Senior Director of State Fiscal Research
As states finalize their budgets for the next fiscal year, Minnesota stands out for making smart changes to its tax system that will position the state for future economic growth. The legislature passed a tax plan last night that — after years of spending cuts — raises revenue to avoid more cuts and to make new investments that brighten the state’s economic future. It also modernizes the state’s tax system so that it generates adequate revenue for a thriving state in a 21st century economy. Governor Mark Dayton supports the legislation and is expected to sign it.
The plan creates a new income tax bracket for the state’s richest households, repeals some tax breaks for companies operating outside the United States, raises revenues through changes to estate and gift taxes, and increases tobacco taxes. It also helps modernize the state’s outdated sales tax system, including by taxing some digital goods and by requiring some online retailers to collect sales taxes on purchases by Minnesota residents.
The new revenue will prevent more than $600 million in cuts over the next two years to services such as schools, community colleges, natural resource protection, and programs that help seniors live independent lives.
The revenue also will enable the state to make substantial new investments in education. For example, Minnesota will provide free full-day kindergarten in more public schools across the state, and it will substantially improve access to high-quality preschool for underprivileged children — an investment that research has proven boosts the incomes and productivity of children when they grow up.
Among other priorities, the plan also will allow the state to hold tuition steady in the state’s colleges and universities, and to increase financial aid for low- and middle-income families. Over the last five years, Minnesota has cut funding for higher education by 30 percent, leading to substantial tuition hikes.
These investments in the state’s education system will pay off with stronger economic growth in the future by producing a better educated workforce with the kinds of skills and training that employers — especially high-wage employers — will need in the future.
The new revenue also will allow the state to reduce property taxes for many homeowners and many low- and moderate-income renters, who pay property taxes through their rent. And, it will allow for more state aid to local governments, helping them further limit property taxes. These substantial reductions in property taxes, combined with the income tax increase for wealthy residents, will make the state’s currently regressive state and local tax system fairer.
States that are still considering tax and spending changes — and how to boost their economies while supporting middle- and lower-income families — should look carefully at Minnesota’s plan.