New personal exemption unveiled as part of omnibus tax bill

The House Taxes Committee got their first look Monday at the omnibus tax bill that incorporates more than 120 bills that have passed through the committee this year.

House Republicans point to the $2 billion in tax relief proposed in HF848 that would go toward fulfilling their promise of tax relief to the middle class. But bill detractors say the cost of the bill – more than $5.63 billion in the 2016-17 biennium - comes at the expense of greater funding for education and health and human services.

“This has to work for Minnesotans. We realize these aren’t the numbers we will be working with — we’ll be somewhere in the middle between the governor and the Senate,” said Rep. Greg Davids (R-Preston), chair of the committee and sponsor of the bill. Amendments are expected during a Tuesday committee meeting with a motion expected by Wednesday afternoon to move the bill to the House Ways and Means Committee.

The most costly provision in the bill came as a surprise announcement during a morning news conference. A new Minnesota personal or dependent tax exemption, a $538.6 million cost to the General Fund, would provide a tax filer with an exemption, based on income, that could total more than $500 over the next two years for a middle-class family of four, Republicans say.

However, House Minority Leader Paul Thissen (DFL-Mpls) called the exemption no more than a “Jesse check,” which was given to each taxpayer during the budget surplus years of the Ventura administration. During a morning press conference, he said their party calculations show that the exemption would mean about $50 to $70 per single filer, and the money would be better spent by investing in education and health care.

Overall the omnibus tax bill puts forward several new credits and deductions including:

• $236.7 million to phase out state taxes on Social Security income;
• $130.6 million for a credit for principal and interest loan payments on student loans;
• $51.6 million for a military pension subtraction;
• $35 million for expanding the child and dependent care credit; and
• $20.3 million to make pre-K expenses eligible for subtraction and credit.

The bill also would encourage saving for long-term care expenses by establishing a tax exempt savings plan. Contributions to the plan would be tax deductible and investment earning to accounts would be exempt on state taxes. A $200,000 contribution limit would apply to each participant in the plan. The provision comes from HF921, sponsored by Rep. Joe Schomacker (R-Luverne) and is expected to reduce revenue to the General Fund by $250 million over the next biennium.

Sales and Use Tax Changes

House Republicans are proposing to shift several transportation-related sales taxes from General Fund use to a new Transportation Stability Fund to help sustain long-term funding for road and bridge projects. Shifting these taxes would mean $401.3 million less to the General Fund over the 2016-17 biennium and $644 million in the 2018-19 biennium.

As committee chair, Davids has a tradition of having the first bill heard in committee be one from the minority party. This year’s bill, HF132, to exempt sales of precious metal bullion from sales tax, is in the bill. The changes would give it the same tax treatment as other investments such as stocks and bonds. Sponsored by Rep. Paul Rosenthal (DFL-Edina), the provision would bring in $1 million less to the General Fund.

The bill also provides for repeal of last biennium’s tax on digital products.

Other sales tax exemptions include:

• sales and purchases for city celebrations;
• equipment used by restaurants;
• materials and supplies for improvements to small resorts;
• expansion of the exemption for textbook and instructional materials; and
• admission to some nonprofit events.

Property Taxes

Testimony began Wednesday with some Duluth residents’ concerns over a proposal to cap local government aid to three of the four cities of the first class — Duluth, St. Paul and Minneapolis. The proposal was part of the property tax and local government finance division report that was incorporated into the tax bill.

Deb Strom said the cuts would devastate the city of Duluth, where most of the budget is dedicated to police and fire protection. “Do not penalize the people because they choose to live in Duluth,” she said. The proposal, sponsored by Rep. Duane Quam (R-Byron) would net the state’s General Fund $84.6 million in the 2016-17 biennium and more than $169.3 million in the subsequent biennium.

The bill also includes the provision to phase out the statewide general property tax paid by owners of commercial, industrial or seasonal property pay a tax over and above their local property tax. For taxes payable in 2016, the first $500,000 of market value of each parcel of commercial-industrial net tax capacity would be exempt from the levy, as well as the first $250,000 of market value of each parcel of non-commercial seasonal recreation property.

Further testimony

Revenue Commissioner Cynthia Bauerly noted the “stark contrast” between the governor’s spending proposal and the omnibus tax bill. She said the governor’s priorities are more “holistic,” and the tax spending target is out of line when compared to the funding being proposed for other areas of the budget.

“The state’s outlook is better, and that is why the cost of the bill is of concern,” she said, cautioning members that when the bill is fully phased in, the costs could be unsustainable.

Davids said the bill is a work in progress. “It won’t be in the shape that you like [when it moves off the House Floor], but that’s why we have conference committees.”

What’s in the bill

• HF2077 (Drazkowski)
• HF229 (McDonald)
• HF837 (Davids)
• HF281 (Loon)
• HF135 (Peppin)
• HF958 (Ehardt)