Monday, April 24, 2006

COLUMN -- Tax panel deliberations can be a bit hard to stomach

Posted by Craig Westover | 9:00 AM |  

Monday, 24 April, 2006

Listening to a committee discussion on tax legislation can leave you wondering whether lawmakers know what they are doing.

As the saying goes, if one ever watched sausage being made, one might never eat it again. Extending the metaphor, if one regularly watches legislation being ground out, one might not so easily swallow political rhetoric.

Case in point is the Senate Tax Committee deliberations on Senate File 3550 on March 31. The simple intention of this bill, according to tax committee chair Larry Pogemiller, DFL-Minneapolis, is fixing the alternative minimum tax and the so-called marriage penalty.

The subsequent debate was political sausage making at its most gruesome. You might think that if anyone, members of the tax committee would understand the tax code. You’d be wrong.

To carry out the intention, Pogemiller noted, you “need to generate revenue internally.” In other words, fixing a taxpayer problem is okay, as long as it doesn’t cost the state any money. When some individuals are being over-taxed, the obvious real problem is others must be under-taxed.

To make SF3550 palatable for the Legislature‘s spending appetite, the legislation proposes a new tax bracket of 8.15 percent for married couples earning over $270,000, up from 7.85 percent. Of course, that’s not a “tax increase” because the state isn’t gaining any new money -- the bill is “revenue neutral.” Trimming fat from the state budget to fix the tax code clearly isn’t an option.

Before the committee voted on SF3550, Sen. Julianne Ortman, R-Chanhassen, introduced an amendment considering the plight of taxpayers who are thrust into the new higher bracket because of one exceptionally good year. Her amendment would tax those people at the old 7.85 percent rate.

Pogemiller responded to Ortman’s amendment, “Isn’t that how income averaging works, already? Doesn’t that take care of the issue?”

“Mr. Chairman, I don't believe we have income averaging under the Minnesota income tax,” replied Ortman.

There is a long pause while that sunk in. Pogemiller still doesn’t get it, but he had an answer -- accountants.

“Lot of people have incomes that go [up and down],“ he noted. “Isn't that why they have accountants and things?. They figure that all out?”

Sen. Rod Skov, DFL-Clearbrook then wondered if selling a business or a farm wouldn't be taxed as capital gains?

“If my memory serves me correctly, I don't think Minnesota has a capital gains treatment either. We got rid of that a long time ago,” Sen. Warren Limmer, R-Maple Grove, reminded the committee. Ah, but Pogemiller had the answer again.

“Keep in mind that we work off of federal taxable income. I think [capital gains] gets factored back in there in some fashion, doesn’t it?” Pogemiller said.

The experts from the Minnesota Department of Revenue were then consulted. Turns out that because capital gain is compensated for in the federal rate structure and not in the definition of “federal taxable income,” Minnesota taxes capital gains essentially the same as earned income. Oops, better not go there.

Sen. Dave Tomassoni, DFL-Chisholm, suggests that if Ortman wanted to make an impact, her amendment would focus on those in lower brackets moving up rather than saying “if you’re a multimillionaire you get a tax break when you move up to the next bracket.”

When it’s pointed out that someone making $270,000 is not exactly a multimillionaire, Tomassoni’s reply is “Well, I don’t feel sorry for someone making $270,000. I don’t know they deserve a tax break.”

Obviously what they do deserve is the obligation to fix a tax code that this committee clearly doesn’t understand. The bill eventually passes the committee, with Ortman’s amendment. It awaits a full Senate vote.

Is the tax code now fixed?

What about the income averaging question? What about Minnesota’s treatment of capital gains? What about a break for people in lower brackets for whom a “good year” pushes them up a bracket, but not into the top bracket? What about the complexity that requires average folks to pay, in addition to taxes, accountants to prepare their returns in order to follow a code the legislators writing it don’t understand? Guess we shouldn’t get carried away on this reform stuff -- just eat a hot dog and swallow the rhetoric.