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The bill includes LGA reform and $80 million appropriation increase and a sales tax exemption for city and county purchases.
(Published Apr 25, 2013)
On Wednesday morning, the Senate Tax Committee convened to take testimony and consider amendments to the omnibus tax bill (SF 552, Sen. Rod Skoe, DFL-Clearbrook). The bill was approved and was sent to the Senate floor on a vote of 9 to 4. Sen. Dave Senjem (R-Rochester) was the only Republican to vote for the bill, which includes an article related to the Rochester Mayo Clinic Destination Medical Center project.
One of the most interesting amendments, offered by Sen.Ann Rest, would appropriate $206 million in general fund resources for the planning and restoration of the Minnesota State Capitol. Specifically, the amendment appropriates $30 million in FY 2015 for repairs, improvements and renovation of the State Capitol Building and other state buildings in the state capitol area. The amendment includes another $173.6 million in FY 2016 for further repair, improvement and renovation work and then $3 million for the design of a new, second legislative office facility. The amendment was adopted and is now included in the omnibus tax bill.
The 377-page Senate omnibus tax bill includes 16 articles that cover property tax aids and credits, property taxes, education aids and levies, individual income tax, corporate income tax, sales and use tax, tobacco taxes, estate tax and a number of other articles addressing miscellaneous tax issues. For the FY 2014-15 biennium, the bill raises $1.863 billion in revenues to fund state operations included in the other omnibus appropriations bills. The Senate omnibus tax bill also appropriates $257 million in additional tax aids and credits for cities, counties and school districts.
Impact on Cities
As approved by the full Tax Committee, the omnibus tax bill includes $80 million in additional funding for the LGA program and the revised formula bill introduced by Senator Roger Reinert (DFL- Duluth) and a sales tax exemption for cities and counties as proposed in separate bills by Senator Ann Rest, Senator Dave Senjem (R-Rochester) and Senator Chuck Wiger (DFL-Maplewood). The sales tax exemption for cities is estimated to reduce city costs by $77.5 million in the first full year of implementation.
Police/Fire Pension Appropriation
The bill also includes a general fund appropriation increase of $23 million per year to provide additional resources for police and fire pension aids and to reduce the funding deficiency in the PERA police and fire plan. The Senate chose to replace the originally proposed $5 surcharge on homeowner and automobile insurance policies with this general fund alternative. The House omnibus tax bill continues to include the surcharge language, which is estimated to generate roughly the same revenues.
Modified Reporting on Sales Tax Exemption Savings
The approved bill includes a revised property tax savings reporting requirement tied to the city/county sales tax exemption. All cities and counties would be required to submit to the county the amount of their estimated calendar year 2012 actual or estimated sales tax payments to the state. The county would compile this information and add the information for all cities and counties to the annual parcel-specific proposed tax statement mailing. In addition, each city and each county would have to discuss the estimated benefits of the sales tax exemption on their 2014 proposed budgets and fees and other budgetary impacts. The reporting requirement does not include the provision included in the original Senate division report that would have required the commissioner of revenue to recommend reinstituting levy limits if at least 75 percent of the sales tax exemption benefits did not result in a reduction in property taxes.
Duluth Sales Tax Adjustment
The bill includes an adjustment to the Duluth local sales tax rate to account for the sales tax base expansion. Under the plan, the current one percent Duluth sales tax rate would be reduced to 0.87 percent, which presumably would result in a generally similar level of sales tax revenue for the city. Other local city sales tax rates are not similarly adjusted because the taxes are generally authorized for a specific purpose with a sunset when sufficient revenues have been raised. The sales tax base expansion will generally mean that these other city local taxes will expire sooner under the base expansion.
Technical Fixes to 2011 Tax Law
The bill also converts the computation of levy, tax, spending, debt, and similar limits that are based on “market value” or “taxable market value” to estimated market value. These changes are needed as a result of the 2011 law that replaced the market value homestead credit with the market value exclusion, which inadvertently reduced the market-value based levy limits for EDAs, HRAs and port authorities as well as the calculation of the each city’s net debt limit. These changes will restore these existing levy and debt limits by using the market value of the city before the homestead market value exclusion.
Other Provisions of Interest to Cities:
Income Tax Bracket & Corporate Tax Changes
More generally, the bill includes an increase in the upper tier income tax bracket rate to 9.4 percent from the current rate of 7.85 percent for married, filing jointly taxpayers with incomes over $140,960. The bill also includes a number of changes to the corporate franchise tax that generate an estimated net increase in state revenues of $62.6 million for FY 2014-15.
State Sales Tax Base
The bill also extends the state sales tax to clothing, digital goods, and a variety of services consumed by individuals such as haircuts, automobile repair, tattoos, piercings, over-the-counter medicines (unless prescribed by a doctor), cosmetic surgery. This base expansion allows the Senate to reduce the state sales tax rate from 6.875 percent to 6.0 percent. Under the bill, the net increase in sales tax revenues due to the base expansions but netting out the rate reduction and the sales tax exemption for cities and counties yields an estimated $89 million over the biennium.
Clothing Sales Tax/Tax Credit
The repeal of the clothing sales tax exemption is coupled with a clothing sales tax credit that could be claimed when filing the individual’s income taxes. The credit would only be available to low-income individuals based on the number of dependents and the credit would be phased-out for incomes in excess of 200 percent of the federal poverty guidelines.
The bill includes sunsets the tobacco health impact fee and converts it to a tax and also increases tobacco and cigarette taxes including an increase of 0.94 cents per pack of cigarettes. The tobacco tax changes net of the repeal and conversion of the health impact fee are $359.3 million.
Statewide Business Tax
The bill also coverts the statewide business property tax from a levy amount that is annually inflated to a frozen tax rate based on the 2002 statewide business property tax rate. The bill also applies the statewide business tax to public utility property. The combination of the rate freeze and the extension to public utility property generates an estimates $170.7 million in additional revenue for the FY2014-15 biennium.
On Monday, April 29, the omnibus tax bill will be considered on the Senate floor. Given the significant differences between the House and Senate bills, we expect that each body will appoint conference committees by mid-week and the omnibus tax conference committee could convene by late next week.
Questions? Contact Gary Carlson at (651) 281-1255 or email@example.com
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