Reforming Individual Income

Tax and Corporate Franchise Tax

Representative Ann Lenczewski

Monday, March 16, 2009
Highlights of Reform Proposal

• Proposes most significant individual income and

corporate franchise tax reform in over 20 years.

• Increases the progressivity of the Minnesota

tax system.

• Eliminates dozens of business subsidies and tax

expenditures that are ineffective, regressive, or
that we can no longer afford.

• Replaces tax subsidies that disproportionately

benefit upper-income earners with income tax
cuts that benefit everyone.
 What Does The Tax Incidence of Minnesota’s Income Tax
Expenditures Look Like TODAY?
3
Tax Expenditures by Income (2006)
Total MN Spending
$400,000,000
Educator Subtraction ($0.9 million)
Elderly Subtraction ($1.3 million)
$350,000,000
Jobz Subtraction and Credit ($1.4 million)
Active Military Service Subtraction ($4 million)
$300,000,000
Non-itemizer Charitable Contributions Subtraction ($5 million)
Long-term Care Credit ($7 million)
$250,000,000 Tuition Subtraction ($13 million)

$200,000,000 Social Security ($26 million)

rea chart.
K-12 Education Subtraction ($15 million)

Marriage Credit ($53 million)

Minnesota Tax-Exempt Bond Interest ($56 million)
$150,000,000
All Itemized Deductions ($565 million)

$100,000,000

$50,000,000

$0

1 2 3 4 5 6 7 8Source: MN Depart
9 of Revenue,
10Tax
Lowest to Highest Earners (sorted into 10 equal groups) Research Division, March 2009
Eliminating Tax Expenditures that are Ineffective,
Regressive, or MN can No Longer Afford
4

What’s Out:

• Minnesota K-12 Subtraction • Bovine Tuberculosis Credit

• Individual Income Tax Benefits for • Charitable Contribution Subtraction for

JOBZ Non Itemizers

• Long-Term Care Insurance Credit • Gain on Sale of Farm Property for

Insolvent Taxpayers
• Organ Expense Subtraction Donation
• Elderly Exclusion
• Charitable Contribution Deduction
• Refundable Dependent Care Credit
• Foreign Sub-national Taxes Subtraction
• Phase-out the Subtraction for Minnesota
• Health Insurance Premium Credit Bond Interest

• K-12 Education Credit • Americorps post-service education

benefits
• Mortgage Interest Deduction

• Low-Income Motor Fuels Credit

Making Minnesota’s Income Tax System More
Progressive
5

What’s In:

• Mortgage Interest Credit

• Charitable Contribution Credit

• Families Know Best Credit

• Income Tax Rate Reductions

 New Mortgage Credit
6

Under current law, two homeowners with identical

houses and identical mortgages receive different tax
breaks – the wealthy person gets more. The new credit
addresses the “upside-down” impact of the deduction and
provides an equal incentive to everyone.
This new credit is accessible and fair to ALL taxpayers, regardless of income
and whether or not taxpayer itemizes at the federal level.

Provides new tax credit equal to 7% of eligible mortgage interest; Taxpayer

with $10,000 of interest qualifies for maximum $420 credit.

Example: A family with two dependents and an adjusted gross income of

$50,000 and $10,000 in mortgage interest would qualify for the maximum
$420 credit. Under current law, this family would only be eligible to receive
a $131 deduction.
 New Charitable Contribution Credit
7

The new charitable contribution credit will enhance tax

benefits for Minnesotans who contribute more than 2 %
of their income.

This new credit is accessible to ALL taxpayers, regardless of income and

whether or not taxpayer itemizes at the federal level.

The new credit equals 8 percent of charitable contributions in excess of the

greater of: 2% of the taxpayer’s adjusted gross income or $500.

Example: A family with two dependents and an adjusted gross income of

$30,000 that makes $5,000 in annual contributions would be eligible to
receive a $214 credit. Under current law, this family would eligible for a
$120 deduction.
 New Families Know Best Credit
8

This new credit gives families more discretion on how to

spend limited resources and does not limit credit to
certain expenditures.

Targets tax relief to families with children that need it most.

The new refundable credit equals 10% of adjusted gross income over
$14,000, up to a maximum of $200 per child.

Example : A family with one dependent, an adjusted gross income of

$20,000 and no K-12 expenses or dependent care expense would receive a
$200 credit. Under current law, this family would not be eligible to receive a
credit.
 New Income Tax Rate Reductions
9

Income Tax Relief for All Minnesotans

Married Joint Current Law New Proposed Income Bracket

Rate

First 5.35% 5.00% $0 to $33,220

Second 7.05% 7.00% $33,221 to $131,970

Third 7.85% 7.85% $131,970 and above

Eliminating Business Subsidies that Create
Winner and Losers
10

What’s Out:

• Eliminate the 80% reduction for foreign income

• Foreign Royalty Subtraction

• Research and Development Credit

• International Economic and Biotech Zone Incentives

• Employer Transit Pass

• Metropolitan Airports Exemption

• Corporate Franchise Tax benefits for JOBZ

Keeping and Growing Jobs in Minnesota
11

What’s In:

• 100% Single Sales Factor this year

• Full Federal Conformity to Section 179

Expensing
Keeping and Growing Jobs in Minnesota
12

Eliminates the Jobs Tax (deletes payroll factor in the Corporate

Franchise Tax)

Tax cuts for Businesses, Farmers through Full Federal Conformity

to Section 179 Expensing.
 Helping Minnesota’s Small Businesses
13

Tax Cuts for Businesses and Farmers through Full Federal

Conformity to Section 179 Expensing
Full Federal Conformity to Section 179 Expensing to maximize business investment
in Minnesota. The last time Minnesota had full federal conformity to Section 179
expensing was in 2005.

Full Federal Conformity simplifies and streamlines administrative bookkeeping for

businesses and promotes taxpayer compliance.

Tax Year Current Law Current Law New Proposed Start of

Maximum Start of Phase- Maximum Phase-Out
Deduction out Deduction
2009 & forward $25,000 $100,000 $250,000 $800,000
conforms to
federal law
Giving Minnesota Companies a Competitive Advantage
14

Swift Elimination of the Jobs Tax

In 2005, the Legislature enacted an eight year phase-in of the single sales factor for
corporate income tax apportionment by 2014.

Allows 100% single sales factor for corporate income tax apportionment this year.

Makes Minnesota more competitive with 18 other states that have or are scheduled
to have 100% sales on apportionment formulas. (Source: Future State Business Tax
Reform, Ernst & Young, December 2007, page. 10.)

Tax Year Current Law Sales Factor Proposed Sales Factor

2009 84% 100%
2010 87%
2011 90%
2012 93%
2013 96%
2014 100%
 Making Minnesota’s Tax System More Progressive
15

Current Law v. Proposal

Adjusted Gross % of Tax Paid, Current Law % of Tax Paid, Proposal

Income

Under $50,000 21.4% 20.1%

$50,000 to $99,999 26.4% 26.1%

$100,000 to $499,999 32.7% 33.9%

$500,000 and up 19.5% 19.9%

Source: House Research Department, March 2009
 House Research Short Subjects
16

Single Sales Apportionment

http://www.house.leg.state.mn.us/hrd/pubs/ss/ssappss.htm

Section 179 Expensing

http://www.house.leg.state.mn.us/hrd/pubs/ss/sssec179.htm