Monday, April 27, 2009

This Will be the Week that Was. The E-12 Funding bills have passed both bodies as have the tax bills, which puts pretty much everything of note into negotiations starting this week. Unlike other years, the negotations this year will pretty much be a mad dash, as conference committees must reach their agreements and close up their work by May 7. The resulting work of the conference committees will then be approved on the House and Senate floors before heading to the Governor, for a number of likely vetoes.

Vetoes are pretty much expected in the area of taxes and health and human services funding. The Governor has vowed to veto any tax increase and both the House and Senate tax bills contain considerable tax increases. The House bill creates a fourth-tier income tax bracket and also loads up on cigarette and liquor taxes to generate the money they seek to balance their budget plan. The House bill also contains a controversial change to the way Minnesota taxpayers' home mortgage interest is treated. The House bill eliminates the home mortgage interest deduction and replaces it with a tax credit of up to $420. This does a couple of things. First, it basically caps the amount of home mortgage interest considered for possible tax preference at $10,000. In other words, any home mortgage interest you pay in excess of $10,000 will no longer be recognized by the state of Minnesota for tax purposes under the House bill. The plus side of this approach, in the House's view, is that in changing the deduction to a credit, non-itemizers (usually those with low incomes) will be able to access a tax advantage now reserved for itemizers.

The downside of this approach is fairly clear. Politically, it requires a two-step explanation, which is almost always poison (even for the most sound policy, which I don't necessarily believe this is at all levels). Rhetoric against something usually stops at the "they took this away. . ." part of the equation, and it's often difficult to get people to stay tuned for the ". . .and they replaced it with this" follow-up phrase. That seems to be the dynamic at work here. The other problem has more of a policy angle. When you take away deductions and broaden the taxable base, the best way to deal with that is to lower marginal tax rates. That's not happening here, so people aren't seeing the "instant" trade-off. And while it's laudable to make the tax system more progressive and to target tax benefits to those at the lower end of the income spectrum, there are probably better ways to accomplish that, both politically and in a policy sense, than this. Further, SEE districts are heavily residential in nature, with many of our districts filled with young families. Because of when they purchased their house (before the collapse of the housing bubble), the home mortgage interest paid is likely to be over $10,000, making this change a drag on their household finances. It is already difficult for school districts in these areas that are growing and often filled with younger homeowners to pass referendum and debt service levies. Having these folks take a hit on their income taxes isn't going to help matters in that regard.

The Senate is more straightforward in its approach. It also creates a fourth-tier rate for high income earners, but it mainly increases--on a temporary basis--the income taxes paid by all Minnesotans. It institutes a "blinker" tax (meaning it ceases once enough money is raised) that would affect 85% of Minnesota taxpayers. When combined with the Senate's cuts to all division budgets of approximately 7 1/2%, the Senate balances both the current biennium and next biennium without using any accounting shifts, bonding against future tobacco settlements, or what they consider other budget legerdemain. Whatever one feels about their approach (and there are ample reasons not to like it), it is certainly an honest one.

I'll be back later today with further details.

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