Comparison of House and Senate 2001 Omnibus Tax Bills and Governor's Tax Reform Proposal - PDF file
Summary of Governor Ventura's Tax Reform Proposal: Impact on Nonprofits
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ABOUT USThe Minnesota Budget Project is an initiative of the Minnesota Council of Nonprofits.
Governor Ventura's Tax Reform Proposal for the 2001 Legislative SessionThe Governor’s reform proposal makes significant changes in all major tax types. The reform package reduces taxes for all income levels, but does not dramatically change the distribution of tax burdens. The estimated tax incidence under current law and the Governor’s proposal are shown below. Tax incidence divides the state into ten groups of equal numbers of households by income, and measures the effective tax rate, which is the percentage of income each group spends on taxes. [1]
The major elements of the Governor’s reform proposal are described below. Sales Tax RebateThe Governor proposes an $856 million Sales Tax Rebate, similar to the 2000 rebate. The average rebate is estimated at $420. Eligibility for the 2001 Sales Tax Rebate is similar to the 2000 rebate; the taxpayer must meet one of the following criteria:
Income TaxThe proposal would reduce income taxes by a net amount of $890 million in the 2002-03 biennium and $1.5 billion in the 2004-05 biennium. The main component in the income tax proposal is reducing income tax rates in three steps. In 2001, the rates in all three brackets would drop 0.3 percentage points, an additional 0.2 percentage points in 2003, and another 0.1 in 2004. The final 0.1 reduction is contingent on sufficient revenues being available. In addition, the Governor’s proposal would reduce and then eliminate the Alternative Minimum Tax (AMT).
Taxable income is income after subtracting exemptions and deductions. Brackets are adjusted annually for inflation. In order to ensure that low-income families are not left out of income tax reductions and to offset increases in other taxes, the Working Family Credit for lower-income taxpayers would be increased by $25.7 million in FY 2002. Families receiving the credit would see an additional $100 for families with one child and $200 for families with more than one child. In 2003, the additional per child credit would be increased to $200 per child, with some additional changes to the credit formula, for a total increase of $100.1 million in FY 2004. The K-12 Education Credit (and K-12 subtraction for higher-income taxpayers) would be modified so that materials or transportation required by schools would no longer be an allowable expense for the credit or subtraction. The credit would be changed from its current dollar-for-dollar credit to $0.75 on the dollar. This would lower the amount of credits by $17.3 million in FY 2003. The Governor has removed his original proposal to eliminate the Dependent Care Credit in 2002 and transfer its $12 million of funding to the Department of Children, Families and Learning to fund child care programs. Federal child care and TANF funds would be used instead of the dependent care credit funding. The table below shows the impact of two different parts of the Governor’s proposal: the rate reductions and the Working Family Credit expansion. It is helpful to compare these two provisions together, because the Working Family Credit expansion is intended in part to provide relief to lower-income families, who would receive little or no benefit from the income tax rate reductions. Because many of these changes are phased in over time, the table shows the impact both for the 2001 and 2003 tax years. Looking only at percentage changes to the income tax can be misleading, because the income tax is a less significant part of the total tax burden for low- and moderate-income families, but a large part of the burden for upper-income families. To demonstrate the effect of the income tax cuts on total tax burden and therefore on a household’s budget, the table below shows the tax reduction as a percentage of income, as well as a dollar amount. However, for the overall balance of the tax package, one must look at the tax incidence information at the beginning of this document. The table shows that in dollar amounts, the income tax savings generally increase as income increases. However, the reductions as a percentage of income are higher for families in the bottom incomes, for whom the Working Family Credit increase has a significant impact on overall tax obligations, and for taxpayers on the top of the income scale, for whom the income tax makes up the largest part of their state tax burden.
Calculations based on data from House Research. The table above groups families of all sizes together
by income level. The impact of these
changes can be quite different depending on family size – for example, a parent
with children with income of $20,000 will be eligible for a Working Family
Credit, whereas a married couple with no children of the same income level
would not. For examples of how specific
family types would be affected, see House Research’s Issues and Information Page at www.house.leg.state.mn.us/hrd/issinfo/tx_inc.htm
The Ventura administration is suggesting major changes
to the state’s sales tax system. In
fact, the combination of changes would lead to the sales tax becoming the
second largest revenue source for state and local government, surpassing the
property tax.
Among the proposed changes are:
The complete package of changes would mean the state
would collect an additional $504.6 million in sales tax in the 2002-03 biennium
and $1.086 billion more in 2004-05.
The Governor proposes a number of significant changes
to the property tax system. These
include:
These changes are accompanied by class rate
changes. Class rates describe what
percentage of a property’s value is subject to property tax. Properties of different types are put into
classes based on their usage. The table
below lists the proposed changes to class rates, as well as the effective tax
rate, which is the amount of tax per dollar of property value.
Source: Department of Revenue
For easier comparison with current law, the table
describes class rates as they are currently expressed. However, the administration is proposing to
replace class rates with their equivalent “assessed value rates.” For example, a 1% class rate is equal to a
50% assessed value rate. Local tax
rates would also be expressed in “mill rates”, instead of their current
percentages. This is only a change in
terminology intended to make property taxes less confusing — it does not change
the amount of tax paid.
An additional proposed change in the property tax area
is to increase the maximum credit for low- and middle-income homeowners under
the Property Tax Refund program (also called the Circuit Breaker.) The new maximum would be $1,230, increasing
the amount of refunds by $18.6 million in FY 03.
The Governor also proposes numerous changes to aids to
local governments. Overall, general
funding is replaced by more targeted funding.
To some degree, aids are reduced to reflect the state takeover of costs
currently paid by property taxes – not only the general education levy, but
also some child welfare and court costs.
Local governments would also become exempt from the sales tax. Additional aid is provided to communities
that develop new low-income housing through the Low-Income Housing Aid
program. This aid is $70,000 in FY
2003, and $247,000 in the 2004-05 biennium.
The Governor originally proposed a number of proposals
that would have directly affected the tax-exempt status of nonprofits,
including:
The Governor’s updated tax proposal removed these
proposals.[2] The Governor has also proposed reductions in
gambling taxes, which would benefit nonprofits engaged in charitable gaming.
Reflecting a common belief that cigarette taxes should
go towards health care, the Governor proposes dedicating 81% of cigarette
excise taxes ($135.4 million in FY 2004) to the Health Care Access Fund, which
funds the MinnesotaCare program. Currently, these funds are not dedicated to a specific source.
For the other health taxes, the administration
proposes freezing the MinnesotaCare provider tax at 1.5%, and eliminating the
1% premium tax on nonprofit health plans and the wholesale drug tax.
Continuing with his efforts last session, Governor
Ventura proposes to cap auto tabs (officially known as the motor vehicle
registration tax) at $75. The cost of
his proposal is $213 million in FY 2004-05.
The motor vehicle registration tax is made up of two
portions: a $10 flat fee and an additional tax amount. The additional tax is 1.25% of the base
value of the vehicle, but the amount of base value subject to tax is reduced as
the vehicle ages. For the first two
years of the vehicle’s life, the additional tax is levied on 100% of the
vehicle’s base value, for years 3 and 4, the tax is based on 90% of the value,
and so on until the 10th year when the tax is based on 10% of the
vehicle’s value. At the 11th
and following years, the additional tax is set at $25. In all years, the additional tax is never
less than $25, making the total minimum tabs fee $35.
Last year’s tax bill required that the tax be
calculated as usual and the amount due in the first year of the vehicle’s life
remain the same. However, in the second
year of a vehicle’s life, the total amount of tax is capped at $189 and in the
third and all other years, it is capped at $99. In his budget, the Governor proposes that, starting January 1,
2003, the maximum tab fee be $189 in the first year of a vehicle's life and $89 for
all other
year, and starting January 1, 2005, the tax be capped at $75 for all
years.
Click on footnote number to
return to text.
[1] Household
income includes both taxable income and nontaxable income, such as public
assistance payments, tax-exempt interest, and nontaxable social security and
pension income. There are a number of data issues regarding the bottom decile, which
overstates the level of taxation. For
this reason, it is common to disregard the first decile in analysis. Although the results for the first decile
are shown in the graph, we disregard the results from the first decile in
statements about the tax system as a whole.
[2]
For more on this issue, see Minnesota Budget Project, Summary of
Governor Ventura’s Tax Reform Proposal: Impact on Nonprofits.
Updated May 1, 2001 |
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