Gov. Mark Dayton and the Legislature have made no visible progress in retooling Minnesota’s tax system in response to the recent federal overhaul, despite the prospect of higher taxes and a more complicated state tax system if they do not act.
With less than five weeks to go in the session, Republican legislators seized on a report this week by the DFL governor’s own Department of Revenue that showed Dayton’s tax plan would raise taxes on Minnesotans in every income group.
“My reaction was, I told ya so,” said Sen. Roger Chamberlain, R-Lino Lakes, chairman of the Senate Taxes Committee. “He’s increasing taxes on everyone and at every income level.”
Dayton said Republicans are offering a distorted picture, even as they have so far held out on releasing their own proposals. The bulk of the tax burden under Dayton’s plan would come from keeping a health care provider tax in place instead of allowing it to sunset in 2019, as the law now mandates. The tax has been a huge source of revenue for state health programs.
“Repealing the sunset on the provider tax does not increase or change taxes on anyone — it is a continuation of the current [tax] which prevents a $530 million annual hole in the state budget, while protecting the health care of tens of thousands of Minnesotans,” said Revenue Commissioner Cynthia Bauerly in a statement to the Star Tribune.
Republicans at the Legislature say they have no intention of repealing the sunset provision, thus saving Minnesota health care taxpayers more than $1 billion every two years beginning in 2020.
The remainder of the Dayton plan, Bauerly said, would cut income taxes for most Minnesotans — and as with Dayton tax initiatives passed in 2013 and 2014, shift the tax burden off lower- and middle-income Minnesotans and on to upper-income filers.
The partisan brouhaha comes at an inopportune time given a vanishing number of days in which to solve a puzzle that began with the federal tax overhaul passed by Congress and signed into law by President Donald Trump last year. Because Minnesota’s tax system is largely chained to the federal government’s, the Legislature must act, or there will be consequences.
If nothing is done, the Department of Revenue would have to administer the state’s tax system based on the old federal law, leaving a complex morass for both tax collectors and taxpayers.
The Department of Revenue also estimates that without action, 300,000 Minnesota tax filers will wind up with a bigger tax bill, averaging $200.
If the Legislature and Dayton simply adapt the new federal rules to Minnesota’s tax system, 870,000 households would see their taxes go up by an average $489 because they would lose deductions that were stripped out of the federal tax code.
Dayton’s plan would divorce the state tax system from its federal counterpart to give Minnesota more tax autonomy.
In addition to keeping the health care tax in place, Dayton has proposed reinstating an automatic increase on cigarettes that the Legislature repealed last year and which he signed. He would eliminate a tax cut — also passed and signed last year — for wealthy estates that would affect about 1,000 families per year.
But the bulk of Dayton’s tax increases would come on businesses, including restoring an automatic increase in statewide commercial and industrial property taxes; limiting the interest costs businesses can deduct; and taxing foreign income that companies have been enticed to bring home by favorable treatment in the federal tax overhaul.
With the extra money, Dayton would create a new tax credit for those who make less than $140,000 — or $280,000 if married — cutting taxes an average $117 for more than 1.9 million Minnesotans.
Republicans don’t like the plan, saying there’s no need for any tax increases.
As of yet, however, they have produced no alternative.
Rep. Greg Davids, R-Preston, said the House should have a plan for public inspection next week.
Senate Republicans are working on a separate track. Chamberlain said their plan would be a “stark contrast” with Dayton’s, with the “vast majority” not paying a penny more in taxes and a focus on economic growth.
Senate Majority Leader Paul Gazelka, R-Nisswa, acknowledged the task is difficult given the complexity of the policy puzzle. The federal bill rewarded low-tax states while punishing high-tax states like Minnesota by limiting the deductions for state and local taxes.
That makes protecting those taxpayers more difficult, Gazelka said.
“It’s more challenging than I expected it to be,” he said.
At a Wednesday news conference congratulating the University of Minnesota Duluth men’s hockey national champions, Dayton scolded the Legislature when asked about its criticism of his plan.
“Neither of them has even put a tax bill out for public scrutiny,” Dayton said. “They’re happy to keep theirs hidden and keep whacking away at mine, but where are their tax bills? And when are we going to see them?”