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Bill includes a repeal of the income tax exemption for municipal bond interest, which would raise municipal borrowing costs.
(Published Apr 8, 2013)
On Thursday evening, the House Tax Committee considered HF 1493, a bill authored by Rep. Ann Lenczewski (DFL-Bloomington), that would repeal or limit a variety of tax preferences, including the repeal of the tax-exempt status of municipal bond interest income for bonds issued on or after July 1, 2013. Currently, there is no Senate companion to HF 1493.
The bill is notable not only for the amount of revenue it would produce for the state but also due to the timing of the hearing. According to the revenue analysis, the bill would raise an estimated $412 million in the first year of the biennium and an additional $351 million in FY2015. The timing of the hearing occurs as the House is in the process of crafting the income, corporate income, and sales tax sections of their omnibus tax bill. With the projected $627 million state budget deficit and House budget initiatives, the omnibus tax bill will have to generate revenues to fund both.
Several organizations testified in opposition to the repeal of the municipal bond interest exemption. The League of Minnesota Cities, the Association of Minnesota Counties, the Minnesota School Boards Association, and Metro Cities all testified in opposition based on the impact of the repeal on borrowing costs. Currently, local governments can issue bonds at lower interest rates because bond holders are willing to receive a lower interest rate in exchange for the tax benefit. Without the tax benefits, interest rates will increase to be competitive with other bonds. The increase in bond payments will increase the cost of construction projects funded by the bonds, and that cost will flow to local taxpayers.
Clearly, many cities have contacted their legislators to express concern about the repeal of the bond interest exemption. Many committee members contacted by League staff prior to the hearing were clearly aware of the negative impact on city borrowing costs. If the provision appears in the chair’s delete-all omnibus tax amendment, we will alert cities to contact their House members.
The bill also makes significant changes to other aspects of the individual income tax as well as the corporate franchise and occupation taxes, and modifies the sustainable forest incentive program, extends the suspension of the political contribution refund program, and clarifies the imposition of local lodging taxes.
Several of the most visible changes in the bill are limits on itemized deductions. More specifically, the bill would limit the itemized deduction for mortgage interest and the property tax itemized deduction for property taxes to the mortgage interest and property taxes on an individual’s principal residence. The bill would also repeal the charitable contribution itemized deduction and the charitable contribution subtraction for non-itemizers and replaces them with a nonrefundable credit equal to eight percent of charitable contributions in excess of two percent of adjusted gross income or $400, whichever is greater.
The bill was laid over for possible inclusion in the House omnibus tax bill. The full House omnibus tax bill will be released on Monday, April 15.
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