Tax changes for online hotel booking create level playing field

November 3, 2011

It was little noticed, but Minnesota did score a small victory this legislative session: The state budget created a level playing field between similar businesses, and it updated our tax system to catch up with modern technology.

Online booking agencies such as Priceline were collecting less sales taxes to book Minnesota hotel rooms than traditional travel agents or even the hotels themselves. The system created a competitive advantage for online companies and revenue losses for state and local governments.

Governor Dayton proposed closing the loophole in his budget. The proposal resurfaced as part of budget negotiations and was included in the final tax bill. It will raise $9 million in FY 2012-13.

Here’s how the online booking system works, and what the change means: Hotels contract with online travel companies to market some of their rooms. The online agencies get a discount room rate, then sell them to customers at higher prices. The problem is that the online agencies were only collecting sales tax on the wholesale room rate, not the higher retail rate that customers paid, as hotels and traditional travel agents do. With the change in Minnesota’s tax law, online travel companies will collect the sales tax on the retail price.

On any individual transaction, the difference between the taxes on wholesale and retail room rates is small. But it adds up. Online agencies account for an estimated 14 percent of room receipts in 2011, according to the Center on Budget and Policy Priorities. It reports that the difference costs state and local governments roughly $275 million to $400 million a year nationally. It recommends states update their tax laws to keep up with technology, arguing that:

At a time when sharply reduced revenues are forcing states and localities to cut health care for the poor, lay off teachers, close fire stations, and increase tuition at state universities and community colleges, all of which are reducing economic growth, it is counterproductive to permit [online travel companies] to exploit a tax loophole that pads their profits at the public’s expense.

Minnesota’s new law leaves some questions unanswered. Some Minnesota local governments have their own local lodging taxes. In cases where the Minnesota Department of Revenue collects the lodging tax for the local unit of government, the new law will apply. If the tax is collected locally, the new law may or may not apply, depending on the ordinance’s wording.

Treating online travel agencies and other similar companies equally is part of the larger national debate over a level playing field in e-commerce. On a larger scale, this debate asks whether it fair for online retailers to sell taxable products without collecting sales tax while Main Street businesses selling the same product have to collect the sales tax.

At the national level, the proposed Main Street Fairness Act would make it easier for states to require remote sellers to collect sales taxes on Internet and catalog purchases, putting them on a level playing field with their Main Street competitors. Governor Dayton’s budget also would have required “remote sellers who sell to Minnesota purchasers that are referred under an agreement by a business that has nexus (physical presence) in Minnesota to collect the sales and use tax on those purchases.” That proposal would have raised $11 million in FY 2012-13, but it was not part of the final budget deal.

-Scott Russell


New analysis looks at details of the 2011 budget agreement

August 15, 2011

As the dust settles from the nearly three-week state government shutdown and the whirlwind special session, many advocates have been sorting through spreadsheets and bill language to figure out just what happened. At the Minnesota Budget Project, we’ve just released our new analysis of the budget compromise reached between Governor Dayton and the Legislature, 2011 Budget Decisions Will Undermine Current Recovery and Hurt State’s Long-Term Economic Success.

Unfortunately, the agreement reached between Governor Dayton and the Legislature fails to find a sustainable way to fund the state’s priorities, cuts services that help Minnesotans who continue to struggle during the slow economic recovery, and does not invest in the state’s long-term economic success. The agreement delays $2.2 billion in payments to school districts, borrows $640 million from the future through tobacco bonds, and reduces funding for vital public services by more than $2 billion.

Impact of FY 2012-13 Budget Proposal on the General Fund

Our new analysis provides more details on what the compromise agreement will mean for many valued public services, such as K-12 education, health care, child care, services for the elderly and those with disabilities, higher education, workforce development, transit, public safety, and taxes.

-Christina Wessel

Minnesotans favor budget road not taken: Balance spending cuts and new revenue

August 8, 2011

Two out of three Minnesota residents want state leaders to balance the budget using a mix of tax increases and spending cuts, according to a new MinnPost poll. It found 66 percent favor a combination of spending cuts and tax increases. Only 23 percent want spending cuts only.

This finding is consistent with other polls.

  • The Star Tribune reported in May on a Minnesota Poll that said: “Sixty-three percent of respondents said they favor a blend of higher taxes and service reductions to tackle the state’s $5 billion projected deficit. Just 27 percent said they want state leaders to balance the budget solely through cuts.”
  • Public Policy Polling survey published in June asked Minnesotans: “Would you support a tax increase on the wealthiest 2% of Minnesotans to help balance the state budget, or do you think the budget should be balanced through cuts only?” And 63 of respondents favored the tax increase, compared to only 32 percent that supported cuts only.

Minnesota public opinion has been clear and consistent in its support for a balanced approach, including new revenues. This approach protects critical services such as education, health care, and support for seniors and people with disabilities. Numerous editorials from around the state supported a balanced approach as well.

Minnesotans support raising revenue when they understand what’s at stake. As Growth & Justice wrote in 2010:

Over many years, polls in Minnesota consistently have shown support for revenue-raising if the question is asked with even a smidgeon of context that reminds people what taxes pay for. Ask people point-blank whether they want to pay more in taxes, and they tend to say no. Ask them point-blank whether they want to slash investments in schools and roads and nursing homes, and they also will say no.

Unfortunately, the final budget deal was made up of spending cuts and timing shifts and other one-time fixes.

The legislative session is over, but the debate is not. We still have a mismatch between what our tax system raises and what it costs to fund our state’s priorities.

When two out of three Minnesotans support a balanced approach, legislative leaders should listen. They should do the right thing and create a sustainable budget — and a prosperous future — using a mix of spending cuts and new revenues, raised fairly.

-Scott Russell

Health and human services budget asks vulnerable Minnesotans to pay a price

July 22, 2011

Many of Minnesota’s most vulnerable populations, including the elderly, those with disabilities, and low-income families with children, are being asked to help balance the state’s budget through $1 billion in cuts to health and human services in the final budget approved by Governor Dayton and the Legislature. This is an eight percent cut in FY 2012-13 compared to base funding, which means a reduction from current levels of service.

While some of the most troubling proposals, including those that would have caused more than 100,000 Minnesotans to lose their current health care coverage, did not make it into the final legislation, the health and human services bill still contains provisions that will increase barriers for low-income families trying to work, for the elderly and people with disabilities who want to stay in their homes, and for Minnesotans trying to access health care.

As a result of the final budget, working parents and other low-income Minnesotans will face challenges in building a more secure economic future. For example:

  • Access to quality, affordable child care will become more difficult for working parents. In the budget, provider reimbursement rates are reduced, flexibility for families is limited, and grants supporting system improvements and parental information are cut. The budget agreement also captures $5 million in child care assistance funds that were not spent in calendar year 2010 and transfers them back to the general fund. These resources could have been used to help 500 additional families in 2012.
  • Low-income individuals will find it more difficult to obtain post-secondary education, purchase a home or start a new business. The decision to eliminate Family Assets for Independent in Minnesota (FAIM) means they will lose both the state and federal match on their savings.
  • Funds intended to support families seeking to stabilize their lives, find employment and become self-sufficient are instead used to help balance the state’s budget, including $20 million from the Minnesota Family Investment Program (MFIP) Consolidated Fund and $38 million in federal funds for Temporary Assistance for Needy Families (TANF).

The final budget will also make it harder for people with disabilities and the elderly to access the services they need to remain independent. For example:

  • There will be additional limits on the number of individuals who can enroll in waiver programs that enable the elderly and people with disabilities to access community-based care and avoid entering an institution. Cuts to these waiver programs total $64 million in FY 2012-13.
  • People with disabilities who rely on a relative to provide their care may find it harder to get the assistance they need. The bill cuts payments to these Personal Care Attendants by 20 percent, creating financial challenges for these families. This cut particularly raises concerns for people with disabilities in rural areas, where relative caregivers are often the only option.
  • Some funding cuts do not fall on individuals directly, but will reduce funding for the institutions and community-based providers they rely on. These decisions could hurt the financial stability of these providers, raising concerns about whether some of them will be able to continue to serve their community. For example, there are more than $70 million in cuts to various payment rates for a variety of community-based providers and continuing care facilities that serve the elderly and individuals with disabilities. And, although nursing homes are exempt from most immediate payment rate cuts (a few will even get a small rate increase), the bill eliminates a scheduled $133 million increase in reimbursement rates in FY 2014-15. This planned “rebasing” would have re-evaluated the state’s current reimbursement rate to bring it in line with the cost of providing care.

There is some positive news: the final budget keeps intact Medical Assistance for extremely low-income adults, a health care reform that was approved by Governor Dayton in January. This preserves access to health care for tens of thousands of vulnerable Minnesotans. However, other changes in health care programs will increase the barriers to accessing health care for some individuals. For example:

  • Approximately 7,200 adults without children who are between 200 and 250 percent of poverty (that’s an income between $21,780 and $27,225 for a single adult), will lose their health insurance under MinnesotaCare and be given a subsidy to buy coverage in the private market. It remains to be seen whether affordable coverage options exist in the current insurance market. The bill seeks federal permission to expand this Healthy Minnesota Contribution Program to include parents on MinnesotaCare.
  • Access to health care, particularly in rural areas, could become more challenging. Hospitals face the loss of an anticipated $106 million increase in reimbursement rates in FY 2012-13 and another $491 million in FY 2014-15. As with nursing homes, the bill cuts a planned re-evaluation of payment rates intended to increase the rate to better represent the cost of providing care.
  • Children and adults facing mental health issues will find some funding to counties for mental health services has dried up. The bill cuts Children and Community Services Act grants by 17 percent. The act is renamed the Vulnerable Children and Adults Act and the remaining funds will be used for child protection and to protect vulnerable adults. It will no longer fund mental health services for adults and children.

In some areas, the impact of the budget decisions are harder to predict. For example:

  • The agreement eliminates the MinnesotaCare provider tax beginning in 2020. This tax on health care services is one of the major funding sources for the Health Care Access Fund (HCAF), which in turn funds MinnesotaCare and other health-related grants and services. This significant source of health care funding (projected to raise more than $1 billion in revenue in FY 2012-13) would be eliminated without any specific plan for how to continue funding these important public health functions.
  • There are about $400 million in general fund savings from managed care reforms, including rate reductions, efforts to reduce hospital admissions/re-admissions and emergency room usage, and competitive bidding. The estimated savings associated with these reforms grows to $540 million in FY 2014-15. Unfortunately, it isn’t clear how these savings goals will be achieved, or what will happen if the actual savings falls short of what is anticipated.

We couldn’t possibly touch on all the important changes included in the health and human services budget in this blog. We will be releasing a more comprehensive analysis of the budget agreement in the coming days.

In the meantime, for more information on how Minnesotans will be impacted by the health and human services budget, check out analysis by the Affirmative Options Coalition, National Alliance on Mental Illness of Minnesota, Child Care WORKS and the Arc of Minnesota

-Christina Wessel

State government budget chips away at funding

July 22, 2011

It’s not sexy, but the state government finance bill plays a key role in ensuring the wheels of government keep moving. Some of what’s funded in this bill include offices established by the state constitution, the Department of Revenue, Minnesota Management and Budget (MMB), and the departments of Military and Veterans Affairs. Many policy and budget decisions that affect all state agencies are also included in this budget – such as proposals that impact all state employees and the way state government operates.

Governor Dayton and the Legislature agreed to cut funding for the state government finance budget area by $8 million in FY 2012-13, a one percent reduction. However, the bill also anticipates $86 million in new revenue. (Combining the $8 million in cuts with the $86 million in revenue results in the $94 million in changes to state government that you may see reported elsewhere.) 

Some areas of state government are held harmless in the bill:

  • There are no cuts to the Department of Military Affairs and the Department of Veterans Affairs, which include funding for the Minnesota National Guard and veterans’ homes. In fact, there is $6 million in increased funding for these agencies, mostly to support veterans pursuing higher education.
  • The Secretary of State’s elections office sees no reductions because of a federal requirement to fund the Help America Vote Act. 
  • Much of the Department of Revenue budget is also protected because of requirements to maintain auditing and collections staff.

Protecting some areas of state government means deeper cuts to other agencies:

  • Most offices and agencies receive a five percent permanent reduction in funding. These include the Governor’s office, Legislature, Attorney General, State Auditor, Minnesota Management and Budget, the Councils of Color, the Humanities Center, the Campaign Finance Board, Explore Minnesota, and portions of the Secretary of State and Department of Revenue.
  • A few areas receive deeper cuts. The Science Museum of Minnesota and the Minnesota Arts Board both receive a 10 percent permanent reduction in their state funding. The Minnesota Historical Society receives a seven percent cut. 
  • Public television is cut by five percent, Minnesota Public Radio by 15 percent, and the Twin Cities Cable Channel loses all of its funding.

As mentioned earlier, the bill also includes two sources of new revenue. These proposals sparked controversy during the legislative session because the Legislature and Minnesota Management and Budget differed on how much revenue each would raise. In each case, the final agreement settles on a lower dollar figure:

  • The largest piece of revenue comes from adopting a legislative proposal to employ analytic and intelligence tools to identify businesses and individuals not paying taxes they owe. The bill estimates this will raise $82 million in the FY 2012-13 biennium (the Legislature estimated $133 million). After taking into account the cost of implementing this proposal, the bill anticipates a net $69 million in new revenue for the state.
  • The state will also enter into an agreement with the federal government to pursue debt collections, raising $4 million in FY 2012-13 (the Legislature estimated $37 million).

The state government bill contains a few new policies that could have important implications for how the state functions in the future:

  • A new Pay for Performance pilot program is established that would issue state appropriations bonds. Traditionally, bonds are used to pay for capital projects. In this case, the pilot program focuses on prevention and intervention services, like job training, that when successful save the state money down the road. The anticipated savings would be used to pay back investors. The bill creates an oversight committee and authorizes up to $10 million in bonds.
  • A Sunset Advisory Commission is created to make recommendations on reorganization, continuation or abolition of state agencies.

Some high-profile issues were dropped from the final bill, including legislative proposals to reduce the state’s workforce by 15 percent by 2015 and freeze state employee salaries for two years.

Although most agencies and programs receive a smaller reduction in the final agreement than they did in the Legislature’s budget, the cuts will still have consequences. Most agencies have seen their bottom lines get smaller and smaller as policymakers have chipped away their budgets over the last several years. As former Speaker Steve Sviggum – who has served as commissioner at both Labor and Industry and Minnesota Management and Budget – acknowledged at a public forum a few months ago, state agencies can no longer keep doing more with less. 

-Scott Russell

K-12 education budget shifts costs to the future

July 21, 2011

The compromise reached between Governor Dayton and the Legislature on the K-12 education was a lynchpin to secure an overall budget agreement and end the state shutdown. The bill increases funding for K-12 education by $190 million in FY 2012-13, or one percent, mostly by increasing funding for the basic education formula. However, the bill also delays more than $2 billion in payments to school districts and includes some important policy changes.

The most significant element of the K-12 education budget is the decision to delay $2.2 billion in payments to school districts, reducing spending in the FY 2012-13 biennium by shifting those costs into the future. The agreement continues to delay $1.4 billion in aid payments that were shifted during the 2010 Legislative Session, and adds $772 million in new shifts. Normally, the state pays school districts 90 percent of their annual aid in one fiscal year, and a 10 percent settling-up payment in the following fiscal year. The bill changes that formula to a 60/40 split.

The bill does not include a plan for repaying that $2.2 billion debt to school districts. However, under current law, the shift will automatically start to be “bought back” when the state begins to see budget surpluses. The first $908 million of future surpluses will go to refill the state’s cash flow account and budget reserve. Only then are we likely to begin to reverse the payment shifts to school districts.

The delay in these payments creates cash flow problems for many school districts, forcing them to use reserves or rely on short-term borrowing. As a way of helping defray borrowing costs, the K-12 education bill increases the basic education formula by $50 per pupil in each year of the next biennium, an increase of $118 million in FY 2012-13.

The K-12 education bill also includes some other new investments:

  • The state sets a goal for every child to read at or above grade level by the end of third grade. To help achieve that goal, a new literacy incentive program for school districts is established, with the level of aid based on the number of students achieving reading proficiency and demonstrating improvement. There is also additional funding for the Minnesota Reading Corps, a statewide initiative that focuses on improving literacy among children up to third grade.
  • The bill includes an early childhood scholarship program to help children from low-income families to attend preschool.
  • The bill recognizes individuals who graduate early from high school by creating a scholarship program for those who go on to higher education and a cash grant award for those who enter military service. 

Not all areas of education fare as well:

  • Growth in funding for adult basic education (ABE) aid is reduced from a three percent increase to two percent in FY 2012-13. ABE helps individuals enter and advance in the workforce by providing high school equivalency degrees, workplace literacy training, and English language and citizenship classes.
  • Integration aid, which goes to districts with high concentrations of children of color to promote integration in and between school districts, is phased out in the bill. A task force is created to make recommendations for how to reuse those resources.
  • There is a five percent cut to the Department of Education and the Perpich Center for Arts Education.
  • Charter school start-up grants and metropolitan magnet school grants are eliminated.

Special education, which had been cut by $48 million in FY 2012-13 in the Legislature’s budget, is not cut in the final bill.

There are several policy changes included in the K-12 education bill:

  • The requirement that districts spend two percent of revenue for staff development is suspended and districts no longer have to set aside a portion of the Safe Schools Levy to pay for school counselors and other professionals.
  • There is a new evaluation process for principals, teachers and probationary teachers. And “inefficiency in teaching or in managing a school” is added as grounds for terminating a teacher.
  • School boards are allowed to create “full-service school zones” for schools in high-crime neighborhoods, providing education, health, human services and parent support in a collaborative manner.  
  • The bill eliminates the January 15 deadline for collective bargaining agreements to be settled. School districts that did not have a contract in place by that date faced a reduction in state aid. 

The final agreement drops a number of high-profile proposals backed by either Governor Dayton or the Legislature. Not included in the bill is the elimination of teacher tenure, developing an A-F school grading system, a prohibition on strikes under some circumstances, additional funding for all-day kindergarten, implementing an early childhood quality rating and improvement system, and creating an Achievement Gap Innovation Fund.

Minnesotans value a high-quality education system. We know that a well-educated workforce is a critical building block for the economic success of our children, and our state. Unfortunately, the payment shifts policymakers have turned to in the last two legislative sessions are an unsustainable way of funding this important priority. We need to raise adequate revenues to pay for critical services like education.

-Scott Russell

Jobs and economic development budget bill a mixed bag for workers, employers and housing

July 20, 2011

Governor Dayton and the Legislature approved a jobs and economic development bill that increases funding by $2 million in FY 2012-13, or one percent. That is a better than the $14 million in cuts approved by the Legislature, but not as good as the $4 million increase proposed by the Governor. Within that overall figure there is significant new funding for some elements of workforce training, business development and affordable housing, but cuts to other areas. All of these services are important blocks in building Minnesota’s future economic success.

The bill includes some additional investments in workforce training and business development:

  • $4 million for Vocational Rehabilitation Services to secure federal matching dollars to provide employment services for people with significant disabilities.
  • $300,000 for State Services for the Blind to secure federal matching dollars to help Minnesotans who are blind, visually impaired or Deafblind with their employment skills.
  • $3 million in one-time funding for the Minnesota Investment Fund to encourage business expansion.
  • $2 million in one-time funding for the Redevelopment Account to help development sites with particular problems, such as environmental contamination.
  • $500,000 for Enterprise Minnesota, a consulting company that works with expanding businesses. This provision was not in either the Governor’s budget or the bill passed by the Legislature.

These limited new general fund investments are largely paid for by cuts in other valuable job training and business development opportunities:

  • The Job Skills Partnership, which supports job training or retraining partnerships between educational institutions and businesses, is cut by five percent in FY 2012-13. 
  • There is a three percent reduction in extended employment, which helps people with significant disabilities to maintain and advance their employment.
  • A number of job training and business development grants that are currently being awarded to specific nonprofits are consolidated into competitive grant pools beginning in FY 2013, with a reduced level of funding. Several business and community development grants are consolidated, and general fund support is cut by 23 percent. Workforce development grants for adults are also consolidated, and general fund support is cut by 11 percent. In addition to these cuts, the Department of Employment and Economic Development is authorized to withhold another five percent of the funds to administer the grant process.

Affordable housing opportunities in Minnesota also face a mixed bag. The agreement includes a $2 million increase for the Housing Trust Fund in FY 2012-13, which will preserve 150 rental assistance opportunities. However, there are $7 million in cuts to other areas of the Minnesota Housing Finance Agency, resulting in a six percent cut in overall funding. This will hurt efforts to preserve and rehabilitate affordable housing units, and help first-time buyers.

The agreement also contains the Legislature’s proposal to transfer $16 million from other funds to the general fund, including a $13 million transfer from the Unemployment Insurance Contingency Account. This is significantly more than the $6 million in transfers proposed by the Governor.

The agreement reached by the Governor and Legislature represents a mixed bag for jobs and economic development in the state. The cuts to services will limit options for families struggling to find stable employment and affordable housing as the state slowly emerges from the recession.

-Scott Russell

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