Record Surplus Has Many Asking If Cuts to Minnesota Taxes Go Far Enough

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For the first time since former Governor Jesse Ventura’s administration, Minnesota has a multibillion-dollar state budget surplus—$1.9 billion, to be exact. The state’s budget has been buoyed by a low cost of doing business, which is 0.2 percent lower than the national average, as well as positive job growth, positive net migration numbers, and reduced health and human services spending.

Legislators want to cut Minnesota taxes because of the surplus, but the newly elected, Republican-controlled House and the Senate, led by the Democratic-Farmer-Labor (DFL) Party and Governor Mark Dayton, disagree on how much to cut.

The DFL’s Approach

Taking a cautious stance against future economic instability, the Senate approved a $268 million tax reduction in early May to slash homeowner property taxes by 2.2 percent on average. The bill also increases state aid to cities, counties, and townships by $54 million; offers a $2,500 tax credit for hiring an unemployed veteran; reduces the statewide business property tax by $69 million; and sets aside $19 million for workforce housing credits for projects outside the Minneapolis-St. Paul metro area.

The DFL argues that a tax credit or cut is permanent and can affect Minnesota taxes long after the surplus is gone. Republicans in the Senate and House, however, believe the Senate Democrats’ bill is inadequate.

A Call for More Tax Breaks

If the surplus were divided equally among Minnesotans, each resident would receive just under $350, according to Republican Party Chairman Keith Downey. However, legislators are focusing on tax relief rather than a direct rebate. The House has proposed $9 billion in spending and tax cuts, which is $7 billion more than the surplus. Proposed cuts include $355 million in business income taxes, a $113 million capital gains subtraction, a $170 million reduction in estate taxes, $430 million for a medical device tax credit, and a five-year plan to phase out the income tax on Social Security benefits.

This large portfolio of proposed cuts reflects varying opinions among legislators on how best to use the money. The House Property Tax Committee chairman, Representative Steve Drazkowski, wants to see school bond levies for farmers eased and to eliminate the tax on cabins and resorts. House Speaker Representative Kurt Daudt, on the other hand, has called for new spending on bridges and roads and long-term care for seniors.

The Minnesota Chamber of Commerce advocates a proposal that would exempt business income from the highest tier of the state’s income tax. “This is a great opportunity to use those surplus dollars to improve Minnesota’s business climate,” said Beth Kadoun, the Minnesota Chamber’s director of tax and fiscal policy.

Moderation and Restraint

A March report released by the state’s Department of Revenue predicts that 90 percent of all Minnesota residents will see their taxes as a percentage of income drop between 2012 and 2017.

Representative Greg Davids, chairman of the House Taxes Committee, encourages proposals for how to make further cuts. “I’m taking the approach that I want to hear every idea,” he said. From there, he wants both parties to come to a realistic agreement as to which tax cuts will actually go forward.

The discussion about how to spend the state’s good fortunes is unlikely to slow down, despite the legislative session ending in late May. The debate over whether it is better to cut taxes or establish programs, however, may dictate the future of the Minnesota’s prosperity.