2010 Legislative Session: Fiscal Policy Wrap-Up

Governor Pawlenty and the Legislature closed a $3 billion budget gap through a combination of spending shifts and budget cuts – and no general fund tax increases. The budget deal includes:

• $1.96 billion – K-12 shift
• $299 million – local government aid cuts
• $209  million – health & human services cuts
• $152 million – delayed corp. income & sales tax refunds
• $100 million – higher education cuts
• $200+ million – miscellaneous changes

To ease state cash flow problems, the budget bill requires businesses to remit sales tax receipts earlier than currently required. The Partnership worked with the Pawlenty Administration to give businesses two options for complying with this requirement.

First tax reform in five years:

Despite facing a budget deficit, the Minnesota Legislature passed a $30 million tax package that represents the first real progress on state tax reform since 2005, when Minnesota began phasing in a “sales only” factor for apportioning corporate income taxes. The law passed by wide, bipartisan margins in the House and Senate, with both sides trumpeting the importance of job creation and business investment. The new law contains several changes intended to boost job creation, including:

• An increase in Minnesota’s research and development (R&D) tax credit to 10% on the first $2 million of R&D spending in the state, up from the current 5.0%. In addition, the tax credit becomes refundable and will be available to partnerships and S-corps.
• A new 25% angel investor tax credit for investments in a qualified small business, with a $1 million cap on eligible investments over the life of the business. 

While the budget deficit prevented passage of major tax reform this session, there is a growing consensus among policy experts, legislators and the media that substantial tax reform consistent with what the Partnership has proposed is needed to improve Minnesota’s business climate, increase job creation and address the state’s long-term budget challenges.

Service delivery reform on the table:

Bipartisan legislation this session created a 19-member Commission on Service Innovation charged with providing the Legislature with a strategic plan for re-engineering the delivery of public services. The Partnership will appoint a member to the commission. In addition, several public employee pension plans will study defined benefit, defined contribution and alternative retirement plans and assess the feasibility and sustainability of these alternatives.

We successfully opposed:

Despite bipartisan interest in strengthening Minnesota’s business climate, DFL legislators proposed several tax increases that the Partnership defeated, the most prominent included:

• Eliminating the foreign royalty deduction – a $99 million corporate tax increase.
• Repealing the foreign operating corporation statute – a $41 million corporate tax increase.
• Imposing the corporate tax on income earned in so called “tax haven” countries - $14 million corporate tax increase.
• Creating a 9.1% individual income tax bracket on taxable income over $200,000 for married couples filing jointly – a $435 million tax increase.
• Adding a $14 million surcharge to health plans and $48 million surcharge to hospitals.
  

For more information, contact Fiscal Policy Director Jill Larson.