The Senate omnibus tax bill has similar goals to Governor Dayton’s and the House’s tax proposals: make the state’s tax system less regressive; end the cycle of budget deficits; and fund investments in quality schools, affordable higher education and strong communities.
Here are the main provisions in the Senate tax bill that affect the amount of revenues raised and how the responsibility for funding services is shared.
Income tax. The Senate omnibus tax bill would apply a 9.4 percent income tax rate on taxable income above $140,960 for married joint filers, taxable income above $120,070 for heads of households, and taxable income above $79,730 for single filers. This proposal raises the rate on the existing top (or third) income tax bracket, rather than create a new fourth income tax bracket like the Governor and House do. The Senate proposal raises $1.2 billion, slightly more than the $1.1 billion raised by Governor Dayton’s fourth tier proposal, which would apply a 9.85 percent rate to taxable income above $250,000 for married filing joint filers. The House raises $1.5 billion in targeted income tax increases in FY 2014-15 through a combination of a temporary 4 percent surcharge on taxable income above $500,000, and a fourth tier of 8.49 percent on incomes above $400,000 for married joint filers.
A targeted income tax increase of about the size of the Governor’s and Senate’s proposals is an essential piece of any tax reform plan that seeks to both raise needed revenues and make Minnesota’s tax system less regressive. The rate and income threshold for that increase will be a key point in end-of-session budget negotiations.
The Senate bill also includes income tax cuts in the form of new or expanded income tax credits, some of which include increasing the Angel Investment Credit for high-income investors, and larger tax credits for past military service and service in combat zones.
Tobacco taxes. The Senate omnibus tax bill raises $333 million from increasing taxes on tobacco products, primarily a 94-cents-per-pack increase on cigarettes. Governor Dayton also proposes a 94 cent increase per pack; the House proposes an increase of $1.60.
Sales tax. The Senate takes a “broaden the base, lower the rate” approach to modernizing the state’s sales tax. The state’s sales tax rate would be lowered from its current 6.875 percent to 6.0 percent, and a range of items would become newly subject to the sales tax, such as:
- Digital products, including digital books, music downloads and ringtones;
- Personal services, such as haircuts, spa services, tattoos, wedding planning, dating services and personal shopping;
- Auto repair, and repair and maintenance of household goods;
- Warehousing and storage services;
- Over-the-counter drugs;
- Admission to trade shows and professional athletic events, as well as stadium box seats and suites;
- Publications, excluding newspapers.
Sports memorabilia would be subject to a gross receipts tax. The bill also creates a more level playing field for Minnesota businesses by requiring some internet retailers to collect sales taxes from Minnesota residents, just as retailers physically located in the state do.
Not only does the proposal lower the overall sales tax rate, it also offsets some of the sales tax increase through a new refundable clothing tax credit for low- and moderate-income Minnesotans. The bill also provides a sales tax exemption for purchases by cities and counties, and phases in an upfront sales tax exemption for business purchases of capital equipment, replacing a cumbersome refund process.
The net impact of all sales tax provisions – those that increase sales taxes and those that reduce them, including the clothing sales tax credit – is nearly revenue-neutral, raising $22 million.
Corporate taxes. The omnibus tax bill also takes a “broaden the base, lower the rate” approach to the corporate tax. It ends several tax preferences in the corporate franchise tax, similar to Governor Dayton’s proposal, including preferences for businesses with overseas activities; and it adjusts minimum fees paid by businesses, which have not been updated since 1990.
The bill would lower the corporate tax rate from 9.8 percent to 9 percent, and increase the Research and Development Credit. The net impact on corporate taxes is to raise $63 million in FY 2014-15.
Property taxes and funding for local governments. The Senate omnibus tax bill includes a number of provisions aimed at reducing property taxes. These include:
- $18 million in improvements to the Property Tax Refund for Renters (the Renters’ Credit), ensuring that these low- and moderate-income Minnesotans don’t pay too high a share of their incomes in property taxes. More than 300,000 Minnesota households would receive an increase in their property tax refunds, and the average refund would increase by $57. The Renters’ Credit was seriously eroded by cuts passed in 2011.
- State funding to reduce school property taxes (this is in addition to similar provisions in the E-12 education omnibus funding bill.)
- Increases in funding for other local governments, including an additional $80 million per year starting in FY 2015 for Local Government Aid to cities, a $40 million increase in County Program Aid, and $5 million in aid for townships.
The Senate would raise $176 million by increasing the property tax that commercial-industrial properties pay to the state.
A preliminary analysis by Senate Counsel and Research estimates that property taxes would be 2.5 percent lower overall as a result of the proposed changes in the Senate’s omnibus tax bill and omnibus education bill, and homestead property taxes would be 4.9 percent lower.
Now that all the parties have released their tax plans, they will need to work out final tax legislation. The tax conference committee starts today, and while there are important differences in the details to be resolved, there is agreement on the goals: a fairer tax system that solves the deficit and invests in our future.