Minnesota legislature OKs new higher top income tax bracket

MINNEAPOLIS Tue May 21, 2013 1:45am EDT

MINNEAPOLIS May 20 (Reuters) - Minnesota's lawmakers on Monday approved a bill that would raise more than $2 billion for the upcoming two-year budget through income and other tax increases, allowing the state to close a $627 million structural budget gap.

Minnesota state Senators voted 36-30 to approve the tax bill state representatives approved hours earlier, sending it to Governor Mark Dayton minutes before the legislature adjourned for the year.

Earlier on Monday, in a major victory for organized labor, state representatives approved a bill that allows Minnesota home child care workers and personal care attendants who are paid by or receive state subsidies to join a union.

The labor bill had been approved last week by the state Senate and was sent to Dayton, whose bid to allow the workers to vote in 2011 on union representation was blocked by court order.

Minnesota joins a handful of states that have raised top income tax rates in the past two years including Maryland, and California, where voters in November approved temporary hikes in the sales tax and in the income tax rates for the wealthy.

Several other states cut income tax rates last year, including Kansas, Michigan, Idaho, New York and Oregon.

The tax bill creates a new income tax rate for top earners at 9.85 percent, 2 percentage points above the prior top rate, to generate $1.1 billion for the fiscal 2014-2015 biennium that begins July 1, according to a bill summary from House Democrats.

The top income tax rate applies to income over $250,000 for married couples and $150,000 for single filers. It will give Minnesota the fourth highest top state tax rate in the nation and apply to about 54,400 residents.

Minnesota also is raising taxes on cigarettes and other tobacco products, to generate another $430 million. About $80 million more would come from a tax on certain estates and gifts.

Minnesota also is closing some corporate tax loopholes to gain $400 million for the new budget, and the sales tax base is expanding to some select non-consumer transactions.

Dayton, a Democrat, proposed a major tax overhaul for the state when he unveiled a $38 billion two-year general fund budget in January that included the new top income tax bracket and a sharply lower state sales tax rate applied to more items.

The bill approved Monday did not lower the sales tax rate and extended it to far fewer items than Dayton had proposed.

The cost of the bill to taxpayers is "going to be enormous," Republican Senator Julianne Ortman said in closing debate opposing the bill. "We do not need to raise $1 more in taxes from hardworking taxpayers to balance our state's budget."

Minnesota's most recent forecast in February estimated the structural budget gap at $627 million, down from nearly $1.1 billion due to projections for stronger revenue growth and lower spending.

Minnesota also plans to use the new revenue to increase primary and secondary education spending by $485 million and higher education by $250 million, and provide some property tax relief to homeowners and renters, according to the bill summary.

The bill also includes economic development aid for the Mayo Clinic, Mall of America, the new stadium for the Minnesota Vikings football team, 3M and for a biopharmaceutical facility for Baxter International.