Gov. Mark Dayton, benefiting from good timing as we approach a 2014 election year, indicated last week that he wants to cut taxes for business and middle-class Minnesotans, thanks to a newly forecast $1.1 billion budget surplus.
The resurgent Minnesota economy is producing tax revenue faster than anticipated.
Dayton’s aides say he may ask the DFL-dominated Legislature to repeal or at least dilute three business-to-business taxes passed last spring. In an interview, Minnesota Revenue Commissioner Myron Frans, a tax lawyer and former small-business CEO, said there will be no specific proposals to legislative leaders until the February budget forecast.
“The governor is focused on his priorities of jobs and a fairer tax system,’’ said Frans. “We haven’t closed the door on anything over here.”
Dayton is believed to be most inclined to repeal a storage/warehouse tax; a tax on repairs that will hit hardest small businesses that don’t have their own maintenance staffs, and a telecommunications equipment tax. Dayton didn’t advocate for these taxes, but signed them into law last spring.
The Minnesota Chamber of Commerce, blaming Dayton and the DFL-controlled Legislature for a $2 billion-plus tax hike last session to balance a $39 billion two-year budget, wants more relief for business owners. That may happen.
But Frans indicated little relief for high-end earners from an administration that raised taxes on the top 2 percent of income earners from wages and investments in order to make investments in education, middle-class tax relief and infrastructure spending.
“In 2008, the middle-income folks in Minnesota were paying 12.3 percent of household income in state and local taxes, including sales and gas taxes,” Frans said. “The top 2 percent were paying 9.7 percent. We project that in 2015, middle income folks [those making $32,000 to $69,000 in total household income] will pay about 12 percent in state and local income taxes. The top 2 percent [making $292,000 and up] in household income will pay about 11 percent. This is the largest upward move in tax progressivity … since we started our tax-incidence reports in 1990.”
Many liberals and moderates like this trend. But some high-earners predict an exodus of affluent Minnesotans to Florida and other low-tax states. Especially troubling, they say, is the state’s failure to increase the amount excluded from inheritance taxes closer to the higher federal estate tax exclusion. Federal law exempts the first $5.25 million, Minnesota only the first $1 million.
Hunt Greene, a veteran Minneapolis investment banker, said: “I’m a Democrat. I can afford and tolerate paying higher income taxes. This is different. The Minnesota gift-and-estate taxes kick in at $1 million. The federal level is $5.25 million. And Minnesota is one of only a few states that have a gift tax.
“The result is that, as I talk to the big law firms about their business … their estate practices are swamped with people figuring out how to change their residences,’’ Greene said.
He’s not alone. Others predict that more wealthy Minnesotans will leave rather than subject their estates of over $1 million, or gifts made to heirs, to what can be up to a 40 percent tax that doesn’t exist in states such as Florida or Arizona.
“Every day we get calls from people about changing residency,” said Bob Abdo, a political moderate and 40-year Minneapolis business lawyer. “This pains me. I grew up and was educated here. Essentially, what we have got now is a disincentive for longtime Minnesota residents to stay in Minnesota.
“This means mom and dad … who are loyal to Minnesota because they earned a lot of money here, may now be worth more than $1 million. So, dad dies. No estate tax consequence to mom. But mom is worth $1 million, and it doesn’t take much if you add a house, your retirement accounts and a life insurance policy. Mom dies. It’s supposed to go to the kids. Any amount that goes to the kids in excess of $1 million, whether one kid or 12, will be taxed at about 40 percent for the first $250,000. The tax goes down from there.”
Of course, estate lawyers know how to use family and charitable trusts to avoid some of these taxes. And the Revenue Department says it doesn’t yet detect state taxpayer defectors.
The Dayton administration could consider tax reforms that include broadening and lowering the sales tax, a second look at the 9.85 percent highest marginal income tax rate just imposed by the Legislature, and more conformity with the federal tax system on estates.
I worry more about working stiffs trying to make rent on $35,000 a year. But the Legislature went too far last year. And there’s room for common-sense tax reform that doesn’t abandon the governor’s goal for a progressive tax structure.