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Minnesota Legislature: Tax cuts almost a cinch, but who gets them?

IRS Tax Extension form (4868) with pen, watch and glass

ST. PAUL—Minnesotans are almost certain to get tax relief this year.

With a $1.4 billion surplus in the state treasury, Gov. Mark Dayton and both Republican and Democratic legislators support cutting taxes.

The questions they must answer are: Who gets the tax breaks, and how much money will they receive? It's too early to tell.

Dayton put a $300 million tax-cut plan on the table in January, but lawmakers are just starting to sort through a huge stack of requests for tax relief. More than 100 tax bills have been introduced in the Senate, and House members are wading through 200-plus proposals.

Republicans who control both chambers want bigger tax cuts than the Democratic-Farmer-Labor governor has proposed.

Calling Dayton's offer "bread and crumbs from his table," Senate Taxes Committee Chairman Roger Chamberlain, R-Lino Lakes, said: "We're going to offer something that could potentially offer Minnesotans thousands of dollars of extra income every week, every month throughout the year in increased wages, lower prices and new opportunities."

But lawmakers are weeks away from deciding how much to give back. They're waiting for a new budget forecast on Feb. 28 to tell them what's available. Then they'll set tax and spending targets.

Until then, legislative leaders are outlining some broad objectives.

A STARTING POINT

"My goal is middle-class tax relief," said House Taxes Committee Chairman Greg Davids, R-Preston. That could include tax credits for child-care, school expenses and college tuition, lower taxes on Social Security income, property tax relief for farmers and businesses, state aid to help cities and counties hold down property taxes and investment tax credits.

Dayton included many of those provisions in his 2017 tax plan, which he called a "make-up bill" for the $300 million measure that the Legislature passed last year. He vetoed that bill after catching a mistake that could have cost the state $100 million over three years. The 2016 bill is the foundation for this year's version.

That's a good starting point, Davids said.

"Normally when I read the governor's tax bill, my first thought is, 'At least we recycle the paper it's written on,' " he said. "But as I read through this one, I couldn't say that because there were some very good provisions in his proposal.

"He just doesn't go far enough in tax relief. I want a bigger number, and I'm sure we'll have a bigger number."

But Davids said he'll try to avoid making it so big that Dayton would veto. "Why waste our time?"

TACKLING HIGH-TAX-STATE STATUS

Chamberlain, the Senate tax chair, appears to be eying a more ambitious tax-reduction agenda. With an aging population and flat economic growth, he said, the state must make some fundamental tax policy changes. "It will take a long time to turn the ship around, but we have to start acting now."

He cited studies showing that among the states, Minnesota has the third-highest personal income taxes and corporate tax rate, fifth-highest per capita tax burden and seventh-highest sales tax rate and business property taxes.

"We want to get out of the top 10," said Senate Republican Leader Paul Gazelka of Nisswa, and Chamberlain agreed.

In addition to assembling a tax bill that Dayton would sign, the biggest challenge for GOP lawmakers will be curbing their appetite for more spending in order to leave money on the table for tax cuts.

THE COST OF CUTS

Senate DFL Leader Tom Bakk of Cook said various Republicans have already proposed more than $1 billion in new spending over the next two years. That includes shifting $290 million a year in sales taxes on auto parts and rental cars to a fund for roads and bridges, boosting K-12 education spending by more than $300 million a year, allocating $200 million over two years for state construction projects and a yet-unknown sum to stabilize the individual health insurance market.

"So now you're north of $1.1 billion, and you haven't gotten to the tax bill yet," Bakk said. He predicted Republicans would have trouble finding more than $300 million for tax cuts.

Administration officials warned that deeper tax cuts also could cause a flood of red ink.

"If we have a tax bill that goes above and beyond what the governor has proposed, we run the risk of creating a hole in future budgets," said Management and Budget Commissioner Myron Frans, the governor's point man on state finances.

After lawmakers passed big tax cuts in 1999 and 2000, he said, the state's tax collections dropped below its spending, resulting in deficits in nine of the next 11 years. He called for testing tax-cut proposals to ensure they don't produce future budget shortfalls.

The Legislature approved $20 million of Dayton's proposed tax reductions in January by passing a bill that conformed Minnesota's tax code to recent federal tax changes.

The governor also has recommended some tax hikes that Republicans already have rejected, including continuation of inflationary increases in tobacco taxes and eliminating some corporate tax breaks.

"I will not hear any tax increases," Chamberlain said.

LIKELY FOCUSES

Some tax ideas that appear to have bipartisan support include bills that:

• Increase a child care income tax credit to more than $1,000 per dependent. Dayton proposed legislation that would save 75,000 families about $379 per year. In Minnesota, annual child care costs average about $10,000 per child.

•Provide tax breaks for students paying college tuition. Last year, Dayton and lawmakers agreed to offer both tax deductions of up to $3,000 for families who contribute to savings plans to pay college costs and refundable tax credits of up to $1,000 for college graduates paying off student loans. Both options are being considered again this year.

•Reduce business property taxes by exempting the first $100,000 or more of market value from the state tax levy. Republicans and some Democrats also want to eliminate automatic inflationary increases in the state levy.

•Lower farm property taxes by reducing the amount assessed for new school construction to "a house, a garage and one acre," while exempting the remaining farmland. City and suburban school districts have more success passing school building levy referendums, but rural schools struggle to fund new facilities because the tax burden falls most heavily on farmers.

•Increase state aid to cities and counties for local roads and bridges, police and fire protection and holding down property taxes.

•Grant tax breaks for construction of Minnesota United's proposed professional soccer stadium at the intersection of Interstate 94 and Snelling Avenue in St. Paul.

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