Governor Dayton’s budget proposal part 2: tax reform

After many years of budget deficits and deep cuts to services, it’s time to instead invest in our communities and our future. We’ve long argued for a tax system that more adequately funds our state’s priorities and is based more on the ability to pay.

In his recent budget proposal, Governor Dayton outlines how he thinks Minnesota should achieve those goals. Overall, his tax reform plan raises $2.0 billion that is used to address the state’s $1.1 billion budget shortfall (which rises to $2.0 billion when we account for inflation), and to make new investments, particularly in education (early childhood, K-12 and higher education), economic development and public safety.

The Governor’s tax reform plan includes a number of primary components:

  • It creates a new income tax rate of 9.85 percent on taxable income above $250,000 for married filing joint filers, taxable income above $200,000 for heads of households, and taxable income above $150,000 for single filers. Only the 2.1 percent of Minnesotans with the highest incomes would pay any additional income tax under this proposal. The plan raises $1.1 billion in the FY 2014-15 biennium.
  • It lowers the state’s 6.875 percent sales tax rate to 5.5 percent, and extends the sales tax to items of clothing that cost more than $100, digital goods, and many services purchased by consumers and businesses. The sales tax overhaul raises $2.1 billion in FY 2014-15. The administration estimates that, for consumer purchases, the rate reduction offsets the expansion of the sales tax to more items.
  • It provides a property tax rebate of up to $500 to all Minnesota homeowners, for a total of $1.4 billion in FY 2014-15. Homeowners would apply for the rebate when they file their income taxes in 2014.
  • It lowers the state’s corporate income tax rate from 9.8 percent to 8.4 percent, and ends some current exemptions, including for foreign royalties and foreign operating corporations. Taken together, these efforts to broaden the base and lower the rate are close to “revenue neutral,” raising $4.1 million in FY 2014-15.
  • It lowers the state property tax paid by businesses and cabins by $25 million in FY 2014-15 by preventing the levy from growing with inflation for two years. It also slows the rate of growth starting with taxes paid in 2016.
  • It increases Local Government Aid to cities by $80 million in FY 2015 and raises County Program Aid by $40 million in FY 2015.
  • And it raises taxes on tobacco products, primarily through an increase of 94 cents a pack on cigarettes. This proposal raises $319 million, but seeks to reduce state health care costs in the long term by discouraging tobacco use.

In Minnesota, the highest-income Minnesotans pay a smaller share of their incomesin state and local taxes than middle-income Minnesotans. The Governor’s tax reform plan seeks to close that gap, to make the tax system more fair while also putting the state on a firmer financial footing.