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February 17, 2017

Minnesota Weekly Legislative Update: Tax Policy Takes Center Stage

The seventh week of the legislative session is in the books, and the Minnesota Legislature is one week closer to the first committee deadline on March 10. This week, House Republicans increased their majority by one with the election of Anne Neu, from North Branch. Republicans now have 77 members to the DFL’s 57. A special election was called when the Minnesota Supreme Court ruled that former Rep. Bob Barrett did not live in the North Branch district. Representative-elect Neu, who formerly served on the North Branch Planning Commission, fills the void left by Barrett.

In November, the Minneapolis Star Tribune reported numerous government officials and their friends and family had received free tickets to events at U.S. Bank Stadium. This story prompted the Office of the Legislative Auditor to dig into the Minnesota Sports Facilities Authority (MSFA). In January, the Auditor released a report stating that although the MSFA did not break any laws, it did violate “a core ethical principal.” The Auditor recommended the Legislature exercise more oversight regarding the MSFA. Legislators have introduced legislation to overhaul the structure of the MSFA, which includes eliminating the chair position, decreasing the executive director salary and increasing the board from five to seven. This legislation has passed two committees with overwhelming support.

Following numerous legislative hearings strongly criticizing the MSFA, the chair and executive director both resigned on Thursday.

Commercial Industrial Business Tax Proposals Heard

The House Property Tax and Local Government Finance Division and Senate Tax Committee each dedicated a hearing this week to proposals reducing the state general levy, a statewide property tax on commercial/industrial and seasonal recreational property. The levy was first implemented in 2001 as part of an agreement that compressed property tax rates, removed seasonal recreational property from the educational operating levy and enacted an automatic annual inflator. At the time, it provided local property tax relief for businesses and cabins with the revenue from the statewide levy dedicated to education. Later this revenue was redirected to the general fund. Minnesota is one of a small number of states with a statewide business property tax.

A number of legislative proposals have been introduced this session to reduce this burden to Minnesota businesses. Those proposals run the gamut from freezing the levy at its current level and removing the inflator to exempting the first-tier to removing the levy entirely. On Wednesday, the House Property Tax Committee heard a number of these proposals including:

  • HF 484, authored by Rep. Roz Peterson (R-Lakeville), which freezes the state general levy at its 2017 level and removes the automatic inflator.
  • HF 211, authored by Rep. Jerry Hertaus (R-Greenfield), which lowers the levy base and exempts the first tier. This would exempt the first $150,000 of property value and, by lowering the base, would prevent a shift on the higher valued properties; and
  • HF 726, authored by Rep. Steve Drazkowski (R-Mazeppa), which phases out the statewide levy over the next six years.

Companion bills in the Senate are, respectively, SF 461, authored by Sen. Carla Nelson (R-Rochester), SF 183, authored by Sen. David Osmek (R-Mound), and SF 867, also authored by Nelson (R-Rochester). These bills were heard in the Senate Tax Committee on Thursday.

Proponents of the bills in both committees argued that the state general levy is an undue and increasing burden on businesses, noting that the automatic inflator increases taxes each year no matter how well or poorly the business is doing. Business advocates referenced a 50 State Property Tax Comparison conducted by the Center for Fiscal Excellence, showing Minnesota ranks in the top 10 states for property taxes. Finally, proponents noted that these taxes are passed on to consumers in the form of increased prices. Reducing and eliminating the statewide general levy is the business community’s number one priority this session.

Opponents argued that the statewide levy was a compromise that has resulted in businesses and cabins paying less in property taxes for the last 15 years than they would otherwise have paid. They also noted that even with the levy, Minnesota remains ranked in the top ten business climates in the nation because of high education levels and a strong workforce.

DFL Committee members agreed that something should be done to address the statewide levy and that the first-tier exemption is probably the best option, as it is scalable and really helps out smaller businesses. They raised concerns, however, about significantly reducing or removing the levy, noting the significant amount of revenue it raises and its contribution to the state’s current surplus.

These bills were laid over for possible inclusion in the House and Senate Omnibus Tax bills.

Factors for Determining a Taxpayer’s Residency Addressed

The Minnesota Department of Revenue examines 26 factors in determining domicile, one of two tests it utilizes to determine an individual’s residency for tax purposes. These factors were adopted in the 1980s and have not been updated since. Two recent Minnesota Supreme Court decisions cited the location of a taxpayer’s professional advisors as criteria to determine domicile in Minnesota. As a result, competitors of these professional advisors in other states have had success urging individuals to sever all ties with Minnesota based professionals. The Senate Tax Committee heard three proposals on Wednesday attempting to address this problem:

  • SF 457, authored by Senate Tax Chair Roger Chamberlain (R-Lino Lakes), which prohibits the Department of Revenue from considering the location of one’s attorneys, accountants, financial advisors and financial institutions when determining domicile for tax purposes;
  • SF 458, authored by Sen. Ann Rest (DFL-New Hope), which expands on Sen. Chamberlain’s language to include exempting time spent for medical services from the 186 day rule; and,
  • SF 102, authored by Sen. David Osmek (R-Mound), which eliminates the 26 factors and replaces it with a requirement that individuals file an affidavit with the Commissioner of Revenue attesting they are domiciled in another state, which remains in effect until revoked.

A number of associations representing professional advisors testified in support of the Rest and Chamberlin proposals, citing lost business resulting from the Supreme Court decisions and concerns about losing more business from competitors in other states, specifically Arizona and Florida. The Department of Revenue explained that this is just one of a number of factors it looks at when determining an individual’s domicile. The Department also testified that it supports language not considering the location of an individual’s financial advisors and attorneys, as they aren’t concerned with where individuals are making those transactions, just for what (i.e., purchasing car insurance for which state). The Department did express concerns with exempting time spent for medical services in the state, as that would require the department to ask intrusive questions of the taxpayer.

These proposals were laid over for possible inclusion in the Senate’s Omnibus Tax bill. The House companion to SF 458 is HF 622, authored by House Tax Chair Rep. Greg Davids (R-Preston), which was heard in the House Tax Committee on Tuesday and laid over for possible inclusion in the House Omnibus Tax bill. HF 210, the House companion to SF 102 authored by Rep. Jerry Hertaus (R-Greenfield), was heard in the House Tax Committee in mid-January and was also laid over for possible consideration.

Exempting Social Security From State Income Tax

Minnesota is one of only four states currently that, along with the federal government, taxes Social Security benefits. Multiple proposals have been introduced that either reduce or eliminate the tax paid on these benefits. One of these proposals, HF 869 authored by Rep. Jason Metsa (DFL-Virginia), was heard in the House Tax Committee this week. This proposal allows filers with provisional income less than $71,000 (married joint) or $55,000 (all other filers) to subtract Social Security benefits in computing Minnesota taxable income. It also phases out the subtraction for filers with income over these thresholds and is indexed annually for inflation. Proponents contend that Minnesotans are leaving the state upon retirement because of this tax and this exodus will accelerate as baby boomers start retiring. They also argue that every dollar retirees retain likely gets spent in Minnesota, generating economic activity and investment in local communities. Opponents argue that exempting Social Security from taxation only benefits a small number of Minnesotans, and 50 percent of current beneficiaries make over $100,000. They also suggest there are better ways to target tax relief to a larger population than the bracket change or full repeal, which costs $176 million to $563 million this biennium, and will continue to grow as more and more retire.

HF 869 was laid over for possible inclusion in the House’s Omnibus Tax bill. The Senate Tax Committee is dedicating Wednesday, February 22, to hear a number of other proposals addressing this issue.

Status Updates

Below are status updates on legislation of interest summarized in previous weekly updates:

  • Preemption. SF 580, legislation preempting local governments from adopting ordinances regulating wage, leave, scheduling and other work benefits and conditions as well as invalidating local sick leave laws in Minneapolis and St. Paul passed the Senate Local Government Committee on a party line 6-4 vote and heads to the Senate floor. Read our previous updates for more information.
  • Israel Discrimination Legislation. HF 400 prohibiting the State from contracting with vendors who discriminate against Israel passed the House State Government Committee on a 10-6 vote and was referred to the House Ways and Means Committee. Read our previous updates for more information.

Upcoming Important Dates

February Budget Forecast. The February Budget & Economic Forecast will be released February 28. This forecast is used by the Governor and Legislature to set the FY 2018-2019 budget and ensure that the FY 2016-2017 budget remains on track and in balance.

Committee Deadlines have been announced by legislative leadership. They are:

  • First Deadline- Friday, March 10, 2017: ◦All policy committees must act favorably on a bill in the House of origin.
  • Second Deadline- Friday, March 17, 2017: ◦All policy committees must act favorably on bills or companions of bills that met the first deadline in the other chamber.
  • Third Deadline- Friday, March 31, 2017: ◦Committees to act favorably on major appropriation and finance bills.

The deadlines do not apply to the House Committees on Capital Investment, Ways and Means, Taxes, or Rules and Legislative Administration, nor to the Senate committees on Capital Investment, Finance, Taxes, or Rules and Administration.

Legislative Break

The House and Senate will be in recess starting Saturday, April 8 through Monday, April 17. No Committee, floor, or other action will take place in either body that week.

Social Media Updates

Stay connected with legislative updates by following us on Twitter @FaegreBD_MNGov.

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