Hf1782 - Rep. Lenczewski Tax Reform Proposal

Reforming Individual Income Tax and Corporate Franchise Tax

Representative Ann Lenczewski Monday, March 16, 2009

Highlights of Reform Proposal •

Proposes most significant individual income and corporate franchise tax reform in over 20 years.

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Increases the progressivity of the Minnesota tax system.

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Eliminates dozens of business subsidies and tax expenditures that are ineffective, regressive, or that we can no longer afford.

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Replaces tax subsidies that disproportionately benefit upper-income earners with income tax cuts that benefit everyone.

What Does The Tax Incidence of Minnesota’s Income Tax Expenditures Look Like TODAY? 3

Tax Expenditures by Income (2006) Total MN Spending $400,000,000 Educator Subtraction ($0.9 million) Elderly Subtraction ($1.3 million)

$350,000,000

Jobz Subtraction and Credit ($1.4 million) Active Military Service Subtraction ($4 million)

$300,000,000

Non-itemizer Charitable Contributions Subtraction ($5 million) Long-term Care Credit ($7 million)

$250,000,000

Tuition Subtraction ($13 million)

rea chart.

K-12 Education Subtraction ($15 million) Social Security ($26 million)

$200,000,000

Marriage Credit ($53 million) Minnesota Tax-Exempt Bond Interest ($56 million)

$150,000,000

All Itemized Deductions ($565 million)

$100,000,000

$50,000,000

$0

1

2

3

4

5

6

7

Lowest to Highest Earners (sorted into 10 equal groups)

8Source: MN Depart 9 of Revenue, 10Tax Research Division, March 2009

Eliminating Tax Expenditures that are Ineffective, Regressive, or MN can No Longer Afford 4 What’s Out: • Minnesota K-12 Subtraction

• Bovine Tuberculosis Credit

• Individual Income Tax Benefits for JOBZ

• Charitable Contribution Subtraction for Non Itemizers

• Long-Term Care Insurance Credit

• Gain on Sale of Farm Property for Insolvent Taxpayers

• Organ Expense Subtraction Donation • Elderly Exclusion • Charitable Contribution Deduction • Refundable Dependent Care Credit • Foreign Sub-national Taxes Subtraction • Health Insurance Premium Credit • K-12 Education Credit • Mortgage Interest Deduction • Low-Income Motor Fuels Credit

• Phase-out the Subtraction for Minnesota Bond Interest • Americorps post-service education benefits

Making Minnesota’s Income Tax System More Progressive 5

What’s In: • Mortgage Interest Credit • Charitable Contribution Credit • Families Know Best Credit • Income Tax Rate Reductions

New Mortgage Credit 6

Under current law, two homeowners with identical houses and identical mortgages receive different tax breaks – the wealthy person gets more. The new credit addresses the “upside-down” impact of the deduction and provides an equal incentive to everyone. This new credit is accessible and fair to ALL taxpayers, regardless of income and whether or not taxpayer itemizes at the federal level. Provides new tax credit equal to 7% of eligible mortgage interest; Taxpayer with $10,000 of interest qualifies for maximum $420 credit. Example: A family with two dependents and an adjusted gross income of $50,000 and $10,000 in mortgage interest would qualify for the maximum $420 credit. Under current law, this family would only be eligible to receive a $131 deduction.

New Charitable Contribution Credit 7

The new charitable contribution credit will enhance tax benefits for Minnesotans who contribute more than 2 % of their income. This new credit is accessible to ALL taxpayers, regardless of income and whether or not taxpayer itemizes at the federal level. The new credit equals 8 percent of charitable contributions in excess of the greater of: 2% of the taxpayer’s adjusted gross income or $500. Example: A family with two dependents and an adjusted gross income of $30,000 that makes $5,000 in annual contributions would be eligible to receive a $214 credit. Under current law, this family would eligible for a $120 deduction.

New Families Know Best Credit 8

This new credit gives families more discretion on how to spend limited resources and does not limit credit to certain expenditures. Targets tax relief to families with children that need it most. The new refundable credit equals 10% of adjusted gross income over $14,000, up to a maximum of $200 per child. Example : A family with one dependent, an adjusted gross income of $20,000 and no K-12 expenses or dependent care expense would receive a $200 credit. Under current law, this family would not be eligible to receive a credit.

New Income Tax Rate Reductions 9

Income Tax Relief for All Minnesotans Married Joint

Current Law

New Proposed Rate

Income Bracket

First

5.35%

5.00%

$0 to $33,220

Second

7.05%

7.00%

$33,221 to $131,970

Third

7.85%

7.85%

$131,970 and above

Eliminating Business Subsidies that Create Winner and Losers 10

What’s Out: • Eliminate the 80% reduction for foreign income • Foreign Royalty Subtraction • Research and Development Credit • International Economic and Biotech Zone Incentives • Employer Transit Pass • Metropolitan Airports Exemption • Corporate Franchise Tax benefits for JOBZ

Keeping and Growing Jobs in Minnesota 11

What’s In: • 100% Single Sales Factor this year • Full Federal Conformity to Section 179 Expensing

Keeping and Growing Jobs in Minnesota 12

Eliminates the Jobs Tax (deletes payroll factor in the Corporate Franchise Tax) Tax cuts for Businesses, Farmers through Full Federal Conformity to Section 179 Expensing.

Helping Minnesota’s Small Businesses 13

Tax Cuts for Businesses and Farmers through Full Federal Conformity to Section 179 Expensing Full Federal Conformity to Section 179 Expensing to maximize business investment in Minnesota. The last time Minnesota had full federal conformity to Section 179 expensing was in 2005. Full Federal Conformity simplifies and streamlines administrative bookkeeping for businesses and promotes taxpayer compliance. Tax Year

Current Law Maximum Deduction

Current Law New Start of Phase- Maximum out Deduction

Proposed Start of Phase-Out

2009 & forward conforms to federal law

$25,000

$100,000

$800,000

$250,000

Giving Minnesota Companies a Competitive Advantage 14

Swift Elimination of the Jobs Tax In 2005, the Legislature enacted an eight year phase-in of the single sales factor for corporate income tax apportionment by 2014. Allows 100% single sales factor for corporate income tax apportionment this year. Makes Minnesota more competitive with 18 other states that have or are scheduled to have 100% sales on apportionment formulas. (Source: Future State Business Tax Reform, Ernst & Young, December 2007, page. 10.) Tax Year

Current Law Sales Factor

2009

84%

2010

87%

2011

90%

2012

93%

2013

96%

2014

100%

Proposed Sales Factor 100%

Making Minnesota’s Tax System More Progressive 15

Current Law v. Proposal Adjusted Gross Income

% of Tax Paid, Current Law

% of Tax Paid, Proposal

Under $50,000

21.4%

20.1%

$50,000 to $99,999

26.4%

26.1%

$100,000 to $499,999

32.7%

33.9%

$500,000 and up

19.5%

19.9% Source: House Research Department, March 2009

House Research Short Subjects 16

Single Sales Apportionment http://www.house.leg.state.mn.us/hrd/pubs/ss/ssappss.htm

Section 179 Expensing http://www.house.leg.state.mn.us/hrd/pubs/ss/sssec179.htm