The Senate finished its work on Budget and Tax bills Yesterday with the Passage of a Bill which creates the highest general income tax rate in the nation. The Bill (SF 1611 Linked Here), creates a 4th tier in Minnesota’s Income tax and imposes a 9.7 % rate on Couples who make $250,000 or Single individuals who make $141,000. The new income tax bracket would raise about $1 Billion in new taxes each biennium.

The bill is linked to increased spending for Early childhood education, K-12 general education funding, and college aid, but less than 1/2 of the income tax increase is spent on education. So the bill is mostly a tax bill.

Incidently, SF 1611 is also Unconstitutional because it violates the “Single Subject” Rule under Article 4, Section 17 of the Minnesota constitution. The Senate had already passed a separate Omnibus Education Bill (SF 2095 Linked Here) , and a separate Omnibus Tax Bill (SF 1024 Linked Here). SF 1611 includes the unrelated subjects of education spending and income tax increases in a single bill. Senate Republicans filed a Protest and Dissent, under Article 4, Section 11 of the Constitution to create a record of the Constitutional Violatiton.

Here is a summary of the vote on the bill provided by MPR.

In my opinion this is bad policy. Minnesota’s revenue system is already volitile according to State economist Tom Stinson, and others. This means that we already rely too much on income tax revenues to pay for State services. When economic recessions occur, like in 2003, the first tax to decline is the income tax. This reduces State revenues dramatically, and results in large budget shortfalls. ( Recall the $4 Billion deficit in 2003)
Other states rely more on Sales and Property taxes than does Minnesota. During hard economic times, other states get the “flu”, but Minnesota gets “pneumonia”. Increasing Income taxes even more, (like SF 1611 does), creates greater revenue volitility, and requires devastating program cuts when the economy takes a downturn.

Paying for schools with higher income tax funding keeps our schools on an economic “roller coaster”. Once spending increases are built into the budget base, it would be very painful to have another round of $5 Billion budget cuts like we experienced in 2003. That is why State spending must remain disciplined and stay within the growth rate of the economy as a whole.

Altogether, the Senate DFL has passed bills which increase taxes more than $3 Billion, in addition to the $1.2 Billion sustainable surplus and the $1 billion “one-time” money surplus.

Tax increases include:

1. 18.5 cent gas tax increase ( once fully phased in around 2012);

2. $20 county wheelage tax on all vehicles;

3. 1/2 cent county sales tax for county transportation;

4. 1/2 cent sales tax increase for transit in the 7 county Metro;

5. Increase in the license tab registration tax for motor vehicles;

6. Increase in the statewide commercial/industrial property tax;

7. Increase on Foreign Operating Companies doing business in Mn.

8. Creating new 9.7 % rate in the income tax (4th tier)

In my opinion, Governor Pawlenty will not sign these tax increases. House and Senate Republicans will uphold most vetos. There might be a few exceptions, such as a reasonable gas tax increase. If the legislative DFL’ers were to pass a bill with only a 5-8 cent gas tax increase, there might be enough Republicans who would support a veto override. But, Democrats don’t appear willing to send such a “clean” bill to the governor.

The stage has been set for another budget “showdown” between the Governor and the DFL controlled legislature. April and May should be interesting.