More tax cuts coming

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The Tax Conference reached a tentative agreement just before midnight Wednesday on the contents of the second tax bill. That agreement will provide $103 million in tax relief in the current biennium (FY 2014-15) and $119 million in the next biennium. This relief is on top of $443 million (current biennium) and $956 million (next biennium) provided in the first tax bill enacted in March.

Among the largest single items in the tentative agreement announced Wednesday night is an extension of the sales tax exemption for local government purchases. The 2013 tax act exempted the purchases of counties and cities, a move which adds transparency to the tax system and contributes to lower property taxes by reducing local government expenses. However, the 2013 act did not explicitly exempt joint powers agreements or various other local arrangements from the sales tax, which had the unintended effect of penalizing local jurisdictions that participate in these collaborations. Extending the sales tax exemption to include these local entities will reduce state revenue by an anticipated $31 million beginning in the next (FY 2016-17) biennium.

Another major dollar item in the tentative agreement is a reduction in the June accelerated sales tax payment. Generally, sales taxes collected by a business do not have to be remitted to the state until the following month. However, since 2009 businesses with annual sales, use, or excise tax liability in excess of $120,000 were required to remit 90% of their June sales tax payment in June; this was done to help temporarily balance the state budget by shifting revenue that normally did not arrive in state coffers until the next fiscal year (which begins in July) to the current year. The tentative agreement reduces the June accelerated payment from 90% to 81.4% and increased the annual threshold subject to the tax from $120,000 to $250,000. This change is expected to reduce state revenue by $45 million in the current biennium and by a much smaller amount in subsequent biennia.

The tentative agreement will also increase the size of the homestead credit refund for taxes paid in 2014 by three percent and the renters’ property tax refund by six percent. These one-time refund increases, which will cost the state nearly $25 million in the current biennium, will temporarily reduce tax regressivity by targeting tax relief to low- and moderate-income homeowners and renters.

Two items discussed in depth on this site were a House proposals to annually adjust the city Local Government Aid (LGA) appropriation to keep pace with inflation and population growth and to provide small business tax relief by exempting the first $150,000 of business value from the state property tax. While the agreement did provide an inflation and population growth adjustment to the LGA appropriation for 2015 (a $10 million increase), it failed to make the adjustment permanent. Cities will have to lobby the legislature for another appropriation adjustment in the next legislative session. The small business property tax reduction was not adopted.

The Senate tax bill included a refundable tax credit for (1) certain tutoring for disabled students with an “Individualized Education Plan” (IEP) and (2) qualifying expenses related to reading tutoring for students evaluated for but not having an IEP. The tentative tax agreement includes one-time funding for the second portion of this credit, but not the first. The cost of this credit is $2.8 million in the current biennium.

The tentative second tax act agreement included dozens of other items, including an increase in the agricultural homestead credit, an increase in aid to counties to deal with aquatic invasive species, and an extension of the existing military pay subtraction to active status National Guard members. Click here to view the legislative spreadsheet listing all of the items in the tentative agreement and their projected cost.

At this point the second tax bill agreement is tentative, subject to “sign-off” by Governor Dayton and legislative leaders. The tax conference committee is expected to meet next Monday, May 12, to finalize the deal.