Overall Revenue Options in Minnesota

In class, we have examined and analyzed various revenue sources for state and local governments such as the property tax, sales tax, income tax, user fees and intergovernmental grants.

The Minnesota Budget Project, an initiative of the Minnesota Council of Nonprofits, conducted a study with various revenue raising options to help close the 2012-2013 budget deficit.  The analysis, while not representing a complete tax reform, does provide an analysis on revenue raising options that have been part of public discussion.

  

Income Tax

The income tax is the tax that relates the most to the ability to pay thus attempting to make Minnesota taxes less regressive.  During the past few years there have been various proposals to create “a fourth tier” income tax bracket.

Another way to raise revenue through the income tax would be an income tax surcharge.  This is an efficient mechanism to raise revenue.  A 10% income tax surcharge would generate between $1.4 billion-$1.6 billion in revenue.

In Governor Dayton’s Budget, a new 10.95 percent tax bracket for taxable income above $150,000 a year for a married couple was created.  This proposal would raise $2.0 billion in FY 2012-13.  In 2010, the legislature passed a 9.1 percent rate on taxable income above $200,000 for a married couple.   This proposal was estimate to raise $271 to $495 million in revenue in FY 2012-13.

Property Tax

Property taxes are generally levied at the local level, however there is a statewide property tax on businesses and cabins.  A state property tax on homes valuing above $1million would generate $63 million.  This proposal is estimated to only apply to 7,800 properties and be an average increase of $5,600.

Sales Tax

Minnesotans pay sales tax on most goods but pay no sales tax when they purchase most services, even as services have become a larger share of the economy.  Also, Minnesota is one of only five states that have a sales tax exemption on clothing.  The elimination of the sales tax exemption on clothing would generate an estimated $580 million in revenue.  Another option highlighted in the study would be removing the exemption on consumer purchases of many services such as car repair and maintenance, personal care services (like hair styling and body piercing), legal services, accounting services and funeral services , which would raise $834 million in FY 2012-13

According to the Minnesota Tax Incidence Report, sales taxes are considered regressive.

Alcohol and Tobacco Taxes

Minnesota has two alcohol taxes: an excise tax on manufacturers and wholesalers and a gross receipts tax for retail sales on on-sale and off-sale purchases.  The Minnesota Legislature’s 2009 omnibus tax bill increased the alcohol gross receipts tax from 2.5 percent to 5.0 percent, and increased the alcoholic beverage excise tax by about two cents a drink for beer and wine and about three cents a drink for distilled spirits. This legislation was vetoed and didn’t become law.  It was estimated that this proposal would generate $263 million in FY 2012-13.

In 2009, legislation was proposed to raise the cigarette tax by $1 per pack and double the separate tobacco products tax from 35 percent to 70 percent.  It was estimated to generate $314 million in FY 2012-13.

Looking Forward 

Currently, the legislature is in the final year of the biennium.  In February 2012, state budget officials projected a $323 million surplus.   While this news is optimistic, this report is still useful as it still provides a comprehensive analysis of revenue raising options that can be examined in the upcoming budget setting year starting in January 2013.