The Tax Bill That Wasn’t

If Minnesota’s 2015 legislative session is remembered for the absence of a tax bill, it may also be recalled for the pop culture references from House Tax Chair Greg Davids reflecting the emotional swings surrounding the tax bill’s fate as the clock wound down. We heard pessimism from the Beatles (“Imagine There’s No Tax Bill”), the ray of hope from Journey (“Don’t Stop Believing”) and a final plea for perseverance from Larry the Cable Guy (“Git-R-Done”).

In the end, the exhortations proved to be for naught – primarily because the tax bill ended up handcuffed to the transportation finance stalemate. Legislators’ failure to produce an omnibus tax bill in a budget session does truly appear to be a rare moment in state history. Having checked in with a couple of long time Capitol veterans, this seems to be a “first” in at least 40 years. There have been sessions with vetoed omnibus tax bills; there have been non-budget sessions without a tax bill; there have been budget years with a tax bill arising out of a special session; but no one can recall an odd-numbered year with no tax bill.

Even without the transportation roadblock, conferees still had their work cut out for them. The House and Senate tax bills reflected very different priorities, philosophies, and perhaps most importantly, numbers. The initial meeting of the tax conference committee probably best captured the magnitude of these differences. For the “walk through” of the 101-page side-by-side comparison of the House and Senate bills, non-partisan staff was asked to focus only on provisions that both bills addressed in some way. Staff provided that review and answered follow up questions from committee members in a very tidy 75 minutes.

A key theme of the House’s tax bill was tax relief, to the tune of around $2 billion over the FY 16-17 biennium. A phaseout of the statewide business property tax, a phased-in exemption for Social Security income, and a two-year increase in the personal and dependent exemption amounts were among their relief initiatives. The House’s tax bill also took on the state’s transportation funding issues by dedicating sales tax revenues from certain auto-related sales to transportation, stripping them from the general fund. The House bill also promoted the idea of “property taxpayer empowerment”, largely by requiring local government referenda to be held at a general election and by creating a process for voters to initiate a reverse referendum on property tax levy increases.

In contrast, the Senate bill spent far less money – $450 million over the biennium. The biggest piece of that pie came from shifting some aid payments to local governments forward – essentially putting another arrow in the state’s budget balancing quiver by undoing a shift the state enacted in the 2000s. Additional support for the Local Government Aid and County Program Aid programs clearly demonstrated a desire to provide additional dollars for local governments. Finally, the Senate bill had a considerable “reform” ambience (whether such reforms were needed is of course, in the eye of the beholder) with changes proposed to the state’s corporate tax regime, the assessment and taxation of railroad property, and the taxation of electric generating machinery.

Predicting what “would” have happened is a futile exercise because it’s difficult to know which provisions are true legislative priorities and which are campaign literature bait or pure cannon fodder for negotiations. Based on bill introductions and the content and tenor of committee hearings in both bodies, however, we would not have been surprised to see some sort of reduction in the statewide business property tax and changes to the estate tax – especially in the areas of federal conformity and portability of unused exemptions between spouses – make their way into a final agreement.

Of course, the failure to launch a tax bill has created some collateral damage for changes that people generally agreed needed to happen. The city of Rochester had hoped for clarifying changes to the DMC financing statute to prevent some potential problems with the project in the near future. Housekeeping provisions in the Department’s technical and policy bills fell by the wayside. The public finance bill and changes the League of Minnesota Cities hoped to see in the tax increment financing area have gone for naught. And changes to how the state determines residency for tax purposes – provisions that were largely the same in both the Senate and House bills – will probably have to wait until next year, creating additional headaches for the state’s business community.

Patience May Be A Virtue

All this suggests there will be considerable pent up demand for action next March when the legislature convenes. A major tax bill, even in a bonding year, is almost a certainty. A legislative session without a tax bill will be a source of frustration and disappointment for many. But it’s not a completely bad thing.

One underappreciated fact surrounding the unused surplus and its “roll over” into next year is that the state has a long ways to go to reach the budget reserve levels being recommended by MMB per statute. We have reproduced information from MMB’s most recent budget reserve report, from January, below. As the agency’s accompanying narrative notes, “the current funded balance in Minnesota’s budget reserve and cash flow accounts remains well below MMB’s recommended level given the underlying volatility of Minnesota’s tax structure.” In fact, as Table 1 indicates, the state’s reserves sit $822 million below the level MMB is recommending for the upcoming FY 2016-17 biennium.

As MMB has noted, the “price” of a tax system more reliant on high income taxation and the accompanying higher growth rates of general fund tax receipts is a willingness to assume greater volatility. We are now experiencing the buzz of stronger revenue growth, but we have yet to experience the hangover of big revenue swings.

As a result, a sense of caution and conservatism is warranted. Adopting major tax or spending changes in the euphoria of a one-year surplus may quickly prove to be shortsighted. Even if this unused surplus is never rolled over into the budget reserve, another year’s worth of economic performance and revenue collections that (hopefully) continue to exceed forecast expectations will provide the additional cushion necessary to embark on any tax and spending proposals next session with a bit more confidence.

That’s an idea that seems to resonate with several legislators on the record and likely a lot more off the record. It won’t make editorials about “failed legislative sessions” go away, but this time next year it may prove to be smart fiscal policy. Between now and then, Chair Davids may well feel compelled to invoke Tom Petty and the Heartbreakers – “The Waiting is the Hardest Part.”