Student Opportunity Gaps

Revenue Debate Comes into Focus

By May 5, 2013 No Comments

By Sam Walseth, MREA lobbyist

After two grueling floor debates, the House and Senate passed their omnibus tax bills. The bills raise the revenue needed to close the projected $627 million deficit and increase spending in priority areas for the DFL majorities next biennium.

The House tax bill creates a new fourth tier income tax rate of 8.49% on household incomes above $400,000 generating about $290 million in on-going biennial revenue. The bill also creates a one-time income tax surcharge of 12% on household incomes above $500,000. The one-time income tax surcharge is slated to repay the entire remaining school aid and school property tax shifts that cost about $800 million.

The House also decided to raise $434 million in tobacco taxes and $355 million in alcohol taxes for the next biennium. The Senate tax bill raises just about as much revenue from income taxes as the House, but the key distinction is that the Senate’s proposal is a permanent increase in income taxes on the top 7% of earners in Minnesota.


Income Tax Debate

The Senate tax bill adjusts the current third tier income tax rate of 7.85% to 9.4% on incomes that fall into the third tier. The current third tier taxable rate kicks in for household taxable income above $140,000. This has caused great consternation among suburban DFLers, many of whom represent communities where two salary households earn that much in a year.

Senate Tax Chairman Rod Skoe was quick to point out that the $140,000 level is taxable income and most households would have to earn closer to $194,000 in gross income before they got hit with the new rate. GOP opposition was quick to argue that many households at $140,000 view themselves as middle class earners. That may be true, but factually only the top 7% of Minnesota earners fall into this category.

The debate over who is the middle class continues. The difference in attitude toward the upper income tax hike, while obvious along party lines, is also felt between metro legislators and rural legislators.

This was evident in the DFL ‘no’ votes on the tax bill. Six DFL Senators were able to vote ‘no’ on the tax bill and five of them are new members from suburban districts. In the House, four DFLers voted ‘no’ and three of them are from suburban districts. Rural legislators will tell you there are very few people in their communities whose incomes fall into what they deem to be upper income. The rural sensitivity tends to be alcohol and tobacco taxes.

The Senate tax bill for instance doesn’t touch alcohol taxes, but it does increase tobacco taxes. Senate Majority Leader Tom Bakk (Cook) pointed out that most smokers (less than 20% of Minnesotans) want to quit, while most of the 85% of Minnesotans who consume some amount of alcohol don’t want to stop.

The Senate tax bill does include an expansion of the sales tax and a lowering of the sales tax rate to 6%. They would expand the sales tax to clothing while issuing a credit to low-income families. They would also expand the sales tax to services like haircuts, auto repairs, home repairs and more.

Governor’s Priorities

The Governor’s priorities will weigh heavily on the tax debate and as I remind people, Governor’s get most of what they want. Governor Dayton wants a large upper income tax hike and a large tobacco tax increase. There seems to be agreement on these two issues, although the House doesn’t want as much permanent income tax increase as the Senate and Governor.

He would like to close corporate tax loopholes, which raise over $300 million in the next biennium, a proposal shared with the House. He’s cool to the idea of sales taxes on services and clothing, but he’s open to an alcohol tax increase which pits him against the Senate proposal.

Basically, for the next ten days, the Governor, Majority Leader Bakk and Speaker Thissen will hammer away on these issues with a goal of raising enough revenue to meet their various spending priorities. There are major rifts in those spending priorities too, as in repaying the shift which is a solo House mission and buying down over a half a billion in property taxes, which the Senate DFL has talked about for years.

Hopefully putting money into the K-12 classroom remains on their radar screens as well!