From military veterans to medical device companies, from retirees on Social Security to pizzeria owners, legions of Minnesotans are coming to the Legislature for tax cuts.
The pilgrimage to the Capitol happens every year, but this time, it’s different.
For the first time since Jesse Ventura was governor, the state faces a new budget year flush with a surplus expected to hit $1.9 billion. That has prompted dozens of interest groups to propose all manner of tax cuts and credits on everything from gold coins to child car seats, from gym memberships to cigarettes and modular housing.
House Republicans, fresh off their 2014 election victory, are devising ways to return some — if not all — of the money to taxpayers. Because an across-the-board income or sales tax cut would be too expensive and rejected by Gov. Mark Dayton and the DFL-controlled Senate, the House is hearing proposals for cuts targeted at specific industries and constituents, many of whom find their home in the Republican Party.
Locking in the tax cuts now would have policy ramifications for years, even decades. Tax credits and cuts, once given, are difficult to rescind, as the recipients learn to fiercely protect them with lobbyists and grass-roots pressure. By the same token, new programs like Dayton’s proposed universal pre-K also are difficult to cut once they’ve been established.
That’s why, despite the surplus, this year’s legislative session could see fierce budget battles between Democrats wanting to secure new programs for important DFL constituencies like the teachers union, and Republicans hoping to cordon off money for favored taxpayers.
Little changes, big impact
Many of the proposals are small, but some — including cutting taxes on Social Security benefits or inherited wealth — are not. And they can balloon over time. A Social Security benefits tax cut would grow from $38 million next year to $194 million in 2019, with continued growth after that, both because the cut is phased-in and because of the aging population.
Rep. Greg Davids, R-Preston, chairman of the House Taxes Committee, estimates that $9 billion in new spending and tax cuts have been proposed as of last week — $7 billion more than the expected surplus.
“I’m taking the approach that I want to hear every idea. It’s a competition of ideas,” said Davids, who runs the committee like an affable, gregarious clubhouse president.
Davids said he’s realistic about what’s possible and wants to pass a tax bill with DFL votes that Dayton will sign. He has heard bills from DFL legislators, including estate tax proposals from Reps. Ron Erhardt and Yvonne Selcer, and several of the big-ticket tax items being bandied about include DFL co-authors in both the House and Senate.
Republicans are still debating the size of the total tax cut, and there may be some division between the state party and GOP legislators. Minnesota GOP Chairman Keith Downey is calling for the Legislature to give back the entire projected surplus. Rep. Steve Drazkowski, R-Mazeppa, also is in that camp. The Property Tax Committee chairman, Mazeppa wants to ease school bond levies for farmers and eliminate the tax on commercial, industrial and summer cabins and resorts, which, once phased-in, would eventually cost more than $1.7 billion over two years or, more than 4 percent of the general fund.
Speaker Kurt Daudt, R-Crown, has called for new spending on such priorities as roads and bridges and long term care of the elderly, which would involve a mix of tax cuts and spending. Daudt has indicated that he may propose cuts to some areas of the budget to pay for new spending.
Davids said his favorite tax cuts include relief for veterans and Social Security recipients, a cut in the commercial and industrial property tax and a reduction of the estate levy. That’s just a start, however. Minnesotans have overpaid, and there will be more “Davids dollars,” he said with a grin.
“I’ve got all sorts of friends right now,” Davids said about the interest groups looking for a break. “You wouldn’t believe the number of friends I have.
“When I come out with a tax bill, I’ll have fewer friends,” he added.
Republicans also favor a proposal advocated by the Minnesota Chamber of Commerce that would exempt business income from the new fourth tier of the income tax directed at the wealthy. That change alone would cost the state treasury $355 million during the first two years, according to the Department of Revenue. The Senate version of the bill includes three DFL co-authors.
In calling for business tax cuts, Republicans and their allies point to a Tax Foundation survey that ranks Minnesota 47th for best business tax climate.
“This is a great opportunity to use those surplus dollars to improve Minnesota’s business climate,” said Beth Kadoun, director of tax and fiscal policy at the Minnesota Chamber, whose political arm Pro Jobs Majority helped Republicans win control of the state House.
Democrats are already voicing opposition.
“They care more about rich dead people than at-risk kids,” said Rep. Ryan Winkler, DFL-Golden Valley, referring to the estate tax cuts, though those bills include some authors from his party.
Different kind of spending
Though less salty, the lead DFL member of the House Taxes Committee, Rep. Ann Lenczewski of Bloomington, also is critical of the GOP approach.
She said tax cuts should be viewed the same as spending because they cost money: If one person pays fewer taxes, everyone else either pays more or receives fewer government services for the same price.
“To provide a tax preference, a loophole, a carve-out, is a tax increase to all other Minnesotans,” said Lenczewski, who chaired the taxes committee when DFLers controlled the House. “These are subsidies from one group of taxpayers to another.”
Among the proposals in the mix: breaks on resort construction materials, some telecommunications equipment and education materials. Vendors could keep a portion of the state sales tax to defray the cost of collecting it. The list goes on and will likely grow.
Democrats point to a recent report from the Department of Revenue outlining who pays Minnesota taxes, which showed that for 90 percent of residents, taxes as percentage of income will decline slightly from 2012 to 2017. Meanwhile, taxes for the richest 10 percent will rise slightly but remain lower than any other group as a percentage of their incomes.
Democrats say many of the Republican proposals would reverse this trend toward tax progressivity to shower money on a small group of wealthy taxpayers. Just 800 families per year pay estate taxes, for example, Lenczewski said.