Economic Development Abatements

Economic Development Abatements*

2018 $271,000 $1,035,000 $5,584,000 $623,000 $2,274,000 $667,000 $1,609,000

2017 642,000 278,000 6,358,000 597,000 2,229,000 683,000 1,248,000

2016 920,000 1,301,000 6,519,000 599,000 2,156,000 695,000 1,315,000

2015 1,310,000 330,000 7,408,000 551,000 2,209,000 694,000 1,276,000

2014 1,336,000 484,000 8,091,000 528,000 1,891,000 695,000 960,000

2013 1,103,000 564,000 11,029,000 541,000 1,955,000 683,000 941,000

*Note that the economic development abatement levy does not include amounts in a district’s debt service fund attributable to parking lot repairs.

House Research Department

House Research Department November 2018 Minnesota School Finance Page 104

Income Tax Deductions and Credits Education Income Tax Credit

Minnesota enacted an education tax credit in the first special session of 1997, with the credit first available in tax year 1998. Parents may claim the credit for all education-related expenses that qualify for the dependent education expense deduction, except nonpublic school tuition. Thus, the credit is allowed for transportation, tuition for academic summer school and summer camps, tutoring, and textbooks, defined to include instructional materials and equipment, including up to $200 per family of computer hardware and educational software. The credit equals 75 percent of the amount of qualified education- related expenses. The maximum credit is $1,000 per child and there is no family cap (prior to 2004 the family cap was $2,000). The credit is refundable. Any amount that exceeds tax liability is paid to the claimant as a refund. Claimants with incomes under $33,500 may claim the full credit. The maximum credit is phased out for claimants with household income above $33,500 depending on the number of children for whom the credit is claimed. The income measure used to determine eligibility for the credit is a broad measure that includes nontaxable interest, Social Security, and public welfare benefits; the same income measure is used under the property tax refund and the dependent care credit. Tax credits directly offset tax liability (taxes owed), unlike deductions, which reduce taxable income. In the case of refundable credits, the benefit to the taxpayer exactly equals the amount of the credit claimed. If a refundable credit exceeds a taxpayer’s income tax liability, the excess is refunded to the taxpayer. This is accomplished by providing an open appropriation to the Commissioner of Revenue to pay refunds allowed under the credit. A refundable credit provides the same benefit to all qualifying claimants. As a result, all filers who claim an education tax credit of $1,000 will receive a $1,000 benefit. For those with tax liability, the benefit comes in the form of reduced taxes. Filers without tax liability receive a $1,000 refund check. Taxpayers may not claim the deduction and credit for the same expenses. Parents who qualify for both the deduction and credit will receive the greatest benefit by first claiming up to the maximum allowable under the credit, and then claiming any remaining expenses under the deduction. A qualifying taxpayer may assign all or a part of an anticipated income tax refund to a financial institution or a tax-exempt organization. This authority was initially granted only for tax years 2002 and 2003 but has now been made permanent. (Minn. Stat. § 290.0674) Education Income Tax Deductions

For state income tax purposes, taxpayers may deduct from federal taxable income the amounts they spend for tuition, secular textbooks, tutoring, academic summer school and camps, up to $200 of the costs of a computer or education-related software, and transportation of dependents attending public or nonpublic elementary or secondary schools in Minnesota, North Dakota, South Dakota, Iowa, or Wisconsin. The maximum deductions are $1,625 per dependent in grades kindergarten through six, and $2,500 per dependent in grades seven through 12. A deduction reduces the amount of income subject to tax; the benefit a taxpayer receives equals the

House Research Department November 2018 Minnesota School Finance Page 105

taxpayer’s marginal tax rate times the amount of the deduction. Most Minnesota taxpayers are in the 7.05 percent bracket, where a $2,500 deduction decreases state income taxes by $176.25 (.0705 x $2,500). The constitutionality of this tax deduction was upheld in 1983 by the U.S. Supreme Court in the case of Mueller v. Allen. In a 5-4 decision affirming the lower courts’ decisions, the Supreme Court held that the tuition tax deduction statute did not violate the establishment clause of the First Amendment. (Minn. Stat. § 290.01, subd. 19b)

Table 67: Estimated Cost to State in Foregone Tax Revenue

Fiscal Year

Tax Expenditure Amount for Credit

Tax Expenditure Amount for Deduction

2019 $11,600,000 $18,100,000

2018 11,800,000 17,900,000

2017 13,100,000 18,100,000

2016 13,300,000 17,800,000

2015 12,900,000 18,600,000

2014 13,600,000 18,300,000 Source: Minnesota Department of Revenue tax expenditure estimates

House Research Department For more detailed information about Minnesota’s K-12 education tax credit and deduction, see the House Research Department publication, Income Tax Deductions and Credits for Public and Nonpublic Education in Minnesota, June 2017.

House Research Department November 2018 Minnesota School Finance Page 106

Taconite Revenue for School Districts There are 15 school districts in northern Minnesota located in the taconite relief area—the part of the state where taconite ore is mined and concentrated. The finances of these school districts, along with the finances of the area’s other municipalities, are affected by the state treatment of taconite because the taconite industry is generally exempt from local property taxes. As a result, Minnesota’s municipal funding formulas have special aid adjustments to compensate for the loss of this potential tax base through formulas that provide both additional property tax relief and additional revenue. What follows is a brief summary of taconite taxes and the distribution of taconite revenue to school districts. For more complete information on taconite revenues and the interrelationship between school districts and taconite revenue see the Minnesota Mining Tax Guide, published annually by the Department of Revenue (online at http://www.revenue.state.mn.us/businesses/mineral/Documents/2017_mining_guide.pdf). Taconite Taxes Affecting School Districts

The taconite industry is generally exempt from local property taxes and, instead, is subject to a series of taxes including production taxes, occupation taxes, excise taxes, and royalty taxes. The majority of mining industry revenues are received through the taconite production tax and nearly all the school district taconite revenue is provided through the production tax. The overall taconite production tax rate is set in statute. For concentrate produced in 2016, the rate is $2.659 per ton. The production tax rate is inflated each year by multiplying the production tax rate for 2013 times the change in the implicit price deflator since that time. Taconite Revenue Programs for Schools

The proceeds of the taconite production tax are required by statute to be deposited into a variety of funds, and state statutes also contain formulas to provide for the distribution of revenues, primarily to local units of government, including school districts. School districts located in the taconite relief area received about $22 million out of a total of $97 million raised by the production tax for production year 2016 (distributed in 2017). Minnesota Statutes requires school districts to use some of the taconite revenue for property tax relief and the remainder of the taconite revenue is set aside as additional revenue for the school districts. Taconite Revenue—Regular School Fund 24.72 Cents per Ton—$9.173 Million

Regular School Fund Added Aid. Taconite area school districts receive some taconite aid that may be used for any spending purpose. For fiscal year 2014 and later, of the 24.72 cents per ton of taconite production tax revenue in the regular school fund, 11 cents per ton is distributed to all school districts located in the taconite relief area as additional revenue and may be used for any purpose. Regular School Fund Property Tax Relief. The remainder of the regular school fund taconite revenue is used for direct school district property tax relief. This portion is determined by calculating an index for each district equal to its pupil units, times the ratio of the average adjusted net tax capacity per pupil unit for all districts in the taconite relief area to the district’s adjusted net tax capacity per pupil unit. This amount then reduces the districts’ school levies.

House Research Department November 2018 Minnesota School Finance Page 107

Table 68: Estimated Taconite Revenue Used to Reduce School District Levies

Payable Year Levy Reduction 2018 $7,846,000

2017 8,598,000

2016 8,664,000

2015 9,119,000

2014 8,907,000

2013 7,257,000 House Research Department

Taconite Referendum Fund—$6.179 Million

In 1981, the legislature acted to allow taconite revenue to be used to equalize referendum levies in taconite districts. A taconite district receives an additional $175 per pupil unit if the district has passed a referendum levy or had a referendum in place prior to the 2001 legislative session. Taconite referendum revenue essentially “equalizes” a qualifying school district’s referendum levy. The lower the district’s tax base, the higher the amount of taconite referendum revenue. The district receives additional taconite revenue according to the following formula:

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