Legislature adjourns as tax bill closes $627 million state budget deficit

by T.W. Budig
ECM Capitol reporter

The Democratic-led Legislature voted to tax the rich and smokers and to close corporate loopholes in raising about $2 billion in new taxes in its omnibus tax bill.

The Senate took its vote shortly before the Legislature adjourned until next year.

The tax bill closes the $627 million state budget deficit, fuels education funding and provides tax relief for homeowners and renters.

It creates a fourth-tier income tax rate at 9.85 percent — a change snagging about $1 billion — applicable to joint married filers earning more than $250,000 in taxable income, single-filers with taxable income of more than $150,000.

The income tax increase embraces the top two percent of taxpayers.

Republicans are not pleased.

“Thank goodness the increase in the candy tax and snack tax went away,” Rep. Nick Zerwas, R-Elk River, quipped.

“This bill hurts every Minnesotan,” he said.

The tax on a pack of cigarettes is increased by $1.60 per pack under the tax bill.

The increase is about more than raising money, Democrats argue.

House Tax Committee Chairwoman Ann Lenczewski, DFL-Bloomington, presents her tax bill to the House. (Photo by T.W. Budig)

House Tax Committee Chairwoman Ann Lenczewski, DFL-Bloomington, presents her tax bill to the House. (Photo by T.W. Budig)

“I view it as a public health imperative,” House Tax Committee Chairwoman Ann Lenczewski, DFL-Bloomington, said.

Senate Tax Committee Rod Skoe, DFL-Clearbrook, a former smoker, said he had never voted for a cigarette tax increase before.

“This is one of the hardest issues for me,” he said.

But Skoe found the health argument compelling.

All told, changes to tobacco taxes raise $430 million.

In addition to closing perceived corporate loopholes — a closure capturing $400 million — a 10 percent gift tax is imposed.

For the gift tax, a lifetime credit of $100,000 is provided, and a taxpayer can give up to $13,000 a year without counting towards their $1 million exemption.

The tax bill does not include the sweeping sales tax reforms originally proposed by Democratic Gov. Mark Dayton, but it does expand the sales tax to non-consumer warehousing and storage, repair and maintenance of electronic equipment and commercial and industrial machinery,

The storage of boats, cars, and recreational vehicles not eligible to be deducted as business expenses are exempt from the warehouse sales tax expansion.

Further, the storage of farm products and refrigerated storage are also exempt.

But the expansion of the sales tax to the repair and maintenance of industrial machinery includes farm machinery.

And the warehousing provision, which will go into effect in 2014, applies to some farm storage.

The tax bill contains an Internet “Amazon” online sale tax provision for out-of-state retailers with affiliates in Minnesota selling on their behalf.

That captures $10 million.

In terms of tax relief, the bill exempts cities and counties from paying the sales tax for most purchases, a $172 million savings to local government.

Under the bill, some 300,000 homeowners will see their property tax refunds increase, and another 100,000 additional homeowners will receive a refund, Democrats say.

One provision Republicans focused on during floor debate dealt with the Vikings stadium.

A one-time flush of money into the stadium reserve account is achieved through a cigarette tax on floor stock. To further stabilize the state stadium funding, left shaky by feeble electronic pull-tab revenues, corporate tax-loophole-closur dollars could be channeled towards paying off the stadium.

Some Republicans were flabbergasted.

“Can you smoke in the new stadium?” Rep. Tom Hackbarth, R-Cedar, asked Lenczewski.

“Because smokers are going to be paying for it,” he said. The tax bill contains no alcohol tax increases.

A Mayo Destination Medical Center provision is included in the tax bill.

It anticipates the state investing a maximum of $327 million over 27 years after the clinic, City of Rochester, and Olmstead County make sufficient investments.

A Rochester Democrat choked up on the House floor while thanking Lenczewski for the language.

The tax bill extends Mall of America TIF districts to spur Phase Two mall expansion.

It provides a sales tax exemption for the proposed Baxter Biopharmaceutical facility in Brooklyn Park.

About 54,400 Minnesota resident tax returns, or about 2.1 percent of filers, will fall under the fourth-tier income tax rate.

Senate Tax Committee Chairman Rod Skoe, DFL-Clearbrook, talks to a Senate colleague on the Senate floor. (Photo by T.W. Budig)

Senate Tax Committee Chairman Rod Skoe, DFL-Clearbrook, talks to a Senate colleague on the Senate floor. (Photo by T.W. Budig)

Ninety-eight percent of Minnesota taxpayers will see no income tax increase, according to the governor’s office.

A married couple with a taxable income of $617,000 would pay about $8,400 more in taxes under the fourth tier.

A single filer with a taxable income of $428,000, under the fourth tier, would pay an additional $5,500.

Minnesota’s 9.85 percent tax rate would be fifth highest in the country.

Republicans were critical of the bill not only for what was in it, but what wasn’t.

“What’s unfortunate, we did not make our veterans a priority in the bill,” Rep. Anna Wills, R-Apple Valley, said.

Wills had pursued a veterans-hiring tax credit.

“It’s not necessary, and not needed,” Rep. Joe McDonald, R-Delano, said of the tax increases.

The tax bill passed the House on a party line 71-58 vote; it passed the Senate on a 36-30 vote.

Democratic senators Terri Bonoff of Minnetonka, Melisa Franzen of Edina, and Susan Kent of Woodbury voted with Republicans.

Debate in the Senate also had Republicans standing on the floor condemning the tax bill.

“These taxes are really about envy,” Sen. Dave Thompson, R-Lakeville, said of the tax-the-rich approach.

“This bill will make us a high-tax island,” Sen. Julianne Ortman, R-Chanhassen, said.

Sen. Dan Hall, R-Burnsville, described the Democratic taxing philosophy as predatory.

“If they got a need — let’s tax them!” Hall said.

Sen. Sean Nienow, R-Cambridge, called the tobacco-tax increase as Democrats taking “politically correct” money.

Tim Budig can be reached at tim.budig@ecm-inc.com

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