ST. PAUL - Don’t plan on spending money from a big cut in state taxes just yet, Minnesotans.
When state finance officials announced last week that Minnesota’s projected budget surplus had shrunk by one-fourth - from $1.2 billion to $900 million - it meant not only that Gov. Mark Dayton and the Legislature have fewer dollars to give back to taxpayers this year, but with slower economic growth and lower tax revenues forecast for the next three years, state policymakers will be cautious about making any ongoing tax and spending commitments.
“My appetite to create additional spending or tax cuts … has probably waned significantly,” Senate Majority Leader Tom Bakk, DFL-Cook, said after hearing the economic forecast Friday.
But Republican House Speaker Kurt Daudt of Crown said even a smaller surplus means “we are collecting too much money from Minnesotans.” He and his fellow GOP lawmakers still want to give it all back to taxpayers.
So the battle lines for the legislative session that starts Tuesday are drawn. Republicans, who control the House, will push for large tax cuts, while Dayton and his fellow Democratic-Farmer-Laborites, who comprise the Senate majority, will make education funding, especially for pre-kindergarten programs, a top priority. Both sides also want to pump more money into roads, bridges and possibly bus and rail transit, although they sharply disagree on how to pay for it, and both agree the state must borrow more money for construction projects.
Any tax cuts are likely to be part of a bipartisan grand bargain that also covers new spending on transportation, education and bonding projects.
If and when Dayton, Daudt, Bakk and other legislative leaders agree on a dollar target for tax cuts, House and Senate tax negotiators “will work something out,” predicted Senate Tax Committee Chairman Rod Skoe, DFL-Clearbrook.
“We’ve got to provide relief” for overburdened taxpayers, said House Tax Committee Chairman Greg Davids, R-Preston.
Why? One reason is that Minnesota’s tax ranking for state and local government taxes per $1,000 of personal income, after dropping out of the nation’s top 10 in the first decade of this century, crept back to ninth-highest in 2013.
Where to start?
Although both parties agreed that tax cuts were a top priority last year, no agreement was reached before the session adjourned. But House and Senate tax negotiators got a head start on working out their differences last spring.
The two chambers passed sharply contrasting tax bills last session. House Republicans voted for $2 billion in tax cuts over two years, while DFL senators supported less than $500 million in revenue reductions.
When the session adjourned, the negotiators had 182 tax-cut proposals on the bargaining table - and some clear ideas about how to hammer out agreements. Davids said he expects all but one of those House-Senate tax conference committee members - former DFL state Rep. Ann Lenczewski, who resigned last fall - to return to the talks this month.
A logical starting point would be policies on which the two parties agree. Dayton and Daudt both said last week that they want to focus on tax relief for middle-class taxpayers.
One middle-class benefit on which they agree is increasing income tax credits for child care expenses. Last year, Dayton proposed allocating more than $100 million to make more families eligible for those tax breaks. Davids agreed and inserted it into the House tax bill.
Last week, Dayton thanked the Republican chairman and said he will propose the child care credit again this week.
But after that, it’s harder to find policy changes on which the two sides agree.
DFLers and Republicans agree that the statewide property tax levy on businesses is too high. A Minnesota Center for Fiscal Excellence study last year reported that businesses in rural Minnesota pay the second-highest property taxes in the nation, while metro-area business taxes are sixth-highest.
But DFL senators and House Republicans are miles apart on how much to cut those taxes. The House bill called for phasing out the state commercial property tax over six years. The Senate offered a modest reduction in the tax rate.
Bakk said he opposes providing “property tax relief that ultimately goes to the bottom line in Bentonville, Ark. (Wal-Mart’s hometown), or to John Menard in Wisconsin.” But Skoe said he’s open to a “small rate change” for all businesses. Such a cut would also benefit cabin owners, who also pay a state levy.
The 2015 House and Senate tax bills both would have increased the state’s tax credit for research and development investments, and both tax committee chairmen said they would support an increase again this year if the money is available.
Minnesota is one of just a few states that tax Social Security benefits, and Daudt said House Republicans “think it makes sense to exempt that income” from taxes, as they proposed last year.
Dayton noted that Minnesota already exempts Social Security benefits for low-income recipients and only partially taxes it for middle-income seniors. While he opposes reducing Social Security taxes for the wealthiest seniors, he said he’d support exempting more Social Security income for middle-class recipients.
In addition to Social Security tax relief, Davids said House Republicans will push for exempting military pensions from Minnesota income taxes, a change DFLers have not supported.
He also will advocate providing “student debt relief” through tax credits for college loan payments. DFLers prefer to increase student financial aid.
Dayton said he will again propose expanding the state’s “working family tax credit” to provide larger refunds to more low- and moderate-income taxpayers, especially those with children. DFL senators support that proposal, but so far, Republicans aren’t on board.
Senate DFLers had planned to call for boosting state aid to cities and counties, but after Friday’s forecast, Bakk said, “It just got hard.”
If money is available, legislative negotiators have dozens more tax-cut ideas to consider.
“Everything is on the table,” Davids said.