The bill eliminates both the Political Contribution Refund, which is part of the state’s campaign finance system that reimburses Minnesotans for small donations to candidates and parties, and the Sustainable Forest Initiative, which reimburses landowners for sustainable forest practices.
• $216 million is transferred out of the state’s Cash Flow Account, raising concerns about whether the state will have adequate cash on hand to pay its bills in a timely manner.

The Senate omnibus tax bill moves in two conflicting directions regarding property taxes. The recently-released Tax Incidence Study identified the rise in property taxes as one of the contributors to a shift in Minnesota to a more regressive tax system – that is, one where low- and middle-income people contribute a higher share of their incomes.

On the one hand, the Senate seeks to lower property taxes by increasing the Property Tax Refund for homeowners by an average of $105 (which is available to qualifying households with incomes up to $100,780), and cutting property taxes paid by businesses and cabins.

However, on the other hand, the bill puts pressure on property taxes through cuts in state aids to local governments. The Department of Revenue estimates the net impact of the bill is $302 million in property tax increases in FY 2013, $178 million in FY 2014 and $125 million in FY 2015. And at the same time, the bill cuts deeply into the property tax refunds received by renters, even though rental property taxes have grown considerably since 2005 and rental property taxes have become much more regressive.

-Nan Madden