The Senate Tax Committee passed its omnibus tax bill, Senate File 1972, last week. The bill includes $104 million in tax cuts in FY 2012-13 and $195 million in FY 2014-15. The major tax cut provisions include:
- Conforming to federal rules that increase the standard income tax deduction for married couples in 2012 only ($62 million in FY 2012-13).
- Creating a new income tax benefit for people with military retirement pay that replaces a smaller credit for past service ($24 million in FY 2014-15).
- Increasing the targeted property tax refund, which provides a property tax refund to homeowners of any income level whose property taxes increase by 12 percent or more in a single year ($2 million each in FY 2012-13 and FY 2014-15).
- Phasing out the statewide property tax paid by businesses and cabins ($29 million in FY 2012-13 and $142 million in FY 2014-15). The tax would be fully eliminated for taxes payable in 2026.
- Increasing the Angel Tax Credit for investors in certain start-up businesses ($2 million in FY 2012-13 and $4 million in FY 2014-15). The bill also eliminates the compensation and minimum wage requirements for businesses receiving investments that qualify for the tax credit.
- Phasing in a capital equipment upfront exemption for businesses ($4 million in FY 2012-13 and $10 million in FY 2014-15). Currently, business purchases of capital equipment are exempt from the sales tax, but the business must pay the tax and apply for a refund. The bill would allow businesses to get the sales tax exemption at the time of purchase, starting with smaller businesses in 2013 and reaching all businesses in 2016.
- Extending tax benefits to qualified data centers by another year ($6 million in FY 2014-15).
The bill freezes Local Government Aid (LGA) so that cities will receive the same amount in 2013 as they did in 2012. This is a $1 million reduction in LGA in FY 2014-15. The bill also requires local governments to publish certain kinds of budgetary information.
In the current budget cycle, the tax cuts in Senate File 1972 are paid for by other provisions in the bill, mainly a $100 million transfer from the state’s budget reserve. (The Senate omnibus education finance bill would transfer another $416 million from the state’s budget reserve to reverse a portion of the school funding shift.) The omnibus tax bill gives the Dayton administration the option to identify savings in state agencies, and reduce the $100 million transfer from the budget reserve by the amount of those savings.
Fortunately, the bill does not include any cuts to the Renters’ Credit. This puts it in stark contrast to the House omnibus bill, which makes $67 million in cuts to this property tax refund for low- and moderate-income renters.
But the Senate bill does not have a sustainable way to pay for its proposed tax cuts. It adds $194 million to the deficit for the next budget cycle, which is currently projected at $1.1 billion, and that doesn’t include the cost of inflation. The state also still has a way to go to fully reverse the school funding shifts, currently estimated to cost another $2.4 billion.
And the tax cuts grow over time, primarily through the phase-out of the statewide property tax. If that tax were fully phased out in FY 2014-15, the cost would be $1.7 billion. But the bill does not have a plan to replace that with other revenues – or identify the cuts in services that would be needed to fill in such a hole.
The House has passed its omnibus tax bill, House File 2337, and differences between the two bills will need to be resolved by a conference committee.