The legislature’s compromise tax bill demonstrates that it isn’t a question of whether revenues will be raised, but how. The Department of Revenue estimates that property taxes will rise $534 million in FY 2012-13 and $693 million in FY 2014-15 if the legislature’s tax bill becomes law. The two primary factors contributing to property tax increases are deep cuts to property tax refunds for renters and significant cuts in state aids to cities and counties. Those estimated property tax increases are even after taking into account a cut in the state property tax paid by businesses and cabins and a $30 million increase in the state Property Tax Refund for homeowners, commonly called the Circuit Breaker.
The omnibus tax bill (formally the conference committee report on House File 42) follows the same themes as the original House and Senate tax bills. It includes $203 million in new tax cuts in the FY 2012-13 biennium, which include:
- Gradually eliminating the state property tax paid by businesses and cabins. The cost of this provision grows over time, starting at $50 million in FY 2012-13 and $119 million in FY 2014-15. There isn’t an estimate of the impact when the state property tax is fully eliminated in 2025, but if it were fully eliminated in FY 2012-13, the cost would be $1.6 billion, about five percent of the state’s general fund revenues.
- Accelerating the state’s transition to Single Sales Factor, where the apportionment formula for corporate taxes will be based solely on a multistate corporation’s share of sales made in Minnesota. Going to Single Sales Factor in 2012 instead of 2014 has an additional cost of $18 million in this biennium.
- Conforming to a number of federal tax changes in the 2011 and 2012 tax years, at a total cost of $122 million. The largest conformity item increases the standard deduction for married income tax filers.
- A few tax cuts that don’t start until the next biennium, including an income tax exemption for military retirement pay at a cost of $24 million in FY 2014-15 and adding private school tuition to the list of authorized expenditures for the state’s K-12 education credit at a cost of $11 million.
In order to pay for the new tax cuts and address the state’s revenue shortfall, the tax conference report makes $925 million in spending cuts in FY 2012-13 and over $1.2 billion in FY 2014-15. In all, the “Property Tax Aids and Credits” part of the budget is cut by 26 percent compared to base funding in FY 2012-13 and 35 percent in the following budget cycle.
- The Renters’ Credit – the state’s property tax refund for low- and moderate-income renters – is cut by $186 million, a 46 percent cut compared to base funding. Households that include seniors and people with disabilities face an average cut of $190 and other families can expect an average cut of $335. About one in four currently-eligible households would no longer quality for a property tax refund.
- Local Government Aid to cities is cut by $310 million in FY 2012-13 and $452 million in FY 2014-15. Duluth, St. Paul and Minneapolis are cut by 25 percent each year until they lose all aid in FY 2015. For other cities, the bill essentially locks in the cuts that were made last year.
- County Program Aid, which is received by all counties, is cut by $73 million. This is in addition to cuts to specific funding streams in other budget bills that will impact counties’ ability to provide services in their communities.
- The bill cuts the state’s Market Value Credit reimbursement to local governments by $104 million in FY 2012, and starting in FY 2013, replaces the Market Value Credit with a reduction in the tax capacity of homes, saving the state $261 million. (We’ve described this proposal in more detail in an earlier blog.)
- 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.
The tax conference report also contains transfers from other funds into the state’s general fund, including the remaining $8.7 million from the Budget Reserve, $166 million from the Cash Flow Account, and $60 million from the Douglas J. Johnson Economic Development fund, which had previously been debated in the Economic Development bill.
The tax bill is currently on the Governor’s desk. It is expected that he will veto the bill, given the expected increases in property taxes from the local aid cuts and deep cuts to the Renters’ Credit.
-Nan Madden
