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The Senate tax bill doesn't include a new fourth-tier income tax rate as widely anticipated. Instead it hikes the current third-tier rate from 7.9 to 9.4 percent.

Senate tax bill increases top income tax rate to 9.4 percent

Sen. Rod Skoe, chairman of the Taxes Committee, is widely regarded as a fair and thoughtful legislator who is willing to take opposing views into account. He is also considered one of the Legislature’s top experts on the Minnesota tax code. (Staff photo: Peter Bartz-Gallagher)

(Updated to include revised tobacco tax numbers.)

The Senate tax bill doesn’t include a new fourth-tier income tax rate as widely anticipated. Instead it hikes the current third-tier rate from 7.9 to 9.4 percent.

The new rate would apply to individual incomes above $80,000 and to joint filers making more than $140,000. The income tax increase would raise $1.1 billion in the next biennium and would affect roughly 7 percent of filers, according to Sen. Rod Skoe, DFL-Clearbrook, the chair of the Taxes Committee.

The Senate bill raises  roughly the same amount of revenue from income tax hikes as Gov. Mark Dayton‘s proposed budget.  The House tax bill books about $1.5 billion in additional income taxes for the next biennium.

The Senate bill differs substantially from the House and governor’s proposals  in how it treats the state’s sales tax. Skoe’s bill would reduce the sales tax from 6.875 to 5.7 percent, but it would be applied to many items that aren’t currently taxed. For instance, it would take in more than $500 million in the next biennium by applying the sales tax to clothing. Overall the change in the sales tax would raise $90 million more than what’s currently on the books.

The Senate tax bill calls for significant increases in  aid to local governments. It adds $80 million for aid to cities, $40 million for aid to counties and $5 million in additional assistance for townships. That’s slightly more than what’s called for in the House bill. In addition, the Senate proposal exempts cities and counties from paying sales taxes, at a cost of roughly $200 million.

The Senate bill also proposes raising substantial revenue by increasing taxes on tobacco products. That includes a nearly $1 per-pack increase on cigarette taxes as well as a conversion of the 2005 “health impact fee” on cigarettes into a differently configured excise tax whose proceeds would not be dedicated to health care spending. All told, the Senate bill would generate an additional $360 million in tobacco tax revenues.  That’s nearly $80 million less in added tobacco revenues than in the House bill, which raises $434 million in new tobacco proceeds. But the Senate bill doesn’t include any increase in alcohol taxes, which the House relies on for $350 million in additional revenues.

The total amount of new revenue raised in the Senate bill is $1.9 billion.

In introducing the budget bill, the typically reserved Skoe expressed enthusiasm for the proposal. “When I woke up this morning, I was so excited I almost smiled,” he said.

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