March 25, 2009
We’re at that turning point in the legislative session where we are close to understanding the Governor’s budget proposal and starting to get a glimpse of what the legislature will do.
The Governor’s revised budget does not make many changes to the taxes and aids to local governments part of his original budget proposal. However, since most tax provisions are based on the economy, the fiscal impact of his proposals have all been updated to reflect the new forecast. With these latest figures, the Governor’s budget includes $254 million in tax cuts for businesses and $531 million in spending cuts, primarily to aids to local governments and various property tax credits.
The one new item is a proposal to conform to a piece in the federal economic recovery legislation. The Governor proposes to exempt the first $2,400 in unemployment insurance benefits from state income taxes in 2009 – matching the new federal benefit.
The House and Senate have released their targets, with both indicating that they will pass some tax increases as part of their overall approach to addressing the $6.4 billion deficit. Many legislative leaders have also talked about the importance of restoring some fairness to the tax system, citing the growing regressivity recently measured in the Tax Incidence Study.
One step the legislature should take in the name of tax fairness is to reject the Governor’s proposal to cut the Renters’ Credit. Rental property taxes are among the most regressive taxes in Minnesota, and they have been growing more regressive. In a recent analysis, Minnesota 2020 found that rental property taxes have grown significantly since 2004 and the Renters’ Credit has not been able to keep up. As a result, rental property taxes have become significantly more regressive. Any cuts to the Renters’ Credit would only make this worse.
The Governor’s proposal would cut the Renters’ Credit by $51 million – not only increasing the regressivity of the system, but also taking $51 million out of our local economies.
The Minnesota Budget Project has been asking organizations to join a sign-on letter opposing these cuts and asking individuals to make calls to legislators. Both of these calls to action, as well as other resources, are at our Renters’ Credit at Risk web site. The House Property Tax Division will be releasing their bill next week, so now is the time to act!
-Nan Madden
1 Comment | 
Action Opportunity, Budget Process, Taxes | Tagged: business taxes, Governor's budget, renters credit, Taxes | 
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Posted by Nan Madden
March 16, 2009
This morning, State Representative Ann Lenczewski, chair of the House Tax Committee, announced the first part of the House discussion about taxes this session. Lenczewski’s proposal would eliminate numerous individual income and corporate tax benefits that she argues are ineffective, go disproportionately to the wealthy, or that the state just can’t afford anymore. Overall, the plan is intended to be revenue neutral. For example, on the individual income tax side, the numerous tax benefits that are eliminated are replaced by a smaller number of more targeted benefits and a reduction in the state’s income tax. By redirecting these revenues, Lenczewski’s goal is to increase the progressivity of Minnesota’s tax code.
More specifically, on the individual income tax side, the proposal would eliminate at least 17 tax expenditures (including the K-12 subtraction, K-12 education credit, mortgage interest deduction, charitable contribution deductions and refundable dependent care credit) and replace them with just three credits: 1) a reworked mortgage interest credit, 2) a charitable contribution credit, and 3) a Families Know Best credit aimed at low-income families with children. The proposal would also lower the rate on the bottom two brackets of the Minnesota income tax.
On the business side, the proposal would eliminate seven tax expenditures (including the research and development credit, the employer transit pass and corporate franchise tax benefits for JOBZ). Instead, the plan would immediately phase in Single Sales Factor and provide full federal conformity to Section 179 expensing.
The bill was introduced in the House today (HF 1782). However, we’ve also posted a copy of Lenczewski’s PowerPoint presentation on our website. For technical reasons, we’ve had to divide it into three PDFs to post it (part 1, part 2, part 3). I’m sure you want more details – and the PowerPoint provides some, so it’s worth a look.
This isn’t the last we’ll hear on taxes this session. Today’s announcement is really just Part One. Next week, Representative Paul Marquardt, chair of the Property Tax and Local Sales Tax division, will be announcing his property tax plan (Part Two). And later in session, it’s likely the House will also release a proposal for raising revenues to help solve the budget deficit (Part Three).
We’re also hearing the House targets will be out by the end of the week. And the Governor’s supplemental budget could appear any day.
-Christina Wessel
Leave a Comment » | Budget Process, Taxes | Tagged: budget proposal, business taxes, corporate tax, income tax, tax expenditures, Taxes | Permalink
Posted by Christina Wessel
January 27, 2009
The Governor’s budget proposal, released this afternoon, lists his top three priorities as enhancing our job climate, improving K-12 education and protecting state public safety programs. Unfortunately, many of his proposals will cut the ground out from beneath families struggling in this economy. While the Governor undoubtedly faced a huge challenge in coming up with solution to the $4.8 billion deficit for FY 2010-11, he made his task even more difficult by taking revenue increases off the table.
After a quick look at some of the documents, here are a few key points:
- Under the Governor’s budget, general fund spending for FY 2010-11 would be $750 million below spending in FY 2008-09. That doesn’t sound like a big deal…but it is. Even though just about every economist will tell you that government spending is the surest bet for stimulating the state’s economy in a recession, the Governor would take us backwards.
- The Governor’s proposal to create jobs focuses exclusively on tax cuts/incentives for businesses, which he hopes will stimulate job creation. Meanwhile, he proposes $2.4 billion in permanent spending cuts, which we know will result in the loss of jobs in the public, for-profit and nonprofit sectors as services are severely reduced or eliminated. Research shows business tax cuts are not an effective way of providing stimulus.
- For families struggling in this economy, the Governor limits their options. His proposal includes moves like eliminating adult eligibility for MinnesotaCare and eliminating dental benefits, reducing funding for child care, cutting $50 million per year from the Renters’ Credit, reducing state support for higher education by more than $300 million next biennium, and much more. We’ll provide more in-depth analysis on his proposals in the coming days - and we’ll also connect you with the great analysis being done by others.
A few other major components of the Governor’s budget include:
- He assumes Minnesota will get $920 million in federal stimulus relief (this is just a placeholder amount for now).
- He reduces the FY 2010-11 deficit by $1.3 billion by shifting K-12 education payments into the future.
- He raises close to $1 billion upfront by selling bonds secured with our tobacco lawsuit revenues.
We will give the Governor credit for putting $250 million in the budget reserve to help resolve any current-biennium deficit that might arise in the next few months.
As an alternative to the Governor’s approach, earlier today, the Minnesota Budget Project joined with the Organizing Apprenticeship Project to recommend a set of Kitchen Table Principles for solving the budget deficit. These principles, developed through conversations with people from around the state over the last six weeks, reflect the values of ordinary Minnesotans who are concerned about the state’s future.
Of course, we encourage you to take a first-hand look at the Governor’s budget proposal. You can review his powerpoint, look over issue briefs and read the detailed proposals for each agency on the Minnesota Management and Budget website.
-Christina Wessel
4 Comments | Budget Process, Economy | Tagged: budget, budget deficit, Budget Process, budget proposal, business taxes, deficit, Economy, finance, Health Care, low-income, medicaid, Pawlenty, Taxes | Permalink
Posted by Christina Wessel
January 16, 2009
Yesterday, Governor Pawlenty gave his State of the State speech (available as text, podcast, streaming audio or video at his web site.)
The state is facing a big budget deficit because we are in a really tough economy. So let’s take a look at how some of the initiatives mentioned in the Governor’s State of the State would impact the economy…and contrast that with what Mark Zandi, chief economist at Moody’s economy.com, finds will most effectively stimulate the economy (note that Zandi was an advisor to John McCain during the campaign).
- Pawlenty. The Governor says job creation is one of his top priorities. He did not name any direct investments in job creation, but rather a set of business tax cuts including cutting the corporate income tax in half, tax credits and a capital gains exemption for investments in small business, a refundable tax credit for small business owners, faster depreciation, and more. These tax cuts would have to be paid for through greater spending cuts elsewhere.
- Zandi. But the research shows tax cuts are the least successful means of stimulating the economy. Accelerated depreciation would deliver $0.27 in economic activity for each $1 in government revenues forgone, and a corporate tax cut would generate $0.30 in economic activity. In contrast, infrastructure spending, in which the government more directly invests in jobs and purchases of goods and services, shows a return of $1.59.
- Pawlenty. The Governor noted the growth in the health and human services budget (remember – the increased cost of health care is occurring in both public and private systems, it is not anything unique to state programs). He’ll propose significant cuts in this area, only protecting “current health care eligibility for children.”
- Zandi. Those policies that help low- and moderate-income people sustain their incomes during tough times have the greatest bang for the buck, delivering more than $1 of economic activity for each $1 of government money spent on them. (My editorial comment: cutting adults off of health care is not a great way to help Minnesota workers to make ends meet.)
- Pawlenty. A wage freeze for state employees for two years, and requiring a wage freeze for any Minnesota government entity that accepts state money.
- Zandi. Cuts in state and local government spending are a real concern, and can be a substantial drag on the economy. Zandi found that federal aid to the states to help them maintain their payrolls and continue to fund programs would result in $1.36 in economic activity for each $1 spent.
But you don’t need to be an economist to understand the problem. Pawlenty hopes to create jobs through tax cuts for businesses. In the meantime, he would plan to slash spending on local government and health and human services which we know will lead to the loss of already existing jobs. Common sense, as well as econometrics, suggests the most effective way to help our economy is to spend money wisely rather than cut taxes rashly.
-Nan Madden
2 Comments | Budget Process, Economy | Tagged: budget, budget deficit, Budget Process, business taxes, Economy, Health Care, stimulus, Taxes, unemployment | Permalink
Posted by Nan Madden
November 26, 2008
Thanks to the economic downturn, states across the country are drowning in red ink – and now we have a not-very-well-publicized ruling from the IRS that could add to our fiscal woes.
Up until this point, tax law prevented companies from using a newly-purchased company’s tax losses to write off their own taxes. This was quite intentional - it prevented companies from buying other companies just so they could avoid paying taxes. But in late September, the IRS issued a ruling making an exception to this: a bank that acquires a failing bank with tax losses attributable to bad loans can use the losses from the deal to write off future taxable profits. The first case that this applies to: Wells Fargo’s pending acquisition of the uber-troubled Wachovia Corp.
This is a huge policy shift, done without Congressional approval, and the cost is considerable. As the SF Chronicle reported, some experts are saying that these new tax advantages will more than pay for the entire Wachovia deal. That’s worth repeating – the cost of buying Wachovia could essentially be – nothing. It’s a tax write-off worth more than $14.4 billion for Wells Fargo. And when the dust settles from all other acquisitions, the total tax revenue loss from this IRS ruling is estimated around $140 billion. This has understandably incited a reaction from members of the U.S. House and Senate, where legislation was recently introduced to reverse the IRS ruling.
Pending legislation notwithstanding, the practical question of the moment for Minnesota is whether this new ability of acquiring banks to minimize their corporate tax liabilities will trickle-down to states, resulting in less revenue for our already-in-deficit state of Minnesota. According to an analysis from Citizens for Tax Justice, a nonpartisan tax research and advocacy organization, at least 18 states – including Minnesota – could be hit. Wells Fargo certainly has a large presence in our state, so I’d expect some impact. According to their web site, Wells Fargo is ”the second largest private employer with 20,000 team members…it has the largest distribution of any financial organization in the state.”
Certainly an issue worthwhile for Minnesota to follow.
-Katherine Blauvelt
2 Comments | Economy, Taxes | Tagged: banks, business taxes, IRS | Permalink
Posted by Katherine Blauvelt
September 29, 2008
As Christina mentioned on the blog last week, we testified at the Governor’s 21st Century Tax Reform Commission.
The Commission members will soon be developing their recommendations on “how Minnesota can improve and modernize the state’s tax code for businesses to encourage economic growth in a fast-changing, highly competitive and global economy.” This report will be released on December 1.
If we think about the state’s revenue system as a puzzle, the Commission to date has been taking one piece of that puzzle – business taxes – and examining it closely. We urged the Commission to now put that piece back into place and understand its role in a larger context.
I made the case that the public sector is a partner with individual Minnesotans, the for-profit sector and the nonprofit sector in creating a society with a high quality of life in which all people have the opportunity to succeed. The business community and our economy benefits from public investments that include:
- our physical infrastructure
- the human capital of our residents
- protecting the safety and well-being of both people and property, and enforcing our laws
- the way we care for each other and ensure that all people can live in dignity, and
- cultural and environmental amenities.
All these make Minnesota a great place to live, raise a family and do business.
However, recent tax and budget trends threaten our economic future. I urged the Commission to ensure that their final recommendations have two characteristics:
- That it at least be revenue-neutral; that is, it does not cut total tax revenues. Reducing revenues simply does not make sense when the state is facing a deficit of $2 billion in the next budget cycle, including the impact of inflation.
- It should pay attention to tax fairness, and not make the tax system more regressive. The state’s tax system has already become more regressive since 2002, and the Commission’s recommendations should not make that worse.
A set of recommendations that have these characteristics will better fit into our current fiscal environment.
- Nan Madden
1 Comment | Taxes | Tagged: business taxes, tax reform commission | Permalink
Posted by Nan Madden
