Hundreds of thousands of Minnesotans will get more money in their pockets thanks to tax cuts beginning July 1, costing the state treasury about $650 million over the next two years and much more over the coming decade.
Social Security recipients, farmers, first-time home buyers, families with child care costs, small businesses with big property tax bills and college loan debtors are among the beneficiaries. The chief author of the cuts, Rep. Greg Davids, R-Preston, cheekily called it “the greatest tax bill ever” as he lauded its relief for a range of middle-class interest groups.
Even as the tax cuts are poised to take effect, a political squabble over them continues. DFL Gov. Mark Dayton wants the Legislature to come back into session and undo several of the cuts, arguing they tilt Minnesota’s tax system more in favor of the wealthy.
“The bill prioritizes tax relief to some of the most fortunate in our state, large businesses and special interests at the expense of Minnesota’s fiscal stability while ignoring those in Minnesota who have not yet benefited from the recovery and those who rely on essential government services,” Dayton wrote in a May letter to House Speaker Kurt Daudt, R-Crown.
The law, which passed with large, bipartisan majorities, freezes the statewide business property tax and the levy on cigarettes, both of which previously increased with inflation. Another measure cuts estate taxes for wealthy heirs.
But the fight over the law rages on. Dayton says he acted under duress when the GOP-controlled Legislature made funding for his administration’s Department of Revenue contingent on his signing.
Dayton wants the Legislature to remove three of the most controversial provisions that cut taxes for smokers, wealthy heirs and businesses that own property.
To encourage lawmakers to return to the drawing board, Dayton zeroed out funding for the Legislature as of July 1, which means lawmakers and their staffs won’t get paid. In response, the Legislature is suing Dayton. The two sides will appear before a Ramsey County district judge for the first time Monday.
Still, the fight over the tax bill is also a fundamental policy debate about the state’s future and even its identity.
Dayton and DFL allies believe the state’s current tax structure is relatively fair to all income groups — studies show effective tax rates under Dayton have risen on the wealthiest Minnesotans but remained largely unchanged for everyone else. And, they say the revenue provides money required for good schools, health care, parks and other government services that make Minnesota a good place to live.
Republicans believe their bill will begin to reduce the size of a state government they say is too large, fueled by a heavy tax burden.
“I think our tax code does punish success,” Davids said, citing taxes on estates, business and high earners as just three examples.
Dayton’s budget director Myron Frans, who helped craft the 2013 tax law increasing taxes on the wealthy after a career in the private sector, replied with evident frustration: “If we’re punishing success, why is the number of people in the top tax bracket continually growing? Why don’t they just flee the state and go somewhere where they can make a living and survive?”
After Dayton raised taxes on the state’s wealthiest households by creating a fourth income tax tier, more than 3,000 Minnesotans entered the new bracket in 2015.
Republicans say the increase in wealthy families would be larger if not for a tax system they say is punitive, and that Minnesota is chasing away the wealthy to lower tax states while spending big sums on new residents who use government services.
Davids cited the estate tax: “People earn their money, they die, and we tax them again. That’s not Minnesota nice.”
Davids said Republicans — and the many DFLers who voted for the bill — are looking out for family businesses and farmers with 500 acres who may need to sell acreage just to pay the estate tax. With the tax cut, which will cost $44 million in the year it is fully phased in, Davids argues that families will be protected.
Family farms and businesses already do not pay tax on the first $5 million of their estates. Department of Revenue Commissioner Cynthia Bauerly said about 1,000 families per year currently file and pay estate taxes. Once the tax cut is in place, it will apply to just a few hundred, she said.
In all, 284,000 senior citizens will get a break on their Social Security income, including 72,000 who will now pay nothing on those benefits. College graduates with student loan debt will get a break, as will middle-income families with child care costs and families saving for college.
Business also benefit: The tax bill will exempt the first $100,000 from the statewide business property tax, which will take those taxes in greater Minnesota from some of the highest in the nation to the middle of the pack, according to Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence.
The law also suspends an automatic increase in the business property tax that had been tied to inflation, which Haveman said will properly restore democratic accountability. Lawmakers will now be required to affirmatively vote on it.
The Dayton administration points out that for companies like out-of-state commercial developers that own lots of properties — whose first $100,000 will now be free of state taxation — the bill is a bonanza of savings.
All told, the suspension of the inflation increase on the statewide business tax will cost the state more than $1 billion during the next decade, Bauerly said.
The total cost of the new law rises during the second two years to $790 million. Bauerly said the state stands to lose an estimated $5 billion in tax revenue in the next decade.
Senate Minority Leader Tom Bakk, DFL-Cook, said Dayton should have vetoed the bill because of its effect on the state’s long term fiscal future.
“I’m one in the room who was around during [the Gov. Tim] Pawlenty years when we used every trick in the book to deal with deficit after deficit after deficit,” Bakk said.
Haveman of the Center for Fiscal Excellence said the break for Social Security recipients, to which Dayton pointedly did not object, creates the most opportunity for fiscal havoc because of the state’s aging population — meaning more people will soon be qualifying for this break.
Moreover, Haveman argues, the bigger threats to fiscal stability are unpredictable policies from the federal government that could mean massive cuts to current federal funding for heath care for the neediest Minnesotans; rapidly rising health and human services budgets that already comprise 28 percent of the total state budget; and, unfunded public pension liabilities of $20 billion.