ABOUT US

WHAT'S NEW

RESEARCH AND ANALYSIS

EVENTS

SIGN UP FOR UPDATES

DONATE

SEARCH

LINKS

MINNESOTA COUNCIL OF NONPROFITS HOME

House Omnibus 2001 Tax Bill

The House of Representatives has released their omnibus tax bill, HF 2498, which provides $1.56 billion in tax relief in the 2002-03 biennium.  This summary is intended to give an overview of the major components of the bill and to highlight items with an impact on low- and moderate-income families and nonprofit organizations.  A detailed summary is available from House Research and a spreadsheet is available from House Fiscal Analysis.

Sales Tax Rebate

The House proposes an $856 million Sales Tax Rebate, similar to the 2000 rebate.  The rebate is calculated using a schedule based on filing status and taxable income and ranges from $237 to $3,250 for married filing jointly and head-of-household filers and from $120 to $1,625 for other filers.

To receive a rebate based on the rebate schedule, the taxpayer must have filed a 1999 Minnesota income tax return by November 20, 2001 and had at least $1 of tax liability, and not be a dependent.

The following groups of persons will also receive rebates, but not calculated on the rebate schedule:

• Dependents age 18 or older with wage income will receive 35% of the rebate amount for non-dependents of the same income level.
• Recipients of social security, railroad retirement benefits, or a public pension will receive a rebate of $120 (does not include dependents).
• Persons who filed a 1999 Minnesota income tax return to receive a refund of withholding or to claim a refundable credit but did not have tax liability, or filed for a 1999 Minnesota property tax refund, will receive the minimum rebate amount for their filing status (does not include dependents).
• Non-residents who paid at least $10 in Minnesota sales tax on non-business purchases can apply for a rebate of 41.25% of the sales tax paid.  This rebate cannot exceed the amount a Minnesota resident of the same income level would receive.

The bill allows rebate recipients to donate their rebate to the following purposes: basic sliding fee child care, K-12 education, affordable rental housing, contaminated site cleanup, transit/highway funding, University of Minnesota/Minnesota State Colleges and Universities, and nursing homes.

This proposal differs from past rebates in that it does not wait to calculate the total amount of the rebate based on the actual size of the surplus when the state “closes the books” on June 30, 2001.  Instead it uses the surplus amount determined in the February forecast, even though the actual surplus may be smaller.

Property Taxes and Local Government Aid

The major component of the bill is property tax reform and relief, containing a net $688 million in relief in the 2002-03 biennium.  Some of the highlights are:

• Elimination of the state-determined general education levy.  The general education levy is a portion of education funding that is determined by the state but collected on local property taxes.
• Agricultural and cabin properties are exempted from school referendum levies.
• A statewide general property tax is levied on commercial/industrial and cabin properties only.  The tax will collect $430 million in Fiscal Year 2003, and will be adjusted each following year for inflation.  This tax is gradually converted over time to be a tax on the value of the land only (excluding the value of buildings).
• A dedicated fund for transit is created.  19.5% of the revenues collected from the sales tax on motor vehicles are dedicated to the transit fund.  These revenues replace the property tax as a funding source for transit.

These changes are accompanied by considerable class rate changes.  Class rates describe what percentage of a property’s value is subject to property tax.  Classes are based on the property’s usage.  The table below lists the proposed changes to class rates, as well as the effective tax rate, which is the amount of tax as a percentage of property value.  (These class rates do not apply to the statewide general property tax levy on businesses and cabins.)

	Class Rate		Statewide Average Effective Tax Rate (2002)
	Current	Proposed	Current	Proposed
Residential Homestead			1.35%	1.12%
Value Less than $76,000	1%	1%
Value over $76,000	1.65%
Disabled Homestead	0.45%	0.45%
Residential Non-homestead			1.7%	1.51%
Value Less than $76,000	1.2%	1%
Value over $76,000	1.65%	1.5% in 2002 1.25% in 2003 1% in 2004
Multifamily Residential
2-3 Units	1.65%	1.5% in 2002 1.25% in 2003 1% in 2004	2.08%	1.93%
4 or more units	2.4%		2.95%	1.99%
Small City 4 or more units	2.15%
Low Income (4D) Apartments	1%	0.9% in 2002 0.95% in 2003 1% in 2004; new construction 1%	1.37%	1.26%
Seasonal Recreational			1.47%	1.27%
Value Less than $76,000	1.2%	1%
Value over $76,000	1.65%
Commercial/Industrial			4.04%	3.45%
Value under $150,000	2.4%	1.5%	3.14%	2.73%
Value $150,000 to $200,000	3.4%		4.22%
Value over $200,000		2%		3.59%
Electric Generation Machinery	3.4%	1.5%	4.13%	2.09%
Farm Land – Homestead			1.12% House 0.63% Land	0.91% House 0.46% Land
Value under $115,000	0.35%	0.55%
Value $115,000 - $600,000	0.8%
Value over $600,000	1.2%	1%
Farm – Non-homestead	1.2%	1%	1.19%	1%

Source: House Research

An additional 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 $1,190, nearly double its current level.  For renters receiving the Property Tax Refund (also called Renters’ Credit), the bill is less positive.  The bill directs the Department of Revenue to conduct a study to determine what percentage of rent should be considered to be the renter’s share of property taxes for the purposes of calculating the refund.  The percentage would be adjusted based on the study for Renters’ Credits starting in 2003.  Most evidence suggests that the new percentage will be lower than its current value of 19%, given that rents have grown more quickly than property taxes over time, and therefore property taxes make up a smaller portion of total rent.

In conjunction with these property tax changes, the bill makes a number of changes to aid programs to local governments, including the largest programs, HACA and Local Government Aid (LGA).  The bill provides for the state takeover of 30% of the non-federal share of county out-of-home placement costs and the costs of district court administration and mandated court services in those judicial districts where these costs have not already been assumed.  County HACA is reduced to offset this change. 

The bill provides that for counties and cities over 2,500 population, there can be a “reverse referenda” in which the voters can challenge any property tax levy increase.

Income Taxes

The bill contains relatively small amounts of income tax changes, with a $165 million reduction in corporate taxes (mainly through a move towards a single-sales factor), and $90 million in individual income tax changes in the 2002-03 biennium.  In addition, the bill would appropriate $150,000 for the biennium for grants to nonprofits providing volunteer tax assistance to low-income and disadvantaged taxpayers.

The changes in the individual income tax relate to credits and subtractions.  Subtractions reduce the amount of income subject to Minnesota tax, while credits reduce the amount of tax paid.  Subtractions include:

• Active duty military pay for persons stationed outside Minnesota
• The first $3,000 of military pay (including for Reserves and National Guard)
• The non-itemizer deduction for charitable contributions is increased from 50% to 100% of total contributions exceeding $500.
• Capital gains exclusion of 50% for certain investments held at least five years.

Subtractions do not provide any benefit to families without state tax liability.  In 2000, a Minnesota family of four would need income of $26,800 to owe any state tax liability, a family of three would need income of $25,600.^[1]

Credit changes include:

• Marriage penalty relief in the Working Family Credit and Dependent Care Credit.
• The Dependent Care Credit can cover dependents up to age 15, rather than up to age 13 as under current law.
• The maximum amount of K-12 education credit would be $1,000 times the total number of children in the family (rather than the current maximum of $2,000 for families with two or more children).  The phase out is also adjusted, allowing families to be eligible at a higher income level than under current law (current maximum income is $37,500).  Allowable expenses for the K-12 credit are expanded to include purchase of musical instruments and extracurricular activity fees paid to schools.
• A new, non-refundable credit would be created for donation of land for conservation.  The credit would equal 50% of the fair market value of the land donated.

Sales Tax

The House tax bill does not include the Governor’s suggestions to expand the sales tax to services and lower the rate.  This section of the bill would provide $194 million in reduced sales taxes in 2002-03.  The largest portion of the cost, $154 million, is a one-time expense related to eliminating a provision whereby retailers must submit their June sales tax payments one month early, which moves these revenues from one fiscal year to the next.

The remainder of the sales tax provisions deal with exemptions of various types of products, including energy-efficient equipment and alternative fuel vehicles.  

The bill also makes a number of definitional and process changes so that the state is in compliance with the Streamlined Sales Tax, a national effort that may enable the states to eventually begin collecting the sales tax that is due on internet and catalog sales.

Taxes on Nonprofit Organizations

The Governor proposed a number of proposals that would have directly affected the tax-exempt status of nonprofits in his tax reform proposal.^[2]  There are no significant changes to nonprofits’ tax status in the House omnibus bill.  Some small provisions relating to nonprofits include:

• The bill tightens up the current sales tax exemption for tickets to arts events to limit the exemption to events truly put on by nonprofit arts organizations. 
• The bill also clarifies that fundraising sales for combined campaigns are not taxable (i.e., a company that sells cookbooks to their employees to raise money for United Way would not have to collect sales tax on the cookbooks.)
• The bill exempts from property taxes up to $100,000 of land value for a 501(c)(3) organization that is an agricultural historical society whose primary purpose is to acquire, preserve, restore, and exhibit artifacts and other items useful in understanding local or regional agricultural history.

The bill reduces gambling taxes, which would benefit nonprofits engaged in charitable gaming.

Health Care Taxes

The House omnibus bill would repeal the MinnesotaCare provider tax, the 1% premium tax on nonprofit health plans, and 2% premiums tax on indemnity health insurance.  Health plans must pass on the savings from these tax reductions to consumers. 

To replace this funding source, the 2002 one-time tobacco settlement funds, portions of the ongoing tobacco funds for 2002 and 2004, and all ongoing tobacco payments from 2005 onwards, are dedicated into the Health Care Access Fund.  $120 million of cigarette and tobacco tax revenues from 2004 are dedicated to the Health Care Access Fund, and this amount is adjusted each year based on increases in personal medical care expenditures.

Auto Tabs

There are no reductions in auto tabs in this tax bill.

Click on footnote number to return to text.

[1] These figures assume a two-parent family of four and a single-parent family of three.  Center on Budget and Policy Priorities, State Income Tax Burdens on Low-Income Families in 2000.

[2] For more on this issue, see our Summary of Governor Ventura’s Tax Reform Proposal: Impact on Nonprofits.

Updated May 8, 2001

About Us | What's New | Research & Analysis | Events | Sign Up for Updates
Donate | Search | Links | Minnesota Council of Nonprofits Home

2314 University Ave W. #20
St. Paul, MN 55114
Phone: 651.642.1904
Greater Minnesota: 1.800.289.1904
Fax: 651.642.1517
Email: