Tax breaks dwarf deficit

Minnesotans pay an extra $100,000 a year so state legislators don't have to pay taxes on their daily living allowances.

Buying a horse? For reasons no one at the State Capitol can fully explain, Minnesotans also pick up the 6.8 percent sales tax on that, too. Worried that your cow has tuberculosis? Taxpayers help offset the cost of getting it tested. Even notorious local Ponzi scheme felon Tom Petters has received special tax treatment from the state.

Minnesota has nearly 220 tax exemptions that total more than $11 billion a year.

Now, with time running out to solve the state's $5 billion budget deficit, some lawmakers are taking a fresh look at this little-known part of the tax code and vowing to rein it in.

Rep. Linda Runbeck, R-Circle Pines, said the tax breaks have gotten out of hand. "I want to short circuit it," she said.

But cracking down on tax exemptions is fraught with political risk.

Some of the breaks have broad public appeal, such as tax-free clothing and the state's home mortgage deduction. And no one is proposing ending the deduction for charitable contributions that's claimed by 700,000 Minnesota filers.

Petters, for example, got a special tax break when he ran Fingerhut, the mail-order company. That tax break remains on the books even though he is in prison and no one has used it in years.

Not all the special breaks are aimed at the wealthy, though. The state's Working Family Tax Credit was expected to benefit 265,000 filers in 2011, to the tune of $189 million. Homeowners who use coal, wood, steam or propane gas to heat their homes pay no tax on those fuels. The state also does not tax prescription drugs, insulin or artificial limbs.

Hidden costs for state

According to a 2009 legislative review of tax expenditures, some tax breaks are effective. The deduction for charitable contributions, for example, has been found to promote philanthropy.

Others have raised questions at the Legislature. More than 230,000 Minnesotans, for example, relied on an income subtraction to recoup costs of K-12 music schools, summer camps and other enrichments. Most years, that costs the state nearly $20 million in tax revenue.

What's more, the breaks -- technically defined as "tax expenditures" -- are not considered to be part of the budget the lawmakers are wrestling over now, even though their cost to taxpayers is just as real.

"It seems that the only thing harder than passing a law is repealing it," said state House Taxes Committee Chairman Greg Davids, R-Preston.

For legislators ready to take on the tax breaks, the question is: Who do you want to pick on?

Runbeck has sponsored a bill to do away with one of her party's most cherished tax breaks -- the Job Opportunity Building Zones. It's a business-friendly mix of benefits championed by former Gov. Tim Pawlenty.

Does she think there could be others to look at as part of a final budget deal? "I do," she said.

Too risky to touch?

Some tax breaks remain political grenades even though there's no proof they achieve the desired effect, like the mortgage-interest deduction. Only a fourth of Minnesota taxpayers take advantage of the credit and, according to the 2009 report, there is little evidence that it has increased homeownership.

For months, DFL Gov. Mark Dayton has stood firm on his proposal to raise taxes on high earners in Minnesota as a key way to help balance the state budget. He has proposed eliminating several tax breaks, aiming at insurance companies and some real estate deductions, but they are not central to his budget plan.

It's far from clear whether Dayton would ever give up his proposed tax hike on high earners in favor of ending more tax breaks as a means of brokering a budget deal. It's equally uncertain whether enough Republicans in the Legislature would accept a deal to end some tax breaks.

To those who lose their tax credit or deduction, said former state Revenue Commissioner Ward Einess, "It's a tax increase."

The GOP's budget proposal does not include ending tax breaks. "That's our position," Ortman said last week.

The Senate's Republican caucus maintains that it does not want to grow revenues as a matter of principle -- because its intent is to shrink state government.

Still, Ortman sounds bothered by at least a few of the tax breaks.

For some, she said, the state actually writes a check, as with bovine tuberculosis testing, which was projected to cost the state $100,000 in 2011.

"There's an example of one where you would say, 'Now why is that a priority?'" Ortman said.

Last year, DFL legislators negotiated with Pawlenty on a job-creation proposal that included a mix of business-friendly tax breaks and credits.

To pay for it, they did something never before done in Pawlenty's tenure: They ended a tax break, and used the money to pay for the program.

At a bipartisan news conference, Pawlenty signed the deal into law.

"Here's an example of getting rid of something, without raising general taxes, to buy things you want," said Rep. Ann Lenczewski, former chair of the House Taxes Committee and the legislator who requested the 2009 assessment of tax expenditures. "So," she said, "it can be done."