Governor’s budget cuts aids to local governments, cuts taxes on businesses

The Governor’s tax bill is made up of two main parts. First, there is a $272 million package of tax cuts for businesses, Second, there is $536 million in cuts, primarily in aids to local governments and property tax credits.

The size of the tax cuts means that the cuts in aids and credits only make a small dent in the state’s overall budget deficit. In fact, 51% of the cuts to aids and credits made in FY 2010-11 – and 73% of the cuts made in FY 2012-13 – pay for the new tax cuts, not for deficit reduction.

The Governor’s tax cuts package includes:

  • Gradually cutting the state’s corporate tax rate in half over six years. This is by far the largest of the tax cuts, costing the state $120 million in FY 2010-11, $410 million in FY 2012-13, and more in future years.
  • Changing the sales tax exemption for capital purchases so that businesses will get the exemption at the time of purchase, rather than applying for a refund. This costs $78 million in FY 2010-11 and $23 million in the next biennium.
  • A new Green JOBZ initiative that provides twelve years of tax incentives for companies that “create renewable energy, represent manufacturing equipment or services used in renewable energy, or that create a product or service that lessens energy use or emissions.”
  • A few other credits for investments in small businesses.

This package of tax cuts would cost the state $272 million in lost revenues in FY 2010-11 and $455 million in FY 2012-13. The ongoing cost is likely to be even higher, as some provisions don’t have any impact until five years in the future, and the corporate tax cut is not fully in effect for six years.

The administration argues that these tax cuts will provide incentives for growth. However, it is not clear how much “bang for the buck” the state will get in the near term. In an analysis of several options to stimulate the economy, economist Mark Zandi found that small business expensing provisions and cuts in the corporate tax were among the least effective of the options studied. Given the large cost, especially of the corporate tax reduction, policymakers will have to consider whether the state can afford to gamble on whether such provisions will pay off.

The Governor’s budget also includes deep cuts to the “aids and credits” portion of the tax budget, which includes aids to local governments, as well as the state’s Property Tax Refund.

There are cuts to four different ways the state provides aid to local governments in order to reduce property taxes and to ensure that even communities with low property wealth can provide a basic level of services:

  • County Program Aid is cut by $126 million in FY 2010-11 and $132 million in FY 2012-13. This is a 27% cut compared to base funding.
  • Local Government Aid, which provides state aid to cities, is cut by $246 million in FY 2010-11 and $259 million in FY 2012-13, a 23% cut compared to base.
  • The Homestead Market Value Credit and Agricultural Market Value Credit are cut by 13% and 17%, respectively.

The cuts to aids to local governments raise real questions about their ability to continue to provide critical services. The Governor’s budget recognizes that some increase in local property taxes will likely result.

The Governor’s budget also includes a 27% cut to the Renters’ Credit, which provides a property tax refund to nearly 274,000 low- and moderate-income households whose property taxes are high in relation to their income. This provision is likely to have a detrimental impact on the economy, as it would mean 51 million fewer dollars circulating in the local economy. (There is still time to join our sign-on letter opposing this cut.)

The Governor also would eliminate the Political Contribution Refund, which provides a refund of $50 for individuals and $100 for married couples for contributions to political parties or candidates, and makes changes to three other smaller aid programs.

-Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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