Mortgage interest tax breaks would be capped at $420, education credits used for everything from tutoring to violin lessons would vanish, and a host of other deductions and credits would be eliminated under a bold and controversial tax overhaul proposal from House DFLers that would also cut taxes for lower-income Minnesotans.
Rep. Ann Lenczewski, chairwoman of the Taxes Committee, said her proposal would "sweep the barn clean" of the little advantages that riddle the tax code and disproportionately reward higher-income Minnesotans.
"We are going to do significant, major tax reform this year," said Lenczewski, DFL-Bloomington. "Credits are back-door spending that favor those at the higher level." She compared the state's tax revenues to a lake from which everyone drinks. Those who avail themselves of special credits and deductions have stationed themselves "way upstream with cups and pitchers," scooping out their share ahead of everyone else.
The proposed overhaul, she said, "will make a whole bunch of people here angry. A lot of Minnesotans benefit from these."
Indeed, the changes would hit nearly every Minnesotan in some way. Refundable credits for day care would disappear, as would a recently enacted credit for farmers with cows afflicted with bovine tuberculosis.
In return for stripping an estimated $200 million of breaks from the tax code, Lenczewski said the state would reap the benefits of a more progressive, transparent, simplified system that forces interest groups to compete openly for limited resources. Government should not care, she said, whether a tax credit is used to buy language lessons for a child or pay hockey fees. The K-12 education credit, she said, would be replaced with a "Families Know Best" all-purpose credit of up to $200 per child.
As for business, she said, if companies like 3M need a state subsidy for research and development, "they should ask the state for a grant."
A rough ride
The proposal has not been endorsed by House leadership, although Lenczewski, one of the House's most respected voices on taxes, said she has support throughout the caucus.
House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said Lenczewksi "is offering a big and bold set of ideas" that would be examined closely. "The fact is that every tax exemption costs the state money," Kelliher said, "and some have outlived their usefulness."
Elimination of the mortgage deduction would be difficult to shepherd through, Kelliher acknowledged, "but there is a tax fairness issue here." The current deduction is tied to income and so is worth more to homeowners with higher incomes, even though they may have mortgages identical to those with lower incomes."
Lenczewski said she expected her proposal to get "a rough ride," and the pushback started almost immediately from Republican Gov. Tim Pawlenty. His spokesman, Brian McClung, said the plan "appears to be a major tax increase on many of Minnesota's best and largest employers at a time when we want to promote job growth, " and "sends the wrong message" by eliminating business credits.
But Lenczewski and Rep. Paul Marquart, DFL-Dilworth, say their proposal is patterned after President Ronald Reagan's overhaul of the federal tax code in the 1980s, when a multitude of breaks were winnowed out. Over the years, Lenczewski said, "about half of them have crept back in," and it's "time to wipe the spiderwebs out again."
Lenczewski's plan does not raise revenue on its own because it offsets the elimination of exemptions with slightly lowered tax rates for wages up to $131,000.
House Minority Leader Marty Seifert, R-Marshall, said the plan would create "a lot of disruption," particularly for suburban families who have built the mortgage deduction and education credit into their budgets.
"This is a thoughtful proposal and I don' t want to dismiss it outright," Seifert said. "But I want to get a better sense of how this would affect business. The question that ought to be asked of everything we do in this session is 'Does this help or hurt job creation and retention?'
"If it helps, let's look at it. If there's a chance it would hurt, I don't think we can risk it."
Charlie Weaver, executive director of the Minnesota Business Partnership, said he was "a big fan of Representative Lenczewski," but was dubious about eliminating major credits and deductions. "The R&D credit is one of the few things that makes Minnesota competitive," he said.
Patricia Lopez • 651-222-1288