Tag Archives: income taxes

Dayton’s $37.9B budget proposal summarized

This morning, Governor Mark Dayton released his long-awaited 2014-15 budget proposal.  And, true to his word, there’s a lot to chew on here.  Dayton’s proposal contains fundamental tax reform and some new spending initiatives that are sure to raise some eyebrows.  In this post, we’ll summarize the proposal.  In the coming days, we’ll get into more detail on the merits and problems with specific elements of the plan.

The November economic forecast from Minnesota Management and Budget projected $35.8 billion in revenue and $36.9 billion in expenses under current law for the 2014-15 biennium.  Dayton’s proposal wipes out that $1.1 billion deficit by increasing revenue by a new $2.1 billion and increasing spending by a smaller amount: $1 billion.  Total spending for the biennium totals $37.9 billion, much lower than what some GOP sources were floating prior to the proposal being announced.

Revenue:  Net increase $2.1 billion

Dayton has put together a comprehensive tax reform plan in his proposal, with a lot of moving pieces.  Let’s break it down by the type of tax.

Individual income taxes:  Dayton would add a new top bracket to Minnesota’s individual income tax code, a marginal rate of 9.85% on taxable income over $250,000 (couples) or $150,000 (individuals).  This proposal would raise $1.1 billion in 2014-15.  Dayton also proposes a new property tax rebate, which would give back up to $500 on each property.  This proposal would cost $1.4 billion for the biennium.  Net impact: -$300 million.

Sales taxes:  This is the largest component of the tax reform plan.  Dayton’s proposal would remove many of the exceptions from the state’s sales tax code.  Consumer and business services (except for a very limited set) would now be taxed.  This includes legal services, accounting services, haircuts, auto repair, etc.  Most goods would also now be taxed.  Remaining goods exceptions would be food, prescription drugs, and clothing (items that cost under $100).  In return for broadening the base of the sales tax, the rate would be reduced from 6.875 percent to 5.5 percent.  Dayton Administration estimates show that this change would work out to be essentially neutral for most families.  Opponents of the provision have already called out that the sales tax charged on business services will be baked into consumer prices, leading to a net increase in what consumers pay.  Also included is a 0.25% sales tax increase for the seven-county metro area designed to fund transit projects.  Net impact: $2.1 billion.

Corporate income taxes:  Dayton proposes cutting the corporate income tax rate from 9.8% to 8.4%.  Such a change would drop Minnesota to the 12th highest corporate income tax rate.  To pay for the rate change, Dayton’s proposal would eliminate tax breaks for foreign operating companies and foreign royalty payments, making the reform essentially revenue neutral.  Net impact: $5 million.

Cigarette taxes:  Cigarette taxes would be raised by 94 cents per pack under the Dayton proposal, reaching $2.54 per pack.  Net impact: $370 million.

Spending:  Net increase $1 billion.

Most of Governor Dayton’s proposed new spending goes to education.  Let’s see how it breaks down:

E-12 Education:  The two largest components here are a significant increase to special education funding ($125 million) and a 2% increase in the basic education formula ($118 million, or $52 per student).  Additionally, Dayton proposes additional funding for all-day kindergarten ($40 million).  Finally, early education programs get a major boost ($93 million in total, with the largest single element being $44 million in Early Learning Scholarships which fund pre-school for low income families).  Dayton does not propose paying off any of the remaining K-12 shift in the next biennium, waiting to pay it off until the 2016-17 budget. Net impact:  $344 million.

Higher Education:  Dayton proposes an $80 million expansion of the State Grants program, which will allow 5,000 additional students to enter the program, and increase the payout to 90,000 students already on it. Additionally, Dayton proposes $80 million in expanded funding for MnSCU to expand internship and apprentice programs, improve facilities and equipment, and retain faculty (assuming required administrative cuts are made).  Dayton also was going to propose an additional $80 million in funding for the University of Minnesota, but is withholding support for that increase pending the Legislature’s requested review of administrative costs.  Net impact:  $170 million ($250 million if the U of M makes it back in).

Health and Human Services:  Programs receiving increased funding in this part of the budget include child permanency and mental health programs ($44 million), the Statewide Health Improvement Plan ($40 million), and funding for the health care exchange ($29 million).  Net impact:  $128 million.

Local Aids and Credits:  Dayton’s proposal would increase aid to cities and counties by $120 million.

Where are the spending cuts, you may ask?  Dayton points to last session’s budget, where $4 billion in spending reductions were achieved ($2 billion in cuts, $1 billion in additional reductions since the budget was passed, and $1 billion in inflation not added to department budgets).  In his 2014-15 proposal, Dayton cites an additional $225 million in reductions, much of which comes in the Health and Human Services budget, such as $74 million in savings from restructuring in the long term services program and $65 million in negotiated savings with service providers and drug companies.  Additionally, inflation totaling $890 million was not included in the budget for the various departments.

Additional details on the proposal can be found at the Minnesota Management and Budget website.

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About those “people who don’t pay taxes”

Republicans have spent a lot of time lately complaining about the sizable portion of Americans who now don’t pay federal individual income taxes.  Current estimates show that over 45% of taxpaying units have a zero or negative federal individual income tax liability, a percentage that has grown over time.

To them, they say, it’s a “skin in the game” problem.   Minnesota Rep. Michele Bachmann, for instance, recently said “We need to broaden the base so that everybody pays something, even if it’s a dollar. Everyone should pay something, because we all benefit.”

Let’s leave aside for the moment the fact that people who don’t pay federal individual income tax are still being taxed in substantial ways — including payroll tax and gas tax at the federal level (the individual income tax only represents 41% of federal revenue) — and look at just who these “nonpayers” actually are.  Are they “lucky duckies” as the Wall Street Journal like to call them?  And just how did they get to the point of paying no federal individual income tax?

Obviously, the key factor behind most of the folks who fall into the nonpayer category is their income.  Specifically, they don’t have a lot of it.  88% of nonpayers have household incomes of under $40,000.  Of the remaining 12%, almost half of them have incomes of over $100,000, including about 4,000 households with incomes over $1 million (that’s up 53% from 2007, even though the number of households with incomes at that level has fallen over that time).

There are other key attributes that tend to drive whether one is a nonpayer or not:  46% of nonpayers are elderly and 64% of nonpayers have dependent children.

So how did we get to this situation?  The short answer is that both parties have filled the tax code with targeted credits.  In the immediate WW-II period through the Nixon Administration, the percentage of nonpayers stayed pretty close to 20%.  The introduction of the Earned Income Tax Credit in 1975 spiked that percentage up slightly such that the percentages tracked closer to 25% until the late 1990s.

Since then, the tax code has been littered on a bipartisan basis with multiple credits that have, in part, caused the sharp increases we have seen in recent years.  The first step was the introduction of the Child Tax Credit in 1998, which gave a $400 tax credit for each dependent child on the return.  This credit was expanded in 1999, 2001, and 2003 (reaching its current level of $1,000).  In 2001, the child and dependent care credit was expanded, and in 2003, the new lowest tax bracket of 10% was established and taxpayers got a cut in capital gains and dividend taxes (this contributes greatly to the wealthy folks who fall into the nonpayer category).  In 2008, taxpayers received stimulus checks, and in 2009, the stimulus bill included the Making Work Pay Tax Credit (replaced in 2011 by a temporary payroll tax cut).

These provisions, building one upon the other and in combination with the weak economic conditions, have created the 45%-plus nonpayer rate we have seen in recent years.  Removing these tax credits would fully cut the number of nonpayers in half.

The real question, then, is where do we go from here?  Should we follow Republican logic to its conclusion, remove the credits, and raise taxes on 60 million lower-income Americans?

That’s where the question gets tougher.  Removing credits like these actually impact all Americans, and the middle class and wealthy would take the brunt of the damage.  Except for the earned income tax credit, all of the credits noted above provide greater benefits to the top three quintiles of Americans than they do the poorest in our society.  In total, the top 20% earn twice as much as a percentage of income (and far more than that in real terms) as the bottom 20% from these provisions.

As such, removing these credits — in and of themselves — is not a solution.  Not only would it take money out the pockets of those who can least afford it, but it would further squeeze middle-class families AND take substantial money away from the wealthy — the so-called “job creators” Republicans have been so anxious to protect.

The real answer to what we’re facing is a return to principles embraced on a bipartisan basis in 1986.  Simplify the tax code by removing all but the most essential credits and deductions.  Lower rates across this wider tax base.  Treat all income the same, regardless if it was earned through work, earned as a capital gain or dividend or inherited.

Such reform would accomplish goals that both parties have:  more people would be paying in, the tax code would be simpler (it shouldn’t be used as a backdoor way to handout money), and it can continue to be just as progressive (or even more so) than before.


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