Minnesota Legislative Update: Budget, Taxes and Transportation on the Table

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Authors: David H. Johnson , Donovan M. Hurd

The Legislature wrapped up the fourth week of a 13-week session. With one week until the first committee deadline, committees in both bodies have kept busy hearing policy bills, often into the evening. Bill introductions in both the House and the Senate also continue to be significant.

On Wednesday, March 14, Governor Dayton gave his eighth, and final, State of the State address. He used it to highlight his accomplishments during his eight years in office, including protecting the state’s water quality, increasing funding for education and access to all-day kindergarten, and leaving the state with a budget surplus. The week concluded with Governor Dayton releasing his supplemental budget recommendations as well as his recommendations on how the state’s tax code should conform to recently enacted tax reform at the federal level.

Governor’s Supplemental Budget

Governor Dayton released this supplemental budget on Friday morning. His budget would leave $123 million on the bottom line. The largest funding recommendations go toward education, border-to-border broadband and human services.

Last year, the Minnesota Legislature provided $50 million in new, one-time funding to voluntary pre-kindergarten (VPK). This was $125 million less than Governor Dayton had requested. This year, the Governor is proposing to make VPK funding permanent with an increase of $204 thousand for FY2019 and continuing funding in FY2020-2021 at $57 million. Other education priorities in the budget for FY2019 are $15.87 million for the Safe and Secure Schools Act and a $16.93 million increase in special education funding. The Governor also proposed funding to shore up PERA, MSRS and TRA, the state’s three public employee pension funds.

The Governor is also recommending $30 million in one-time funding for the Border-to-Border Broadband Development Grant Program. This program funds the expansion of broadband service to areas unserved or underserved in Minnesota. This funding level is expected to expand broadband access to over 11,000 households, businesses and community institutions.

Governor Dayton is requesting an additional $20.57 million to fund various Human Services programs including opioid treatment and prevention programs and funding for increased protection of seniors and vulnerable adults.

The Legislature will use these recommendations as a starting point for shaping their own budget.

Governor’s Tax Conformity Recommendations

Federal Tax Conformity has dominated conversations around the Capitol this year. On Friday morning, Governor Dayton released his recommendations on this issue. Dayton emphasized how complex federal tax conformity is and highlighted the important impacts. If the Legislature does nothing, some Minnesotans’ individual state income taxes would increase, and if the Legislature fully conforms, even more Minnesotans’ individual state income taxes would increase. The Governor proposes to conform to some of the federal changes and make other changes to Minnesota’s tax system to protect many individual taxpayers from increased taxes.

Dayton’s plan would move Minnesota away from using “Federal Taxable Income” by replacing it with “Federal Adjusted Gross Income.” The Governor’s proposal would also create a Personal and Dependent Credit, expand the Working Family Credit, protect the Property Tax Refund and preserve a number of itemized deductions, including the Property Tax Deduction.

To help fund tax cuts for individuals, some taxes on businesses would be increased.

Dayton wants to repeal three tax law changes from last year’s legislative session which would:

Reinstate the state general tax inflator applicable to business property taxes
Restore the tobacco tax inflator and restore the premium cigar tax
Freeze the estate tax exclusion at $2.4 million.

The Governor’s proposal also provides for Minnesota to conform to federal changes regarding:

Section 179 expensing
Limiting business interest deductions
Bonus depreciation for equipment

Other changes proposed by the Governor include:

Tax deemed repatriated foreign income
Increase the Angel Tax Credit
Tobacco tax enforcement and standardization
Corporate tax changes which eliminate some tax breaks
Limitation of the Data Center Tax Exemption

With regard to the Individual Income Tax, the Governor’s proposal projects $319 million in tax relief, with 1.9 million families getting an average tax cut of $117, and $329,000 families getting an average tax cut of $160.

Metropolitan Council Reform Proposals Heard

The Senate and House Transportation committee heard several bills this week proposing how to reform the Met Council’s governance and operations. Senator Eric Pratt (R, Prior Lake) is the author of SF2809, which would increase the size of the Met Council to 29 members, include locally elected officials in the council, require staggered terms of members, eliminate the Transportation Advisory Board, and create municipal committees within each district. Proponents of this bill testified that including elected officials on the council will lead to better accountability for metropolitan constituents, noting that out of 500 regional planning organizations the Met Council is the only one without elected officials. Opponents, including the Met Council which opposes the bill, raised concerns about workload and this bill passed out of the Senate Transportation Finance and Policy Committee on a party-line vote on Wednesday and is now waiting to be heard on the Senate Floor. The House companion, HF3273, was heard on Monday in the Transportation Policy Committee. It passed and was re-referred to the Government Operations Committee.

On Tuesday, March 13, the House Transportation Policy Committee heard HF3369, authored by Rep. Linda Runbeck (R, Circle Pines). This bill seeks to address concerns with the Met Council’s lack of transparency when it comes to their budget, and it prohibits the Met Council from using operating budget reserves for capital transit costs. The Met Council would also be required to notify the legislature whenever they adopt amendments to the budget. This bill was laid over for possible inclusion in the Transportation Policy Omnibus bill.

Transportation Networks

A bill to regulate ridesharing companies, such as Lyft and Uber, is speeding through House committees as it tries to make the first deadline. HF3032, authored by Rep. Sandy Layman (R, Cohasset), would preempt local ordinances and requirements with a statewide uniform code. Currently, these companies are largely unregulated outside of Minneapolis and Saint Paul. Ridesharing companies worry that a patchwork of local regulations will be difficult for their drivers to navigate.

Opponents of the bill include cities and their association the League of Minnesota Cities. They worry that preempting local ordinances could mean lower standards for Lyft and Uber drivers compared to taxicab drivers who are subject to more stringent regulation at the local level.

On Thursday, March 15, the bill passed out of the House Civil Law Committee and is now headed for the Government Operations Committee.