New State Deficit Projections Change Income Tax Debate

Everyone’s favorite time of year is now upon us. The time of year that is more about giving than receiving. If you’re thinking Christmas, you’re wrong. Here’s a hint, this is one of the certainties in life other than the fact that it’s going to end. Give up? Its tax season and we’re right in the thick of it. All of the painstaking work of saving every receipt is about to pay off.

But, as I said before, it’s more about giving than receiving. Here’s some good new though, the annual state budget deficit estimate is down $1.2 billion. The bad news, it’s still estimated at $5 billion. Candidate for Governor Mark Dayton had a plan to raise revenue to close the gap. He proposed a 3% temporary income tax surcharge on individuals earning greater than $500,000 per year. This surcharge would have raised an additional $918 million per year, now bringing the estimated deficit down to around $4 billion, but more importantly make the inevitable spending cuts a little easier to bear.

However, now that the projected deficit has shrunk by almost 20%, Governor Dayton has decided to drop the tax surcharge stating "That was always intended to be temporary. I'm delighted that this revenue picture permits it to be extremely temporary." State budget officials although pleased with the new estimate, are not as upbeat about the news as they caution that the new estimate is a result of things happening on the federal level, not as a result of any state actions nor lasting economic improvement. The surcharge would have brought Minnesota’s upper income tax bracket to the second highest rates in the nation however, a tough political pill to swallow when you put it that way. Under the proposal Minnesota’ top income tax bracket would have reached 10.95%, marginally lower than the state with the highest tax bracket, Hawaii which stands at 11%.

The state of Minnesota, in general, relies more heavily on state income tax as a source of revenue than most states. As a percentage of the state’s General Fund almost half of the revenue comes from income taxes, and a quarter when you include all Operating Funds. While the sales tax is one of the highest in the nation, there are a number of exemptions (i.e. clothing) that narrow the tax based, and thusly result in less revenue.

As state lawmakers will continue to quibble about using income taxes to shore up gaps in the budget, some of you however, can bridge the gap in your own budgets using the income tax code, and it’s rather simple. To find out how click here.

For additional state tax information, and to make state by state comparisons follow this link: taxfoundation.org. Or, to get a better sense of Minnesota’s overall tax burden on citizens as a whole try here.

By Steve Tanner