The bad and the ugly of the DFL’s three budgets

The state Senate released its budget yesterday, meaning that we finally have all three budget proposals. These will now be knocked together into a final bill. How do the three compare?

Income tax

The House budget proposes a new, top, fifth tier of state income tax of 10.85% on incomes of $1 million for married couples and $600,000 for individuals. Fortunately, neither the Senate nor the governor’s budget proposals include this bad policy.

Rebate checks

Sadly, all three budgets contain proposals for rebate checks. This is a spectacularly dumb policy that will only stoke inflation.

The governor’s budget initially proposed $2,000 for a married couple and $1,000 for an individual. The House budget reduced this to $550 for a married couple and $275 for an individual and the Senate budget proposes $552 for a married couple and $279 for an individual.

Both the House and Senate plans, unlike the governor’s plan, offer additional checks on behalf of dependent children — $275 per child up to three children in the House plan, $56 per child in the Senate plan.

All three plans cut off payments to married couples at $150,000 in adjusted gross income and $75,000 for single filers. A married couple earning $150,001 or an individual earning $75,001 wouldn’t see a penny.

The House budget proposal is, perhaps, the best of the three in that it is for the smallest amount.

Worldwide combined reporting

Both the House and the Senate budgets — but not the governor’s proposal — include a shift to “Worldwide combined reporting.” This is a rather technical point, but basically broadens Minnesota’s corporate tax base by making so-called “unitary corporations” — those with parent and subsidiary companies linked together — include overseas subsidiaries in their tax reporting.

Minn Post reports:

…After hearing multiple questions raised by accountants he queried, Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence wrote: “Answers to these questions would never be addressed in statute but do provide a sense of the immense size of the administrative rule-making, revenue notice, and litigation sandbox that would be constructed.”

Haveman knows as much about state taxes as anyone in Minnesota, so we can take his word for it that this will be a heavy administrative lift. Besides that, one of the few things Minnesota has going in its fiscal favor is that, while its corporate tax rate is high, it is levied on a relatively narrow base so that the overall burden is not as high as the rate would suggest. This measure goes some way towards eroding that advantage. This, then, is another bad policy and the governor’s budget is preferable here.

Renter credit 

The House bill, but not the Senate’s, would make it easier for middle- and low-income renters to claim tax credit for rent payments. The Department of Revenue estimates that this would lead an extra 100,000 renters to claim the credits, reducing state tax collections by $190 million. Furthermore, the credit would be refundable, meaning that taxpayers with no tax liability would get the value of the credit handed to them in cash.

While it makes sense to make claiming the credit easier, it doesn’t make sense to make it refundable. Until this is ironed out, the Senate bill is the best of the two on this issue.

Capital gains tax

The governor’s budget wanted to charge a surcharge of 1.5% on capital gains between $500,000 and $1 million and a surcharge of 4% on capital gains in excess of $1 million. Fortunately, this is in neither the House or Senate tax bills which are both, then, superior to the governor’s bill on this measure.

Child tax credits

Both the House and Senate budgets include proposals for a “Child and Working Family Tax Credit.”

The House plan would give an eligible family $1,175 per child with no cap on the number of children. It would also grant 4% of the first $12,500 of earned income up to a maximum credit of $500. The combined amount would be phased down starting at $35,000 of earned income or adjusted gross income — whichever is greater — for married couples, and $28,000 for others. The Senate proposes a similar but smaller credit. It would give $620 per child for up to three children or dependents with disabilities. It would phase out for taxpayers with adjusted gross income above $50,000 for married joint filers and above $33,000 for unmarried filers.

Given the likely impact of this measure on labor force participation, the Senate bill is the better of the two proposals.

Child and dependent care credit

Both the governor’s and the Senate’s budgets contained proposals for another tax credit to help with the cost of child care. The amount received under the Senate plan would depend on the number of children, their age, and child care expenses.

Given that this proposal only treats the symptoms of Minnesota’s child care problems and not the underlying causes, the House proposal is the best on offer.

Social security taxation

Both the House and Senate bills would exempt more Minnesotans from paying a state tax on their Social Security benefits. Married filers earning up to $100,000 and individuals up to $78,000 in adjusted gross income would pay no state tax on Social Security benefits, but the Senate plan exempts more people from paying some amount of state taxes over the $100,000 income threshold. Both are bigger than the cuts proposed in the governor’s budget.

This is a tax cut I oppose. We at the Center believe that this surplus is an historic opportunity to cut taxes for all Minnesotans, not just those who derive income from Social Security. As I wrote recently:

With the $1.3 billion this policy is forecast to cost in the current biennium, estimates from the Minnesota Department of Revenue show that we could cut the bottom rate of state income tax by 0.8 percentage points, to 4.55%, providing relief to all Minnesota’s taxpayers, not just those who derive income from Social Security. In their “Give It Back” plan, Republicans proposed a one-percentage-point cut in the bottom two income tax brackets — to 4.3% and 5.8%. By increasing the after-tax return on economic activity, such rate cuts can be expected to increase such activity in a way that increasing the after-tax return on Social Security contributions made years ago will not.   

Small crumbs

The old movie was, of course, called “The Good, The Bad and the Ugly.” Sadly, there isn’t anything “good” in these budgets. The best you get is that one or two of them aren’t proposing the bad policy that the other one or two is. With the exception of Social Security income, there isn’t a single tax rate cut proposed. Reducing the amount of the bad and the ugly is the best Minnesotans can hope for.