Minnesota Senate tax bill offers needed reform

Tax the purchases of clothing, haircuts, over-the-counter drugs and digital downloads. Raise the income tax for married joint filers with taxable incomes in excess of $140,960 and single filers with taxable incomes higher than $79,730. Eliminate tax breaks for businesses with overseas operations. Boost the price of a pack of cigarettes 94 cents.

Described that way, the DFL-designed tax bill that emerged this week in the Minnesota Senate sounds deserving of the "taxapalooza" label that GOP Minority Leader David Hann has applied to DFL tax proposals this session.

But that description isn't the whole story. The Senate's bill also cuts the sales tax rate for all affected purchases from 6.875 percent to 6 percent, reducing the cost of every currently taxed item. It would refund the clothing sales taxes paid each year by low- and middle-income families.

The foreign-operations corporate tax break the bill would eliminate has proved too easy for tax dodgers to abuse. It would be replaced with a credit that would give businesses more reason to bring desirable research and development jobs to Minnesota.

The Senate bill also would end the hassle of applying for a sales tax refund on business purchases of capital equipment. Such items would be exempted from sales tax at the point of purchase.

The bill would bring tax relief to low-income renters. It would replace property tax levies with state dollars in school districts in which voters have approved such levies for operations, reducing property tax bills. It increases state aid and exempts local governments from paying sales taxes. The result should be lower property taxes around the state; Senate projections show that on average, homeowners would see about a 5 percent cut.

About that income tax increase: It's a new 9.4 percent rate only on that portion of married joint filers' incomes that is above the new threshold. And it would affect joint filers whose total income, before deductions, exceeds about $165,000. When former GOP Taxes Committee chair Julianne Ortman said the new tax would fall on "middle-class, hardworking Minnesotans," DFL committee chair Rod Skoe quietly noted that the state's median household income was just under $57,000 in 2011.

In total, the Senate bill raises taxes $1.8 billion over two years. About a third of that amount is needed to erase yet another budget deficit. The bulk of the remainder would ease the decade-long squeeze on education spending that has put the size and quality of the state's future workforce at risk.

We support an income tax boost for the state's top earners, but the Senate approach is too rich. We've recommended the same top-tier rate the Senate chose, 9.4 percent, but we would apply it to incomes above a higher threshold, say married joint taxable incomes of $200,000 or $250,000. We would look to a feature of the House tax bill that the Senate omits — higher alcohol taxes — to close the gap that a smaller income tax increase would create in the Senate budget.

But the Senate bill is not a "taxapalooza." It's the Legislature's best effort in a dozen years to comprehensively adapt the state's tax code to today's economic conditions.

State government needs to recoup some of the revenue it lost in 1999 and 2000 in order to meet Minnesotans' expectations for quality education and effective public services.

It ought to broaden the base of the state sales tax to make it a more dependable revenue source. It ought to adjust income rates to the reality that today's economy, on average, is generous with upper-income earners and stingy with everybody else. And it ought to narrow the increasing disparity in school funding between property-rich and property-poor districts.

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