Senate takes different path from Governor in tax bill

The Senate Tax Committee passed their 2008 omnibus tax bill last week (SF 2869). A quick comparison to the Governor’s tax proposal shows several major differences.

Keep in mind that the state has a $935 million budget deficit for FY 2008-09 and over $2 billion in deficits in the next biennium. On net, the Senate tax bill raises $150 million to help balance this biennium’s budget – three times more revenue than the Governor’s tax proposal.

While the net impact is quite different, the Governor and Senate both include revenue-raising provisions of roughly $150 million in this biennium and $275 million in the next. And they both primarily raise this revenue through addressing Foreign Operating Corporations (FOCs), although the Senate raises a bit more revenue through their proposal. However, the second-largest revenue-raiser in the Governor’s budget is a tax increase on low- and moderate-income renters through a 21% increase in the Renters’ Credit. In contrast, the Senate’s second-largest revenue provision is an increase in the statewide property tax levy paid by businesses.

The reason why the bottom line is so different between the two proposals is because the Governor’s revenue-raisers are partially offset by tax cuts: $89 million in FY 2008-09 and $226 million in FY 2010-11. The major tax cut provisions are a 0.125% reduction in the sales tax rate and income tax exemptions for current and past members of the military. The Senate, on the other hand, has very few tax reduction proposals (even if you count the federal conformity measures already passed in HF 3201.)

The third main departure in the Senate bill is the emphasis on aids to local governments. The Senate has about $252 million in increased aid to cities, towns and counties in the next biennium, whereas the Governor provides no increase in local government aid, but instead proposes levy limits that would constrain how much local property taxes could grow.

These are some fairly serious disagreements, and I didn’t even mention the Senate’s JOBZ proposal. Nonetheless, it seems that this is a starting point from which the legislature and Governor could reach agreement and pass a tax bill this year. Already we’ve seen the Governor take a step forward on FOCs, and everyone seems willing to increase the June Accelerated Sales Tax – it’s not great policy, but it is frequently used as part of a budget-balancing solution.

What neither of these proposals provide, however, is the tax reform that is needed to restore tax fairness and raise adequate revenues through Minnesota’s tax system. There are none of the ambitious reforms to the income tax or homeowner property taxes that were seriously debated last session. So far this year, the House has shown more interest in more sweeping tax policy discussions. It will be interesting to see what approach the House takes when they release their omnibus tax bill later this month.

– Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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