Let high-income tax cuts expire, redirect money to stimulate economy

September 2, 2010

The Center on Budget and Policy Priorities makes a strong case for letting $40 billion in Bush tax cuts for high-income households expire as scheduled at the end of this year. That $40 billion could instead be redirected to help stimulate the weak national economy.

According to the nonpartisan Congressional Budget Office (CBO), if this money were used for job-creation tax credits, continued federal aid to states and extended unemployment insurance benefits, it would create more jobs and generate more economic growth than simply extending the Bush tax cuts for the top income households in the nation (i.e., those with incomes over $250,000 a year). Why? Because higher income households are more likely to save this extended tax windfall than spend it. What the economy needs right now, however, is more consumer spending.

In fact, “CBO found extending the tax cuts for high-income households to be the worst of all options under consideration for preserving or creating jobs and boosting economic growth while the economic is weak,” the Center on Budget and Policy Priorities notes.

In the near term, the CBO found that some actions would create more economic growth and more jobs per dollar spent than extending the high-income tax cuts. For example:

  • A temporary jobs tax credit (a temporary payroll reduction on new hires).
  • Extending federal fiscal aid to states to help them avoid bigger and deeper spending cuts. (Congress in fact has recently taken this action, which may provide $430 million for health care and education in Minnesota.)
  • Extended unemployment insurance benefits for the unemployed. This provides the greatest “bang for the buck,” as benefits paid out to the unemployed would undoubtedly be injected right back into the local economy in spending by the unemployed to meet basic living needs.

When Congress returns from its summer recess in September, expect a fierce debate over the future of the expiring tax cuts (along with whether or not Congress will extend tax credits targeted to low- and moderate-income working families, such as the Child Tax Credit and the Earned Income Tax Credit). Extending the tax cuts for high-income households is the worst option for spurring economic growth, and would add $1 trillion to the national debt over the next ten years. Congress should allow the Bush tax cuts to expire. In the short-term, Congress should redirect that money toward initiatives that will truly stimulate the economy and help struggling working families. Once the nation’s economy is on more solid footing, the resources can be used to make a dent in the nation’s deficit.

-Steve Francisco

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Posted by Steve Francisco

Recovery Act has brought $2.6 billion to Minnesotans

July 9, 2010

Minnesotans have received approximately $2.6 billion in direct federal assistance from February 2009 through May 2010 as a result of the American Recovery and Reinvestment Act (ARRA), according to the Center on Budget and Policy Priorities. The direct assistance was provided through increased benefits for existing federal programs, through new tax credits and through direct cash payments. The collective impact of this direct assistance has been to put additional income into Minnesotans’ pockets to help struggling working families avoid falling into poverty and to save jobs in our local economy through increased consumer spending. Most economists agree that increased consumer spending is the key to a sustained economic recovery.

Here’s a breakdown of how much direct assistance has been received by Minnesotans through tax credits or direct cash assistance through May 2010 thanks to the Recovery Act:

1. Making Work Pay Tax Credit – $1.4 billion for Minnesotans. The Recovery Act created a new refundable tax credit equal to 6.2 percent of a worker’s earned income in 2009 and 2010. The vast majority of wage earners will benefit from this tax credit, receiving a maximum credit of $400 for an individual or $800 for a married couple. Individuals earning over $75,000 or married couples earning over $150,000 receive a smaller credit. No tax credit is available to individuals earning over $95,000 or married couples earning over $190,000.

2.  Food Stamps - $109 million for Minnesotans. The Recovery Act provided a nearly 14 percent temporary increase in the maximum Food Stamp benefit. This translated into the average participating household getting $40 to $50 more each month beginning in April 2009. Also, the time limit on how long childless adults could receive Food Stamps was suspended.

3. Unemployment Insurance (UI) Benefits – $232 million for Minnesotans. The Recovery Act temporarily increased the regular Unemployment Insurance benefit by $25 per week.

4. Extended Unemployment Compensation (EUC)- $672 million for Minnesotans. The Recovery Act , as well as other legislative action, provided additional weeks of unemployment benefits to people who would otherwise have exhausted their benefits. 

5. $250 Economic Recovery Payments – $212 million for Minnesotans. The Recovery Act included a one-time payment of $250 to anyone receiving Social Security, Supplemental Security Income (SSI), Railroad Retirement or disabled veterans’ benefits. This one-time payment was distributed mostly in May 2009.

While we have a long way to go to return to a robust, vibrant and growing economy here in Minnesota, consider how much worse off many Minnesotans and our economy would be today if not for the $2.6 billion in tax credits and direct assistance made possible by the Recovery Act. The money is flowing to struggling families and individuals who spend it in our communities, helping to spur economic recovery.

To keep the economy on the right track, Congress should extend additional aid to individuals (such as by extending  Unemployment Insurance benefits) and to states (such as through the extension of the enhanced federal matching rate for Medicaid). One point seems clear: the federal government has a powerful and significant role to play in helping struggling Minnesotans survive the continuing economic recession.

-Steve Francisco

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Posted by Steve Francisco

House and Senate present a plan to resolve budget gap

May 10, 2010

As the legislative session draws to a close, the recent State Supreme Court decision overturning the Governor’s unallotment actions has added a new twist for policymakers. Monday morning, the House and Senate announced a proposal that would fix a $2.962 billion hole – $535 million needed to fix the state’s remaining budget deficit and another $2.4 billion to preemptively deal with the uncertainties resulting from the State Supreme Court decision.

The proposal (HF 2037) ratifies most of the Governor’s unallotments (including the shift in K-12 education payments), includes $435 million in new revenues and adopts some fixes for helping easing imbalances in the state’s cash flow.

The details of the proposal include (a spreadsheet is available):

  • $1.75 billion from ratifying the Governor’s shift in education payments
  • $21 million from approving some of the Governor’s unallotments and recommended reductions to state agencies (these would be permanent reductions)
  • $293 million from ratifying the Governor’s local government aid unallotments in FY 2010-11
  • $52 million from ratifying the Governor’s unallotment of the Renters’ Credit for low-income families in FY 2010-11 only
  • $19 million from ratifying other tax aids and credits the Governor unallotted in FY 2010-11 (including the political contribution refund program)
  • $100 million from ratifying the Governor’s unallotments to higher education in FY 2010-11
  • $114 million from the health and human services conference committee agreement (this is traveling in a separate bill, not HF 2037)
  • $74 million from ratifying some of the Governor’s unallotments to health and human services in FY 2010 (additional unallotment actions are included in the health and human services conference committee agreement)
  • An additional $77 million in reductions to health and human services in FY 2011 that would be implemented if the state does not receive the federal enhanced Medicaid funds
  • $40 million from the Closed Landfill Investment Fund
  • $435 million in new revenues (about 15 percent of the solution). The bill would create a new 4th tier income tax rate, increasing the rate for married couples with taxable income over $200,000 from 7.85 percent to 9.1 percent. If the state attains a surplus of at least $500 million in the February 2013 forecast, the rate would return to 7.85 percent in 2014. Another provision would also accelerate the expiration of several federal tax cuts that are set to expire next year.

This proposal assumes the state will not receive $408 million in federal money from Congressional action to extend increased federal funding for health care under Medicaid. The bill does include contingency language so that if the resources arrive by June 15, 2010, $77 million in reductions to health and human service would not be implemented and $36 million would be used to fill a hole in financial aid for higher education. The remainder would be used to begin to pay back the school shift and help with the state’s cash flow problems (this part was not clearly explained). Representative Carlson placed the probability of receiving the funds at 80 percent.

The bill also includes language recommended by the Governor that would help ease the state’s cash flow challenges by shifting when the state receives some revenues.

Both the Senate and House are expected to take up the bill on the floor today. Watch the blog for more analysis…

-Christina Wessel (with lots of support from the rest of the amazing Minnesota Budget Project staff!)

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Posted by Christina Wessel

Many states raise taxes to help balance budgets

January 19, 2010

Policymakers in 30 states passed tax increases last year, according to a July 2009 report by the Center on Budget and Policy Priorities. Those include states with both Republican and Democratic governors, who took balanced approaches to resolving their state’s budget shortfalls.

According to the Center’s report, 11 states raised income taxes, 12 raised sales taxes, 11 raised business taxes and 15 raised tobacco and alcohol taxes. Some states raised more than one tax. Here a sample of tax increases from the Center’s report.

  • Wisconsin passed a new 7.75 percent income tax bracket (for married couples making more than $300,000 and individuals making more than $225,000). Along with other income tax changes, the package will raise $280 million in 2010.
  • California passed a 0.25 percent across-the-board increase in all income tax brackets, expected to raise $5 billion in FY 2010.
  • Hawaii temporarily created three new higher income tax brackets, starting at $300,000 for a married couple. Hawaii’s top income rate will be 11 percent until 2015, up from 8.25 percent. (Hawaii also increased standard deductions and personal exemption amounts by 10 percent. That will lower tax bills for low- and moderate-income families.) The package raises $100 million for the biennium.
  • New Jersey temporarily increased income taxes on households earning more than $400,000, raising $1 billion in FY 2010.
  • Iowa limited the size of five different business tax credits, saving the state $18 million in FY 2010.
  • Nevada temporarily raised the sales tax rate from 6.5 percent to 6.85 percent, raising $280 million over the biennium.
  • Wisconsin raised its cigarette tax by $.75 a pack to $2.52 and changed the method for taxing snuff. The taxes are expected to raise $170 million a year.

The Center on Budget’s analysis said during a recession, tax increases could help the economy recover more effectively than spending cuts. Maintaining programs that help people in need means those dollars are quickly spent in the local economy. On the other hand, “high-income households typically spend only a fraction of their income and save the rest,” the Center wrote, quoting a letter signed by 120 economists. “As a result, each $1 increase on taxes on high-income households will reduce their spending by much less than $1.”

The only Minnesota tax increase mentioned in the report? The $51 million cut to the Renters’ Credit that occurred under unallotment.

States are continuing to face budget shortfalls: roughly four of every five states face budget deficits in FY 2010. Deficits are expected to continue into FY 2011. Recent headlines report that states continue to look for balanced approaches. During her recent State of the State address, Gov. Jan Brewer (R-Arizona) “renewed her call for a sales tax increase to help” cover the state’s $5 billion deficit, the Phoenix Business Journal reported. The Seattle Times told a similar story about Gov. Chris Gregoire’s (D-Washington) State of the State speech. Gov. Gregoire said, “she can’t abandon her values or ‘eliminate the safety net for our most needy and cripple our economic future.’” Both states still plan to make budget cuts, in addition to the revenue increases.

-Scott Russell

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Posted by Scott Russell

2009 tax proposals would have rebalanced Minnesota’s tax system

October 28, 2009

We’ve just finished up our analysis of the major tax proposals made in the 2009 Legislative Session and what tax policies were passed by the legislature or implemented by the Governor through unallotment. And what really jumps out at me are the opportunities lost.

We entered the 2009 session facing a serious budget deficit. We also have a state and local tax system that is a smaller share of the economy than a decade ago. The average share of income that Minnesotans pay in state and local taxes dropped by 13 percent from 1996 to 2006. In addition, the tax system is becoming more regressive – meaning that low- and middle-income Minnesotans pay a larger share of their incomes in taxes than those with the highest incomes.

It’s been frequently said that you should never let a good crisis go to waste. So while it isn’t a good thing to have a terrible economy and a huge budget deficit, those circumstances did allow for a rigorous debate about the role of raising revenues as part of a balanced solution to the state’s budget shortfall, and about the value of rebalancing the tax code.

We saw some interesting and creative proposals to do those things in this legislative session. As we’ve described in our blog and also in our new analysis, the House tax committee under Representative Ann Lenczewski’s leadership passed a comprehensive reform of tax deductions and credits – a package intended to simplify the tax code and to ensure that, when the state does use the tax code to provide incentives for certain kinds of behavior, that those tax benefits are available more broadly.

By the end of the legislative session, each body of the legislature passed three tax bills that would have started to reverse the trend of greater regressivity in Minnesota’s tax code. These bills were part of a balanced approach that would have reduced the need for painful cuts to services. Each of these bills fell to the Governor’s veto pen.

But more tax debate surely lies ahead. The state continues to face severe budget deficits in the next biennium…and if the recent spate of bad news continues, a new deficit may well arise in the current budget cycle as well. Those interested in public policy may want to study up on the tax proposals that were debated in 2009 – we’re likely to hear about these and other tax reform ideas in the months to come.

-Nan Madden

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Posted by Nan Madden

Legislature passes bill to balance budget with taxes, education shift

May 18, 2009

The tax conference committee wrapped up their work on Monday night, the last day of the legislative session. The bill includes elements similar to what was in HF 885, the legislature’s previous tax bill that was vetoed by the Governor:

  • A new fourth income tax bracket on taxable income over $250,000 for married couples, as in HF 885. This raises $516 million in FY 2010-11.
  • A surtax on income earned from charging interest over 15 percent, also as in HF 885. This raises $216 million.
  • $286 million raised from alcohol taxes, slightly more than in HF 885.
  • $14 million net raised from additional tax compliance.

The bill also includes two tax cuts:

  • $75 million in FY 2010-11 by allowing businesses to get a sales tax exemption at the time they make the purchase (currently they must pay the tax and then apply for the refund).
  • $5 million in FY 2012 for Angel Investor Credits for high tech businesses.

The bill also includes the K-12 education shift that the House proposed. The spreadsheet passed out in the tax conference committee indicates the net impact of all bill provisions would be to close the $2.7 billion gap remaining for the FY 2010-11 biennium.

The House and Senate passed the bill in the final hour of the legislative session and it is probably a safe assumption that the Governor will veto this bill, leaving the state’s budget unbalanced for the FY 2010-11 biennium. The Governor has indicated that he will balance the budget through his unallotment authority, although he does have the option to bring the legislature back into special session to try to reach a negotiated agreement. As we have previously reported, the Governor had indicated to the legislature that he primarily plans to cut aids to local governments, other tax credits (such as the Renters’ Credit and Political Contribution Refund), human services and higher education.

-Nan Madden

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Posted by Nan Madden

Senate tax bill takes a different approach towards restoring fairness to the tax system

April 23, 2009

On Tuesday the Senate tax committee released its tax omnibus bill and the House tax committee passed theirs. The House bill wipes the tax expenditure slate mostly clean, raises alcohol and cigarette taxes, cuts taxes for some businesses and increases the income tax on the highest-income earners (check out our blog on the bill).

The Senate has similar goals to the House: making sure revenue increases are part of a balanced approach to resolving the budget shortfall, and ensuring that those revenues are raised fairly. But they take a different approach to get there.

The Senate omnibus tax bill raises more revenue than the House ($2.6 billion in FY 2010-11 versus $1.5 billion), and the Senate relies much more on the income tax to raise revenue. Chair Bakk said that this approach acknowledges that the tax cuts enacted in the late 1990s and early 2000s were not sustainable, as the economy has worsened since then and revenue has fallen off (from Politics in Minnesota’s Steve Perry – hats off to their comprehensive coverage of “the T-word”).

Here are some of the major provisions of the Senate tax bill:

  • Unlike the House and Governor, the Senate raises enough revenue to balance its budget for four years. According to the latest economic forecast, we face a $4.6 billion deficit in FY 2010-11 and a $5.1 billion deficit in FY 2012-13, not including the impact of inflation. The House tax bill is about a $1 billion short of a balanced budget in FY 2012-13 and the Governor doesn’t provide enough details to figure it out. In contrast, the Senate tax bill raises enough money in both budget biennia to balance the budget (when combined with other elements of the Senate plan, including spending cuts).
  • Raises $2.2 billion for the FY 2010-11 biennium through changes to income tax rates. The bill creates a new income tax rate of 9.25% (slightly higher than the House proposal of 9%) on income above $250,000 for married joint filers. It also bumps up the three existing tax rates to 6%, 7.7% and 8.5% (currently 5.35%, 7.05%, 7.85%). All of these income tax rate increases would blink off once the state’s budget is balanced. The bill also repeals the low-income motor fuels tax credit, eliminates the tax deduction for mortgage interest paid on a second home, and exempts up to $2,400 of unemployment compensation from income taxes.
  • Includes tax cuts for businesses targeted at stimulating the economy, but also raises some business taxes. The Senate tax committee provides an upfront sales tax exemption for capital equipment purchases by businesses (note this provision is not in the House bill), and also provides an income tax subtraction for pass-through income. The bill raises $132 million in FY 2010-11 from increasing the statewide property tax paid by businesses, and puts on hold the transition to Single Sales Factor, which raises $26 million in FY 2010-11.
  • Creates a new surtax on income from “excess” interest collected, raising an estimated $216 million in FY 2010-11. For transactions that have an interest rate over 15 percent, this would impose a 30 percent tax on the portion of income generated the interest that exceeds 15%. This provision has already generated a lot of testimony, for and against.
  • Expands the definition of business “nexus” to enable sales tax collection on some internet purchases. This proposal takes a page from the state of New York, and attempts to address the fact that the state sales tax is not collected by businesses like Amazon.com that sell online to Minnesotans, but don’t actually have a store in Minnesota. For details on how it does this, read this helpful summary from the Department of Revenue. It raises $23 million in FY 2010-11.
  • Aids to counties and cities is reduced – by about $14 million a year for counties and $16 million a year for cities – and levy limits are repealed. These aids were previously cut by the Governor in December through the unallotment process. The House would cut aids to local governments much more than the Senate.

You can access the spreadsheet for the bill online.

Budget-balancing plans are now coming into focus. The Senate and House proposals close the budget deficit using a balanced approach combining one-time resources, spending cuts and revenue increases, while the Governor relies heavily one-time resources and spending cuts to get through two of the four deficit years.

-Katherine Blauvelt

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Posted by Katherine Blauvelt

How tax increases on high-income individuals effect small businesses

April 22, 2009

The House and Senate have both put out proposals that would increase taxes on the highest-income Minnesotans. I’ve heard legislators ask how many small businesses would be affected – good question! First, let’s walk through a few basic facts about how small businesses are taxed.

There is no agreed upon definition of “small business” – but for tax purposes, it means that the business is taxed at the owner or shareholder level, as opposed to corporations or C-Corps that are taxed at the corporate level and are subject to the corporate income tax.

A small business can organize itself, in terms of ownership structure, as a partnership, sole proprietorship, subchapter S Corporation (S-Corp) or a Limited Liability Company (LLC). Each year, the business fills out a statement of profit and loss that shows the business’ net profit, if any. The profit is then reported to the owners/shareholders. The owners, in turn, have to report the “passthrough” income they received on their federal and state income tax returns. (There is one exception – an LLC can choose to pay taxes on its profits as a corporation, though they seldom do.)

Example: John Q. Public is a marketing consultant organized as sole proprietorship. His business brings in a gross profit of $200,000.  He pays all of his business expenses – car expenses, fees, contract labor, depreciation, mortgage paid, office expenses, pension plan, any rent paid, repairs, travel, business meals and entertainment, utilities, etc. The net profit after expenses – say, $50,000 – “passes through” to John. He pays individual income tax on that $50,000 (less credits and deductions), just as a salaried worker would on their income. Or, if he has other taxable income, the $50,000 is lumped in with that.

Now to the question of how many small businesses would be impacted by increases in the top income tax rates. In 2007, House Research ran the numbers on several proposals that increased the income tax on the highest-income Minnesotans. It found that fewer than 10% of households with small business income would see a tax increase under those scenarios. For example:

  1. A proposal to raise income taxes on household income above $250,000 would have effected an estimated 9.1% of residents with small business income, or about 29,800 Minnesota households. Remember, only income above $250,000 would be taxed at the 9.1% higher rate – the first $250,000 would be taxed at existing rates.
  2. A proposal to raise income taxes on household income above $400,000 would have impacted an estimated 2.9% of residents with small business income, or 9,500 households.

Note: The above two figures were calculated when the economy was still chugging along – I’d assume fewer small business owners would be impacted by a similar tax increase, as profits are down and income is down.

Concern about the tax impact on businesses seems to assume that state taxes represent a large cost of doing business and can hurt job creation. However, research on the connection between state taxation and business activity is much less conclusive. For example, a study commissioned by the Small Business Association found that state tax policy, including both tax rates and the type of taxes in a state’s portfolio, has only a modest effect on business creation.

The world is complex and the economy is complex.  Many factors impact the decisions of small business owners: their own personal situation, health of the economy, regulations, etc. Taxes are just one factor. In fact, health care costs regularly are listed higher than taxes as a barrier to business growth. A Robert Wood Johnson Foundation survey of small businesses this past December found that health care costs are the top concern of small business owners. Bottom line: as policymakers consider tax proposals, they should remember that taxes are just one piece of the “business climate” puzzle.

Remember, the debate on taxes is just getting started. With the House and Senate Omnibus Tax bills out, it’s likely that we’ll get updated estimates on how small businesses will be impacted by tax proposals – and I’ll be sure to blog on it.

-Katherine Blauvelt

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House tax proposal focuses on balance in the tax system

April 21, 2009

The House tax committee saw the draft omnibus tax bill Monday.  Representative Lenczewski described the goals that the bill, available from the committee’s web page, attempts to meet. First, in order to meet House targets, the bill must raise $1.5 billion in the FY 2010-11 biennium and make $275 million in spending reductions. And it seeks to improve balance in the tax system. She noted that, even with these revenue increases, the House is making significant reductions to spending elsewhere in the budget.

Here are some of the bigger pieces:

  • New income tax bracket. The bill creates a new income tax rate of 9% on taxable income above $300,000 for married joint filers. This raises $468 million in FY 2010-11.
  • Reform of income tax expenditures. A whole range of tax deductions and credits would be eliminated from the income tax, including many itemized deductions. In return, new credits related to mortgage interest, charitable giving, and low-income families with children are proposed. These credits would benefit more taxpayers than just those who itemize, but less would be spent in total on these “tax expenditures.” The net impact is $489 million raised in FY 2010-11. (These provisions are similar to Rep. Lenczewski’s tax expenditures bill, HF 1782.) The Minnesota Council of Nonprofits is evaluating the potential impact of the proposed reduction in tax incentives for charitable giving.
  • Eliminate business tax preferences. The bill would repeal Foreign Operating Corporations and some other special corporate tax provisions, but would provide new tax cuts for larger businesses by speeding up the state’s transition to Single Sales Factor apportionment and for smaller businesses through conforming to Sec. 179 expensing. The net impact is $123 million raised through corporate tax changes.
  • Increase alcohol and cigarette taxes. The bill would raise $209 million for the biennium through increasing the gross receipts tax paid at the retail level and increasing the alcoholic beverage taxes by about a penny a drink for most kinds of alcohol and about three cents a drink for distilled spirits. Taxes on cigarettes would increase by 54 cents a pack, which, combined with some other changes to tobacco taxes, raises $204 million for the biennium. These are smaller reductions than proposed in bills heard on these issues last week.
  • Cut to aids and credits. The bill largely includes the property tax division report, which sought to cut aids to local governments and property tax credits by $275 million, make the property tax more based on ability to pay and recognize the challenges faced by local governments by giving them more flexibility. While aids to cities and counties are cut, the bill would allow counties the option to raise a 0.5% sales tax.

The House tax committee is hearing additional testimony tonight and amendments to the bill on Tuesday, and then it needs to pass a floor vote,  so the details could change. After that, it’s off to conference committee to reach a compromise with the Senate. We’ll see the Senate’s omnibus bill Tuesday as well, so stay tuned.

-Nan Madden

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Posted by Nan Madden

House Tax Committee considers some revenue options

April 16, 2009

Generally, the tax committees don’t pass individual tax bills during the legislative session, but rather hear a whole lot of options and then combine them into one “omnibus” tax bill. We’ll see the first draft of the House omnibus tax bill on Monday, April 20. The budget targets set by the House indicate that the omnibus tax bill will raise a net of $1.5 billion for FY 2010-11.

Recently the House Tax Committee has begun hearing some bills with ideas about how to raise some of that $1.5 billion. Two of them are a new twist on ideas that have been around a while (and that have been discussed in our Revenue-Raising Options to Help Close Minnesota’s Budget Deficit).

On April 14, Representative Rukavina presented HF 2079, which is a new version of the income tax surcharge (or surtax) idea used in the 1980s under Governor Quie. When a surcharge is in place, income tax rates and deductions all stay the same. However, once the income tax has been calculated, an additional amount is added. Under HF 2079, this surcharge varies by income, ranging from 6% to 12%. Households with adjusted gross income under $30,000 would pay 6%, incomes $30,000 to $80,000 would pay 8%, $80,000 to $250,000 would pay 10%, and incomes over $250,000 would pay 12%. The bill is estimated to raise $1.4 billion in FY 2010-11, roughly the same as if all income levels paid a 10% surcharge.

Surcharges are often considered temporary measures, and in HF 2079, the surcharge would end once the state has a fund balance of $700 million.

Last Monday, the committee heard Representative Paymar’s bill, HF 1998, which combines two ideas: creating a new income tax bracket and returning income tax rates to where they were in the late 1990s. In recent years, an additional income tax bracket has been discussed as a way to address the finding that the highest-income Minnesotans pay a smaller share of their incomes in total state and local taxes. In tax committee short-hand, this proposal is called a “4th tier” because it creates a new bracket above the existing three tax brackets, and both the House and Senate passed versions of one in 2007.

Representative Paymar’s bill creates a new tax bracket in the middle, rather than on the top. The bill splits the current second tax bracket into two. Currently, this bracket taxes adjustable gross income between $33,221 and $131,970 at a 7.05% rate (those income levels are for married couples filing jointly.) The bill would create a new bracket for incomes $100,000 to $131,970, and tax that income at 8%, which is the income tax rate that applied to the second bracket in 1998. The bill also would increase the tax rate on the top bracket from 7.85% to 8.5% – again, returning the rate to where it was in 1998.  This proposal would raise $440 million in the FY 2010-11 biennium.

That’s two additional ideas added to the mix…we’ll see if they make it to the next stage when the House omnibus tax bill comes out on Monday.

-Nan Madden

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