The Free Press, Mankato, MN

State budget: a closer look

June 25, 2011

Debate over taxes may hold surprises for some

For months, the crux of the disagreement between Democratic Gov. Mark Dayton and the Republican-controlled Legislature has been framed by increasingly well-worn catch-phrases.

Dayton and his Democratic supporters talk of making sure the top 2 percent of earners “pay their fair share” so that middle-class and low-income Minnesotans can avoid “draconian cuts” in services. Leaders of the House and Senate, along with their Republican backers, portray themselves as the last line of defense against “job killing tax increases” and as common-sense advocates of “living within our means.”

But the debate over taxes that threatens to shut down state government starting Friday might contain a couple of surprises for people who haven’t been spending the last six months at the Capitol.

All Minnesotans would pay more under Dayton’s tax plan, although about 95 percent of the increase would be contributed by corporations and Minnesotans earning more than $200,000 a year.

Some Minnesotans are guaranteed to be hit with a net increase in taxes under the Republican legislative budget, too, particularly low-income renters who would see a long-standing tax credit reduced or eliminated. And property owners in three of the state’s largest cities are virtually guaranteed to see real estate taxes increase in the years ahead if the Legislature’s budget plan becomes law because of cuts in Local Government Aid.

The Dayton plan

The most recent tax proposal offered by Dayton would increase taxes by $1.8 billion, down from an original plan of nearly $3.4 billion.

The bulk of the $1.8 billion in revenue raised over two years — more than $1.55 billion — would come from a new 10.95 percent income tax bracket applied to all taxable income above $150,000 for individuals and $250,000 for married couples filing jointly.

The remaining $250 million comes from a variety of tax changes affecting high-income individuals and corporations. A tax incidence study estimates that a percentage of those taxes would be passed on through higher prices to average Minnesotans — about $47 million a year paid by the 90 percent of taxpayers making less than $142,000 a year.

The hit for average Minnesotans is relatively minimal — just under $21 a year for people earning between $46,000 and $60,000 a year.

By comparison, the wealthiest 1 percent of Minnesotans — just over 26,000 taxpayers who take in more than $472,000 annually — would average an additional $20,760 in state income taxes annually.

Those top earners wouldn’t feel that total hit, however, because they can deduct state income taxes from their federal tax bill. The richest 1 percent would see $170 million of their additional state taxes wiped out by the reduced federal tax burden — a third of their total state bill.

And despite Dayton’s talk of making the wealthiest Minnesotans pay their fair share, his revised proposal — offered as a compromise to legislative Republicans — doesn’t quite get there. Even with the higher fourth-tier tax rate, the richest 5 percent of Minnesotans would still pay less of their income in state and local taxes than any other income group.

The Republican plan

The Republican tax bill, vetoed by Dayton, doesn’t directly raise any state-level taxes. But it does eliminate $180 million in tax credits that would have been paid to renters over two years.

The credit currently assumes that 19 percent of rent payments reflects property taxes paid by the landlord and passed on to tenants. The state returns a percentage of that to renters based on their income — giving them a taste of the property tax relief that is provided to homeowners.

The legislative budget reduces to 15 percent the amount of rent attributed to property tax costs — a percentage Republicans say more accurately reflects reality. But the change also completely eliminates the credit for non-disabled, non-senior-citizen renters earning between $25,000 and $53,000 a year.

The bill also eliminates hundreds of millions of dollars in Local Government Aid slated to be sent to cities to reduce property tax burdens. Minneapolis, St. Paul and Duluth would see 25 percent of their certified aid eliminated each of the next four years until they receive no LGA.

The knotty debate

Facing a $5 billion budget shortfall, Dayton and Republican lawmakers agree that the will have to delay repaying schools money owed them because of an accounting gimmick passed by the last governor and legislature. That agreement reduces the remaining red ink to $3.6 billion.

“I am willing to meet you half-way: $1.8 billion in spending cuts and $1.8 billion in additional tax revenues,” Dayton wrote to House and Senate leaders on May 16. “In my February 15th budget, I proposed $3.356 billion in new tax revenues. I am willing to cut my revenue proposal almost in half to $1.8 billion.”

Rep. Kathy Brynaert has faced state budget shortfalls ever since first joining the Legislature in 2007. In each election, the Mankato Democrat told voters that the budget fix needed to be built on a three-legged stool. One leg is using budget reserves or accounting shifts. One leg is additional revenue. One leg is budget reductions.

“When you’re in a deficit, you really want a balanced solution,” according to Brynaert, who said nonpartisan economists have consistently echoed that. “For years, as I’ve listened to that non-partisan economic voice, it’s that three-legged stool.”

Doing it only through cuts means the elimination of programs that otherwise would have reduced future spending, Brynaert said. She points to the Statewide Health Improvement Program, created as part of broader effort to reduce the costs of medical care. It’s succeeding in boosting the health of Minnesotans, but it’s eliminated in the Republican budget plan.

“If you see those things as extras, you’re really reducing the long-range potential of balancing the budget,” she said. “I see a lot of short-term thinking.”

Rep. Bob Gunther, a Fairmont Republican who chairs the House’s jobs and economic development committee, was disappointed that he needed to eliminate or scale back programs in his budget which help Minnesota businesses create jobs. As budget negotiations continue into the summer, Gunther hopes to restore funding to those programs.

But Republican lawmakers are committed to holding the line on tax increases, believing that is the most significant thing they can do to improve the state’s economy, he said.

“We say, ‘Why are we raising taxes on a fragile economy that’s just starting to recover?’” said Gunther, a retired grocery store owner.

Creating a fourth tier income tax rate that would be one of the highest in the nation isn’t the right message to send to business owners about Minnesota as a place to locate or expand, he said.

Brynaert said opponents of Dayton’s proposal exaggerate how much of the tax increase would hit business owners. Only about one in 10 of the taxpayers affected is a business, she said. And even then, the tax is on net income and doesn’t apply to revenue invested in the company or employee payroll.

Sen. Al DeKruif, an Elysian Republican and business owner, said the impact of the tax on wealthier Minnesotans goes beyond business owners. Corporate executives and other key employees are also in that bracket, which means Minnesota companies will have a harder time attracting and retaining those people.

“We either have to pay more to match that or we lose the people,” DeKruif said. “... The question is, ‘Where do wealthy people live?’ The answer is, ‘Wherever they want to.’”

Brynaert said it’s been clear that many entrepreneurs and corporate executives have wanted to live in Minnesota — despite a decades-long tradition of higher than average taxes and because of a decades-long higher than average quality of life.

“We are a high tax state but we are also a high services taxes,” she said. “Our taxes have been paying for something that people find attractive.”

Brynaert notes that the non-partisan tax incidence study show that even with Dayton’s tax increase, high-income Minnesotans would still pay a smaller share of their income in state and local taxes than do middle-class residents.

Gunther wouldn’t mind seeing the disparity eliminated. But he’ll only support that through reducing the tax burden on the middle class, not by increasing it on the upper class.

“I would certainly vote for something like that if they brought it up,” he said, “just so I wouldn’t have to listen to the people on the other side of the aisle complain about it anymore.”

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State budget: a closer look
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