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.