Ten days ago, Governor Dayton signed into law the first tax act of 2014, which focused largely—but not exclusively—on time-sensitive items which needed to be enacted quickly. That act disposed of about half of the projected FY 2014-15 budget reserve through tax reductions and budget reserve increases. Now a second tax bill is working its way through the legislature. Last week the House Tax Committee passed its second tax bill of the 2014 session, which now awaits action by another committee before going to the House floor for passage. Some of the provisions of the second House tax bill (as of March 31) are outlined below.
Two of the items in the House tax bill were already discussed in previous Hindsight posts. A March 20 post argued that adjusting the city Local Government Aid appropriation for inflation and population growth would help city budgets keep pace with growing expenditure needs without major property tax increases. A March 28 post described how a proposal to exempt the first $150,000 of taxable business value from the state business property tax would provide tax relief to small businesses across the state.
The House tax bill also provides for a one-time six percent increase in renters’ property tax refunds (PTR) and three percent increase in homestead credit refunds (a.k.a. circuit breaker). The renters’ PTR in particular—and to a lesser extent the homestead credit refund—are highly progressive property tax relief programs that target relief to low-income households with the greatest need for assistance. In fact, dollar for dollar, the renters’ PTR is the most powerfully progressive property tax relief program on the books.
On this basis, increasing the funding for these programs—particularly the renters’ PTR—would seem to be justified. On the other hand, the increase provided for both programs is one-time. A competing use for one-time resources would be to beef up the state budget reserve, which is already funded well below the $2 billion level recommended by the bi-partisan 2009 Minnesota Budget Trends Study Commission.
Minnesota has more legal classes of property than any other state in the nation (55 by some counts). The existence of so many classes adds considerably complexity to the state’s property tax system. The House tax bill eliminates several of the more seldom used classes that benefit only a small number of taxpayers statewide and which result in tax increases—albeit tiny—for other property owners.
Included among the property classes that currently receive preferential property tax treatment that would be eliminated under the House tax bill are seasonal restaurants located on a lake, marinas providing public access to a lake or river, non-commercial aircraft hangars located on or adjacent to publicly owned airports, and others. The relatively few properties within these classes would see significant property tax increases when these classes are eliminated and merged with other larger classes that receive no preferential treatment.
The 2013 tax act exempted the purchases of local governments from the state sales tax—a move which increased transparency in the tax system, since this sales tax was ultimately passed on to taxpayers in the form of higher property taxes. However, the 2013 act did not explicitly exempt joint powers agreements or various other local arrangements from the sales tax. Thus, purchases made through these sorts of agreements were still subject to the sales tax.
From a policy perspective, this arrangement made no sense in that the state generally tries to encourage cooperative agreements among local governments as a more efficient way of providing public services. The House tax bill corrects this oversight by extending the sales tax exemption to various forms of local government organizations that were overlooked in the 2013 act.
The items listed above are just a few of the scores of provisions in the second House tax bill. These include:
- A significant permanent increase in the agricultural market value credit (which reduces property taxes on homesteaded farm land)
- Reductions in accelerated June sales tax payments that many businesses are required to submit
- Various sales tax exemptions
- A pilot aid program to improve volunteer first responder recruitment and retention,
- Changes in the definition of “real property” that will effectively exempt certain facilities used by biofuel, wine, beer, distilled beverage, and dairy producers from taxation (a change more significant than it sounds)
- Expansion of the list of businesses that qualify for “angel investment credits” and provisions promoting increased use of the credit in greater Minnesota and by women- and minority owned businesses
- Various local “tax increment financing” provisions
- Repeal of various obsolete provisions as part of the Governor’s “unsession” initiative.
The projected net budget effect of the revenue reductions and aid increases in the House’s second tax bill is just over $100 billion in the current biennium (FY 2014-15) and another $100 billion in the next biennium (FY 2016-17). Combined with the tax reductions and budget reserve increases from the first tax act of 2014, over half of the state’s projected $1.2 billion FY 2014-15 budget reserve will have been utilized. On the Senate side, the second tax bill is still in the process of formation.
Minnesota 2020’s April 1 Tuesday Talk will seek input from our readers on the second tax bill of 2014. What provisions should and should not be part of the second bill? Should more (or fewer) resources been placed in the state’s budget reserve? To participate, please visit the Hindsight website tomorrow from 8:00 a.m. to 9:30 a.m.