MN Legislature wrangles over tax-the-rich bill— Gov. Pawlenty threatens veto if passed

BY DENNIS GEISINGER

Two measures currently being considered in the Minnesota Legislature would bring both sorely needed dollars to strapped state programs and help balance a tax system that favors the state’s wealthiest.

Perhaps most controversial, at least as far as the State Republican Party is concerned, is legislation that would increase the tax rate on those with Minnesota’s highest incomes. Bills authored in both the House and Senate have targeted the funds generated by such an increase to education and property tax relief.

Another proposal would close the tax loophole for income earned overseas by state-based foreign operating corporations (FOCs). ). An FOC has 20 percent or less of its property and payroll located inside the United States. The tax benefit for these companies is that only 20 percent of the income earned by these companies is ultimately taxable in Minnesota.

According to the Minnesota Department of Revenue, the FOC and related provisions reduced the amount of corporate income tax paid to Minnesota by $56 million in tax year 2001 (the most recent year for which the department has complete data analyzed)—142 percent more than the $23 million in 1998. The entire corporate tax in Minnesota brings in about $600 million a year (less than 5 percent of the state’s total tax collections).

Different versions of proposed tax laws have been introduced in the DFL-controlled House and Senate and were as of Thursday being discussed and modified in conference committee. A Senate omnibus bill containing much of the language defining changes to the state tax system was passed in March and a similar omnibus bill passed in the House at the end of April.

Rep. Mindy Greiling, DFL-Roseville, authored the House bill that was originally intended to ratchet up taxes on top earners in order to provide more money to state schools. Money from the tax increase was eventually pinned to property tax relief ”but would still free up more funds that we can use for education,” according to Greiling.

“I haven’t met with the governor since mid-session,” Greiling said in April. “And at that time there was not much more discussion of taxes than an exchange of pleasantries.”

Gov. Tim Pawlenty wants a projected $2.2 billion state revenue surplus to pay for any proposed increases in spending. Legislators have pointed out that this surplus will be cut almost in half after adjustments for inflation. Minnesota is one of the only states that does not allow for inflationary trends when figuring its budget. Pawlenty has repeatedly vowed to veto any tax increases.

“His position has been to put his feet in cement,” said Greiling. “I think that now since he’s not running for vice-president his efforts should be fully focused on the best interests of the people of Minnesota,” she said.

Earlier in April, Pawlenty’s office produced a radio message lampooning the DFL-controlled legislature’s call to raise the tax rate on wealthy Minnesotans.
“The response to our ad was very good,” said Tim Pawlenty’s Political Director Mike Krueger. “We had several thousand hits on our campaign website because of the ad,” said Krueger, “And we received several thousand dollars in contributions.”

Released to a statewide audience, the ad was titled “Taxed Enough” and featured a female voice cooing, “When you finish a diet program you don’t celebrate with a trip to the all-you-can-eat buffet.”

“Maybe that was healthy for those people,” said Trishalla Bell, an organizer for the Welfare Rights Committee of Minnesota. “We poor people have had to make do.”

“We want the roll back of cuts on corporate taxes because they mean cuts to the funding of programs that benefit the needy,” said Bell.

Another DFL-sponsored bill under Republican attack would let people earn more and still qualify for public assistance and stop requiring those who do get assistance to work without pay. Sponsors say the changes would help ensure that federal funds keyed to getting welfare recipients back to work will not be lost. The bill would also make it less difficult for those who have disabilities and illness in their family to get public help.

The Minnesota Budget Project, a state nonprofit championing tax fairness and a balanced state budget, says that, “the state and local tax system is regressive—that means that Minnesota’s low- and middle-income taxpayers pay a larger share of their incomes in taxes than the highest-income Minnesotans do,” and that the “tax system is becoming more regressive—that is, less fair—over time.”

According to figures provided by the Minnesota Department of Revenue, in 2004 the wealthiest 1 percent in the state (household incomes over $354,758) paid 9.6 percent of their incomes in total state and local taxes, compared to the average of 11.6 percent. In 2009, the share of income paid in taxes is expected to increase for most Minnesotans, while for the wealthiest 1 percent it will fall to 9.3 percent.

The trend to fund more of government programs and services through property taxes and other local taxes, along with rising income inequality, has made Minnesota’s taxes more regressive. The share of local taxes as part of the total tax picture for state residents is expected to rise from 25.8 percent in 2004 to 28.5 percent in 2009, according to the Minnesota Budget Project.