With policy committee deadlines out of the way, legislators turned their attention to omnibus finance and tax bills. Finance and tax committees in both the House and Senate spent the week compiling bills, taking public testimony and considering amendments. Finance bills must be referred to full finance committees by next Friday, March 31. Legislative leadership’s goal is to have many, if not most, finance bills off the House and Senate floors and into conference before it recesses on Saturday, April 8.
House and Senate Roll Out Transportation Funding Packages
The House and Senate rolled out their transportation funding packages this week. Transportation finance committees unveiled these proposals early in the week, considered amendments, and heard extensive testimony. These packages were passed later in the week and referred to the House and Senate Tax Committees.
Senate Transportation Package
The Senate Transportation package raises an additional $570 million each biennium for roads and bridges in the following manner:
- $400 million this biennium by redirecting certain automobile related sales taxes from the general fund to the Highway User Tax Distribution Fund (HUTDF), with further distribution to the Trunk Highway Fund (THF), County State Aid Highway Fund (CSAH) and Municipal State Aid Streets (MSAS). Those redirected taxes are sales tax on auto parts, sales tax on rental vehicles, rental car taxes and the leased motor vehicle sales tax.
- $117 million redirected from the flexible highway or turnback account – which is a constitutionally established 5 percent from the HUTDF that can be allocated under state statutes – to the THF. This money is currently dedicated to counties for restoration and reconstruction of old state highways that have been “turned back” to counties.
- $53 million in savings from MnDOT efficiencies, estimated at a 15 percent reduction
This package also infuses $766 million in one-time funding with $466 million in federal grants and $300 million in trunk highway bonds over the next four years. $200 million of the trunk highway bonds would be directed to the Corridors of Commerce program, with the remainder being dedicated to various designated state highway projects.
There is no new revenue source for transit. The Senate proposal significantly cuts general fund appropriations for metropolitan area transit. Met Council estimates that this proposal will leave a $65 million budget shortfall for the FY2018-2019 biennium and require fare increases and service reductions. Met Council representatives testified that even with a 25 cent fare increase, Metro Transit will have to cut regular route service by 17 percent in 2018, with a corresponding 17 percent loss in ridership.
The bill does provide that unless an LRT line is operating at the time of enactment, or there is a specific appropriation from the Legislature for capital costs, the costs of operation and capital maintenance must be provided from non-state sources. Current law requires 50 percent of net operating costs (after federal and fare revenues are used) to be covered by the state. Extension of a current LRT line is treated as a separate LRT line and would need legislative approval to qualify for state funds for operating costs.
The Senate package passed the Senate Transportation Committee on Thursday night and referred to the Senate Tax Committee.
House Transportation Package
The House transportation package redirects $450 million from the state’s general fund to a newly created Transportation Priorities Fund, which would be used mostly for road and bridge projects. Those redirected taxes are sales taxes on auto parts and repairs, sales tax on rental vehicles, rental car taxes and the leased motor vehicle sales tax. It also imposes a $75 surcharge on electric vehicle owners.
The House package also authorizes $1.3 billion in trunk highway bonds between FY2018-2021. Proceeds from these bonds are appropriated as follows:
- $300 million in FY 2018 for the Corridors of Commerce program
- $250 million each in FY years 2018-2021 for general state road construction
The House proposes no new revenue for transit. The House proposal does cut general fund appropriations for metropolitan area transit. Met Council estimates the House proposal will leave a $55 million budget shortfall for the FY2018-2019 biennium and require fare increases and service reductions. Met Council representatives testified that even with a 25 cent fare increase, Metro Transit will have to cut regular route service by approximately 12 percent in 2018, with a corresponding 15 percent loss in ridership. In addition, the proposal amends the formula to allocate more MVST funds to suburban transit providers and less to Metro Transit.
The House proposal also shifts funding for operations and capital maintenance of metro area transitways, including the Blue Line, Green Line and Northstar Commuter Rail. It accomplishes this by shifting what was previously the state’s 50 percent share for operations and capital maintenance to the Counties Transit Improvement Board’s (CTIB) local option sales tax or, if CTIB dissolves, the local option sales tax for the county in which the transitway is located. CTIB or the applicable county must pay 100 percent of these costs. Met Council estimates that this proposal shifts approximately $67 million over the biennium from the state to metropolitan area counties.
In addition, the House proposal prevents regional railroad authorities and cities or counties from spending any funds for studying, project development or construction of a light rail project unless the Legislature specifically authorizes the project. The Met Council and local units of government are also prohibited from estimating state sources of funds in determining capital costs for light rail projects unless state funds have already been appropriated.
This package was passed on Thursday and referred to the House Tax Committee.
House Republicans Release Tax Proposal
On Thursday House Republicans released their tax proposal providing $1.35 billion in relief to Minnesota businesses and individuals. HF 4, authored by Rep. Greg Davids (R-Preston), contains many of the provisions that were part of the 2016 Omnibus tax bill vetoed by Governor Mark Dayton. It also represents House Republicans’ belief that using the state’s surplus for tax relief will reduce burdens on businesses and retirees, keeping money in local communities and spurring economic activity. Key tax relief provisions of the bill are as follows:
- Business Property Tax Relief: Provides an exemption of the first $200,000 of commercial industrial property from the state general levy and freezes the annual inflator at the 2017 level. Savings to businesses are estimated to be roughly $208 million in FY 2018-19 and $340 million in 2020-21.
- Social Security Tax Exemption: Allows individuals to exempt Social Security benefits from the state’s income tax. The state’s cost of providing this exemption is estimated to be approximately $269 million in FY 2018-19 and $412 million in 2020-21.
- Agricultural Credit: Provides aid to farmers by exempting 50 percent of agricultural land from local bond levy obligations resulting in property tax relief of $44 million this biennium and $125 million in 2021.
- Estate Tax Conformity: Provides $162 million this biennium and $195 million next biennium to conform Minnesota’s estate tax to federal levels, providing a subtraction for the federal estate and gift tax exclusion amount in computing the Minnesota taxable estate. The state exemption amount is $1.8 million for decedents dying in 2017. The federal amount is $5.49 million and is indexed for inflation.
- College Savings Plan Contributions: Making college more affordable was included in the bill by providing a refundable tax credit or deduction for contributions to any state’s 529 college savings plan. The cost of this provision is estimated to be $22 million this biennium and $27 million in 2020-2021.
Other provisions of the bill include exempting admissions from the sales tax to Minnesota State High School League events as well as events sponsored by several nonprofit organizations. Additionally, admissions to Super Bowl related events would see a sales tax exemption (there is already a sales tax exemption for tickets to the Super Bowl). The bill would also allow a rebate from the Minnesota Sports Facilities Authority to the host committee, the NFL and its affiliates for certain sales taxes paid in connection with preparing for next year’s Super Bowl.
Revenue Commissioner Cynthia Bauerly expressed concerns that this bill’s $1.3 billion in spending—the governor’s proposes only about $300 million in targeted tax relief—comes at the expense of other areas of the budget. She raised concerns about the impact these tax cuts will have in future years, noting that the numbers on the spreadsheet don’t represent what the full costs will be once many of the provisions are fully phased in. In addition, she noted that the removal of the tobacco inflator will likely have adverse effects on youth smoking efforts and health care costs. Finally, she noted the bill doesn’t contain Governor Dayton’s proposals to increase funds for local government aid, county program aid, or the state’s working family credit. It also does not contain any of the governor’s proposals to close what he considers to be corporate tax loopholes.
HF 4 also includes a number of significant policy changes including:
- Domicile Test Modified. Modifies the domicile test for state income tax purposes so that the location of an individual’s attorney, certified public accountant, financial adviser, or the place of business of a financial institution where the individual opened or maintains an account cannot be considered by the Department of Revenue or a court in determining where the individual intends his or her permanent home to.
- Private Letter Ruling Program Established. Directs the Revenue Commissioner to establish a PLR program by January 1, 2018. This program would be similar to the Internal Revenue Service’s PLR program and would provide guidance and an explanation of the reasoning behind the ruling to applying taxpayers as to the state tax treatment of specific transactions or situations. Revenue could exclude categories of transactions or provisions of law from the program.
- Assessment Limits. Prohibits the Revenue Commissioner from assessing sales tax that are inconsistent with the taxpayer’s past practices, if they were fully disclosed to and specifically reviewed by Revenue in an audit and Revenue did not assess additional tax for that item. This limit would not apply if the Commissioner has notified the taxpayer in writing, issued a contrary revenue notice or the law has been materially changed.
The House Committee passed this proposal on Friday and referred it to the Ways & Means Committee. The Senate Tax Committee proposal, which will provide approximately $900 million in tax relief, will be rolled out early next week.
Upcoming Important Dates
- Third Committee Deadline. Friday, March 31, 2017: Committees must act favorably on major appropriation and finance bills by this date. This deadline does 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.
- Adjournment. The legislative session has a constitutional adjournment date of May 22 this year.
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