General Sales and Use Tax Transfer of Tax on Motor Vehicle Leases Based on 6.5% Rate Instead of 6.875% $3,800 $4,000 $4,200 $4,200 $4,200

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1 February 17, 2015 State Taxes Only Department of Revenue Analysis of S.F. 826 (Skoe) / H.F. 848 (Davids) Governor s Tax Policy Bill DOR Administrative Costs/Savings Fund Impact F.Y F.Y F.Y F.Y F.Y (000 s) Individual Income Tax Child and Dependent Care Credit Equal to Federal Credit, Refundable, Phased out over $100,000 (1/1/15) $0 ($48,600) ($52,400) ($55,900) ($60,000) Disallow Working Family Credit for Full-Year Nonresidents (1/1/15) $0 $5,100 $5,200 $5,300 $5,300 Corporate Franchise Tax Treatment of Insurance Companies Used to Shelter Income (1/1/15) $0 $2,000 $2,000 $2,000 $2,000 Accelerate Gain on the Sale of a Business for Nonresidents (1/1/15) $0 $1,100 $2,200 $3,300 $4,400 Exclude Derivatives from Sales Factor for Apportionment (1/1/15) $0 $0 $0 $0 $0 Reduce Dividend Received Deduction for Debt-Financed Stock (1/1/15) $0 $100 $100 $100 $100 Modify the Definition of Financial Institution (1/1/15) $0 $5,000 $5,000 $5,000 $5,000 Prevent Tax Evasion (1/1/15) $0 $0 $300 $1,500 $2,500 Base-Year Percentage for the Research Credit (1/1/15) $0 ($200) ($200) ($200) ($200) Estate Tax No Recapture Tax for Property Acquired by Eminent Domain (7/1/11) $0 ($50) ($50) ($50) ($50) General Sales and Use Tax Transfer of Tax on Motor Vehicle Leases Based on 6.5% Rate Instead of 6.875% $3,800 $4,000 $4,200 $4,200 $4,200 Solid Waste Management Tax Weight-to-Volume Conversion Rate for Construction Debris (7/1/15) $0 $110 $120 $120 $130 General Fund Total $3,800 ($31,440) ($33,530) ($34,630) ($36,620) Yes X No

2 Department of Revenue February 17, 2015 Analysis of S.F. 826 / H.F. 848 Page 2 Fund Impact F.Y F.Y F.Y F.Y F.Y (000 s) Highway User Tax Distribution Fund Reduce Motor Fuel Tax Rate for Compressed Natural Gas (7/1/15) $0 ($45) ($55) ($60) ($65) County State Aid Highway Fund Transfer of Sales Tax on Motor Vehicle Leases Based on 6.5% Rate Instead of 6.875% ($1,900) ($2,000) ($2,100) ($2,100) ($2,100) Greater Minnesota Transit Account Transfer of Sales Tax on Motor Vehicle Leases Based on 6.5% Rate Instead of 6.875% ($1,900) ($2,000) ($2,100) ($2,100) ($2,100) Environmental Fund Solid Waste Management Tax Weightto-Volume Conversion Rate for Construction Debris (7/1/15) $0 $250 $280 $290 $300 Total All Funds $0 ($35,235) ($37,505) ($38,600) ($40,585) Interaction with Governor s Proposal for Free Pre-School for 4-Year-Olds* Child and Dependent Care Credit Equal to Federal Credit, Refundable, Phased out over $100,000 ($48,600) ($52,400) ($55,900) ($60,000) Reduction in Credit if Free Pre-School for 4-Year-Olds Is Enacted $0 $1,120 $3,110 $3,890 Net Cost of the Credit ($48,600) ($51,280) ($52,790) ($56,110) General Fund Total w/interaction ($31,440) ($32,410) ($31,520) ($32,730) Total All Funds w/interaction ($35,235) ($36,385) ($35,490) ($36,695) *If the Governor s proposed child and dependent care credit and proposed free pre-school are both enacted, the cost of the increased credit would be reduced. This table shows the reduction in the cost of the credit, along with the changes to the total cost of the tax bill for the General Fund and for All Funds.

3 Department of Revenue February 17, 2015 Analysis of S.F. 826 / H.F. 848 Page 3 EXPLANATION OF THE BILL A summary prepared by the Appeals and Legal Services Division of the Department of Revenue is attached. REVENUE ANALYSIS DETAIL Child and Dependent Care Credit The House Income Tax Simulation (HITS 6.3) Model was used to estimate the tax year revenue impact. These simulations assume the same economic conditions used by Minnesota Management and Budget for the forecast published in November The model uses a stratified sample of 2012 individual income tax returns compiled by the Minnesota Department of Revenue. Tax year impact would be reflected in the following fiscal year. For tax year 2015, the number of claimants receiving the credit will increase from 38,500 to 130,400 with an average credit of $481. Approximately 109,600 claimants will receive an average increase in credit of $429. Approximately 3,400 claimants will receive the young child care credit for an average credit of $556 per claimant. Some taxpayers who now pay for child care using pre-tax accounts could reduce their tax burden by paying with after-tax dollars and claiming the federal and state credits instead. Data from the Tax Incidence Study database shows that 15,000 taxpayers could save more than $200 in combined state and federal taxes annually (an average of $450) by making such a switch. The estimate assumes that the some will shift to use of the tax credits each year, increasing the cost by $1,500,000 in FY 2016, $3,800,000 in FY 2017, $5,700,000 in FY 2018, and $7,700,000 in FY Disallow Working Family Credit for Full-Year Nonresidents The House Income Tax Simulation (HITS 6.3) Model was used to estimate the tax year revenue impact. These simulations assume the same economic conditions used by Minnesota Management and Budget for the forecast published in November The model uses a stratified sample of 2012 individual income tax returns compiled by the Minnesota Department of Revenue. About 345,000 returns are expected to claim working family credits totaling $249.7 million in tax year Of those, about 9,100 returns are for full-year nonresidents, claiming $5.1 million in credits. They would become ineligible for the credit under the proposal. Tax year impacts were allocated to the following fiscal year. Treatment of Insurance Companies Used to Shelter Income Revenue estimates are based on analysis of current tax returns. Estimates based on a somewhat strict definition of what currently qualifies as an insurance company.

4 Department of Revenue February 17, 2015 Analysis of S.F. 826 / H.F. 848 Page 4 REVENUE ANALYSIS DETAIL (Cont.) Accelerate Gain on the Sale of a Business for Nonresidents Estimate based on Statistics of Income data on the dollar value of capital gains from the sale of pass-through interests. It is assumed 1.8% of entire U.S. gains represents activity in. Minnesota. It is assumed 10% of long-term capital gains are reduced by long-term capital losses. It is assumed in 50% of sales that the gains are reported using installment reporting. It is assumed 50% of the Minnesota activity represents gains from a taxpayer s full liquidation, and it is assumed that 50% of the gains are realized by nonresidents and former resident taxpayers without connections to Minnesota after the sale. It is assumed another 25% reduction reflects S corporation stock gains by nonresidents that are not taxable in Minnesota. It is assumed that all taxpayers will elect installment reporting. The estimate assumes the total dollars subject to installment reporting will be paid in equal parts over five years. An average tax rate of 8% is assumed. Gains from activity in a tax year are reflected in the collections during the following fiscal year. The additional revenue will increase to $5.5 million in fiscal year 2020, and it will remain stable in years after fiscal year Exclude Derivatives from Sales Factor for Apportionment No revenue change is assumed under current practice and with the proposal because the same amount of income and loss would be apportioned to Minnesota. It is assumed that only a small portion of derivative contract transactions are used to purchase actual goods and services. On the contrary, it is assumed that most of the buying and selling of derivatives is focused on market speculation. Due to the back and forth turnover of derivative contracts, it is impossible to determine who is hedging against risk and who is speculating. Reduce Dividend Received Deduction for Debt-Financed Stock The reduction of the dividend received deduction affects only domestic dividends. Data published by the federal government shows less than 2% of domestic dividends are from debt-financed stock. The estimate apportions these dividends to Minnesota. The estimate assumes a 50% reduction due to the dollar limitation on the reduction. Modify the Definition of Financial Institutions Revenue estimates are based on an analysis of current returns. Prevent Tax Evasion Revenue estimates are based on the magnitude of revenue gains associated with similar economic substance cases decided in Minnesota and other states. The estimate assumes most of the revenue gain will be delayed until corporate taxpayers are audited in fiscal years 2018 and 2019.

5 Department of Revenue February 17, 2015 Analysis of S.F. 826 / H.F. 848 Page 5 REVENUE ANALYSIS DETAIL (Cont.) Base-Year Percentage for the Research Credit It is assumed that a small group of taxpayers that were in business in the base period and have current year research and development expenses lacks the documentation to compute a base-period percentage. It is assumed these taxpayers have research and development expenses that are relatively small. Because the 16% is the maximum base-period percentage, the proposal would not provide a larger credit to a business without documentation than to one with documentation. Estate Tax No Recapture Tax for Property Acquired by Eminent Domain Property claimed as qualified small business or farm property on an estate tax return might be taken by a government authority having the power of eminent domain. If this were to happen within three years of the death of the decedent, current law could require that a recapture tax be paid. Because the recapture tax is 16% of the total amount of the property deducted, even if only a portion was taken by eminent domain, an estate would likely not claim certain property as qualified if there were an indication that the property might be taken by eminent domain within the three-year period. Under the proposal, the estate probably would claim the property as qualified, resulting in a revenue loss to the state. It is expected that this situation would not occur frequently. If on average one piece of qualified property valued at $500,000 were taken each fiscal year by a government authority, the revenue loss could be 10% of the value of the property, or $50,000. Transfer of Sales Tax on Motor Vehicle Leases Based on 6.5% Rate Instead of 6.875% The estimates are based on the November 2014 forecast of the transfers for the sales tax on motor vehicle leases. Weight-to-Volume Conversion Rate for Construction Debris In fiscal year 2014, the solid waste management tax yielded total revenue from all rates of $72,575,000. Revenue from non-mixed municipal solid waste came to approximately $4,924,000. Of this amount, 95% is attributed to construction and demolition debris. It was estimated that 10.5% of this waste, or $491,000, is now being taxed by ton rather by cubic yard at the current rate of $2 per ton. The Department of Revenue now believes that a more accurate per-ton tax rate is around $3.50. This is the figure used in the estimates. Making this change would increase revenue from tax paid by the ton to $859,000, for a gain of $368,000 based on FY 2014 receipts. Annual growth was taken from the November 2014 state revenue forecast. The estimate for fiscal year 2016 is adjusted for the eleven months of collections. Seventy percent of the total proceeds from the solid waste management tax are deposited in the state Environmental Fund and 30% are deposited in the General Fund. The revenue impact will change if a different rate is determined.

6 Department of Revenue February 17, 2015 Analysis of S.F. 826 / H.F. 848 Page 6 REVENUE ANALYSIS DETAIL (Cont.) Reduce Motor Fuel Tax Rate for Compressed Natural Gas The DOR Petroleum Tax Unit reports that there were approximately 1,963,000 gallons, or 223,986,000 cubic feet, of compressed natural gas (CNG) subject to tax in fiscal year Total annual excise tax collections for CNG in fiscal year 2014 were about $550,000. An annual growth rate of 7% is applied, based on forecast information from the Energy Information Administration. The estimate for fiscal year 2016 is adjusted for eleven months of collections. Reduction in Cost of Increased Child and Dependent Care Credit Due to Interaction with Governor s Proposed Free Pre-School for 4-Year-Olds The proposed expansion of the child care credit will increase credits for 109,600 returns in tax year Returns receiving the federal child care credit claim eligible expenses for an average of 1.44 children, so taxpayers with increased credit have eligible expenses for 157,800 children. Four-year-olds are 19% of all children under age 5. Because some credits are received for older children, it is assumed that 17% of those with eligible expenses and an increased credit (26,800) are 4-year-olds. There are roughly 69,000 four-year olds in Minnesota, so 39% of 4-year-olds would qualify for an increased credit. It is assumed that 39% of 4-year-olds in free pre-school would have received an increased credit. Projected enrollment in free pre-school was provided by the Minnesota Department of Education. Tax year counts are computed as a weighted average of two school years. The proposed expansion s credit increase averages $429 per return ($298 per child). Although the proposed free pre-school for four-year-olds will reduce child care costs, some will still pay for care before and after regular school hours, during the summer, and on other days when school is not in session. It is assumed that free pre-school will reduce the average tax credit increase for those children by 75% (from $298 to $75 per child). The FY 2017 impact is reduced because free pre-school would start in September The income tax model showed the average increase in credit per child rising 3% per year. Tax year impact is allocated to the following fiscal year. Source: Minnesota Department of Revenue Tax Research Division Revenue-Analyses.aspx sf0826(hf0848)_1 / cc, mjr, paw, cw, dkd, cej, rrs, tfe

7 2015 GOVERNOR S TAX BILL SUMMARY SF 826/HF 848 Appeals and Legal Services Division 600 North Robert Street Saint Paul, Minnesota ARTICLE 1: CHILD AND DEPENDENT CARE CREDIT This article makes two major changes to the refundable Minnesota child and dependent care credit that will increase the number of taxpayers eligible for the credit as well as increase the credit amount for many taxpayers currently eligible. The maximum income eligibility threshold is increased from $39,000 of household income to $124,000 of federal adjusted gross income. Additionally, the maximum credit is increased from $720 to $1,440 for taxpayers with expenses for the care of one qualifying person and from $1,050 to $2,100 for taxpayers with expenses for the care of two or more qualifying persons. These changes are effective for Section 1. Amount of dependent care credit. Amends Minn. Stat , subd. 1 by making a number of technical changes needed to distinguish between taxpayers who are eligible for the credit because they have actual employment-related dependent care expenses and licensed home day care providers and married couples with newborn children, who are eligible for the credit using deemed expenses when they have no actual employment-related expenses. The distinction between the groups is necessary because under changes in Section 2 the credit will begin to phase out for taxpayers with actual expenses with federal adjusted gross income in excess of $100,000 while the credit begins to phase out at $25,000 for taxpayers claiming the credit without actual employmentrelated expenses. Also clarifies that taxpayers who are licensed home day care providers or who are married with a newborn may elect to claim a credit for that child based on actual expenses or deemed expenses. If they elect to claim a credit based on deemed expenses, they cannot claim a credit for actual expenses paid to care for that same child, although they can claim a credit based on expenses paid to care for other qualifying individuals. Defines qualifying individual and employment-related expenses by reference to the Internal Revenue Code definitions used to determine the federal dependent care credit. Finally, removes an obsolete reference to a repealed federal child credit. Effective for taxable years beginning after December 31, Section 2. Increased income thresholds for the phase out of the dependent care credit. Amends Minn. Stat , subd. 2 to provide that the maximum credit for taxpayers with actual employment-related expenses is increased from $720 to $1,050 for taxpayers with expenses for one qualifying person or from $1,440 to $2,100 for taxpayers with expenses for two or more qualifying persons. For taxpayers with federal adjusted gross income in excess of $100,000, the credit is equal to the lesser of the taxpayer s federal dependent care credit or $600 (or $1,200 for taxpayers with expenses for more than one qualifying individual) minus five percent of federal adjusted gross income in excess of $100,000. The maximum credit for taxpayers who are licensed home day care providers or who are married couples with a newborn child without actual employment-related expenses, remains $720 or $1,440 for taxpayers with two or more qualifying children. The credit for these taxpayers who have federal

8 adjusted gross income in excess of $25,000 is the lesser of the credit calculated under section 21 of the Internal Revenue Code or $720 (or $1,440 for taxpayers with two or more qualifying children) minus five percent of federal adjusted gross income in excess of $25,000. Because the credit for taxpayers, other than those in the phase out ranges, will be the same as the federal credit, the need for credit tables is repealed as obsolete. Effective for taxable years beginning after December 31, Section 3. Dependent care inflation adjustment. Amends Minn. Stat , subd. 2b to update the calculation of the annual inflation adjustment used to determine the income levels at which the dependent care credit begins to phase out. Effective for taxable years beginning after December 31, Section 4. Credit to be refundable. Amends Minn. Stat , subd. 3 to make a technical change necessary because the dependent care credit calculated under is not actually calculated under , subd. 3. Also removes unnecessary reference to the commissioner of revenue. Effective for taxable years beginning after December 31, Sections 5 and 6. Income for purposes of the K-12 education credit. Amends Minn. Stat to codify the current definition of income used to determine eligibility for the K-12 education credit. This is necessary because current law defines income for the K-12 credit by cross reference to the definition of income for the dependent care credit, which is repealed in the Repealer. Effective for taxable years beginning after December 31, Section 7. Repealer. Repeals Minn. Stat , subd. 2a, the definition of income used to determine eligibility for the dependent care credit, because eligibility for credits will be based on federal adjusted gross income under changes to , subd. 2 in section 2 of this article. Effective for taxable years beginning after December 31, ARTICLE 2: RAILROAD VALUATION RECODIFICATION This article recodifies provisions in Chapter 270 and amends sections of Chapter 272 regarding taxation of railroad operating property. The amendments will include all operating property as part of the calculation of a railroad s market value, modernize statutory language, move sections of Chapter 270 dealing with railroad valuation into Chapter 273 where other property tax provisions are located, and repeal Rule 8106 because all necessary provisions regarding valuation will be in the statute. All amendments are effective for assessment year 2016 and thereafter. Sections 1 through 12. Definitions. Amends Minn. Stat , subd. 1, 2, 3, and 4 and adds new subdivisions 6 through 12 and 14. Amendments in sections 1, 2, and 4 to subdivisions 1 (updates the cross references to refer to the new sections), 2 (definition of railroad company), and 4 (non-operating property) are technical changes. Section 3 amends the definition of operating property to include but not be limited to roads, locomotives, freight cars, and improvements to leased property. Sections 5 through 12 add new definitions for term company, unit value, book depreciation, equalization, exempt property, original cost, system, and Minnesota allocated value. Effective for assessment year 2016 and thereafter. 2

9 Section 13. Valuation of operating property. Amends Minn. Stat , subd. 1 by amending internal cross references to the recodified section. Effective for assessment year 2016 and thereafter. Section 14. Operating or non-operating property. Amends Minn. Stat , subd. 3 by modernizing the language and providing that county as well as local assessors can request a determination by the commissioner of whether railroad property is operating or non-operating. Provides that requests must be submitted by April 1 of the assessment year and the commissioner must send the determination to the requestor by May 1. Effective for assessment year 2016 and thereafter. Section 15. Deduction for nonoperating and exempt property. Amends Minn. Stat , by adding a new subdivision 6 providing that property that is part of the unit valuation but that is nonoperating property or exempt from taxation must be excluded from the Minnesota allocated value. Explains how this amount is calculated. Effective for assessment year 2016 and thereafter. Section 16. Annual reports. Amends Minn. Stat , subd. 1 by modernizing the language regarding the reports that railroads are required to file with the commissioner before March 31 and adds a provision clarifying that the commissioner shall prescribe the content, format and manner of the report pursuant to 270C.30 and adding a cross reference to the definition of electronic signature in 270C.304. The amendment to subdivision 2 modernizes the language allowing the commissioner to grant an extension of up to 15 days for railroads to file the reports required by , subd. 1. A new subdivision 3 is added providing that railroad companies may file amended reports that correct or add information to the original reports. Also provides that amended reports must be filed by April 30. Adds a new subdivision 4 providing that if railroad companies fail to file the required reports or do not allow the commissioner to inspect their property, records, books, accounts or other papers when requested that the commissioner may make the valuation according to the commissioner s best judgment based on available information. If the company does not make the required report by the due date or extended due date and the commissioner makes the valuation based on available information the commissioner s valuation is final and may not be appealed administratively. Effective for assessment year 2016 and thereafter. Section 17. Examinations and investigations. Amends Minn. Stat , subd. 1 by modernizing the language regarding the commissioner s power to conduct audits and examinations in order to determine the value of railroad operating property. Effective for assessment year 2016 and thereafter. Section 18. Appointment of persons to make examinations and subpoenas. Amends Minn. Stat , subd. 2 by modernizing the language regarding the commissioner s power to appoint people to make the examinations and issue subpoenas. Effective for assessment year 2016 and thereafter. Section 19. Valuation of operating property. Amends Minn. Stat , subd. 1 to include specific directions for valuing operating property. Most of the added instruction is adapted from 3

10 Minn. Rule Part which is repealed. Changes include replacing the reference to the Blue Chip Method of calculating obsolescence which is no longer used, in favor of historical cost less depreciation. Also allows the commissioner to use appraisal judgment in determining which valuation methods to use (the methods must be based on generally accepted appraisal principles) and allowing the commissioner to determine the validity of the approaches to value and how to weight them. Adds new subdivisions 1a, 1b, and1c, explaining how to calculate a cost, income and market approach. Amends Minn. Stat subd. 2 by modernizing the language regarding the notice of valuation that the commissioner must send to the railroad. Effective for assessment year 2016 and thereafter. Section 20. Apportionment, allocation and equalization of value. Amends Minn. Stat subd. 1 by modernizing the language regarding how the commissioner must apportion the market value of each railroad company s operating property to each county and taxing district in which the railroad operates. Adds subd. 1a to explain how the value is allocated to Minnesota. Subdivision 2 is amended to modernize the language regarding the commissioner s duty to determine the equalized valuation of railroad operating property in each county. Effective for assessment year 2016 and thereafter. Section 21. Certification to county assessors. Amends Minn. Stat by modernizing the language regarding the commissioner s certification to county assessors of the value of railroad operating property. Effective for assessment year 2016 and thereafter. Section 22. Railroad operating property. Amends Minn. Stat , subd. 9 to provide that all operating property of railroads is included in the list of personal property that is taxable. Effective for assessment year 2016 and thereafter. Sections 23 and 24. State General Tax. Amends Minn. Stat by updating the baseline levy for the state general tax and by adjusting the apportionment of the levy under the state general tax. Effective for taxes levied in 2016 and thereafter. Section 25. Appropriation. This provision provides that $266,000 in fiscal year 2016, $14,000 in fiscal year 2017, $13,000 in fiscal year 2018 and $11,000 in fiscal year 2019 is appropriated from the general fund to the agency to implement the provisions of the railroad property tax recodification. The sums indicated for fiscal years 2016, 2017 and 2018 are onetime appropriations and are not added to the agency s base. The sum indicated in this section for fiscal year 2019 shall become part of the agency s base. Effective the day following final enactment. Section 26. Revisor s Note: Directs the Revisor to move sections through into Chapter 273 and recodify them as sections through Internal cross references in section through will be corrected to refer to the new sections. Section 27. Repealer. Repeals Minn. Stat , subd. 4 because it merely states that property is not subject to tax unless it is already made subject to tax under Chapter 272. This is unnecessary because Chapter 272 adequately describes what property is taxable. It also repeals Minn. Stat , subd. 3 because its provisions have been moved to new section (formerly ). Repeals Minn. Rules Chapter 8106 because its provisions are made obsolete due to statutory changes. Effective for assessment year 2016 and thereafter. 4

11 ARTICLE 3: CORPORATE TAX REFORM Sections 1 through 5. Preventing tax evasion. Section 1 amends Minn. Stat. 16D.08, subd. 2 to update a cross reference to 270C.03 subd. 1. Section 2 amends Minn. Stat. 270C.03, subd. 1, to add the power to disallow the tax effects of a transaction that does not have economic substance. The rest of the subdivision is renumbered, and a cross reference to Minn. Stat 270C.03, subd. 8, is corrected. Section 3 amends Minn. Stat. 270C.33, subd. 6, to add a presumption of validity to any order of the commissioner disallowing the effects of a transaction. Section 4 creates a new section, 270C.331 to define the terms economic substance; apart from tax effects; transaction, and personal transactions of individuals. Section 5 amends Minn. Stat. 289A.60 to add a new subdivision 27a, creating criteria for penalties due to transactions that have been disallowed due to lack of economic substance. All changes are effective for taxable years beginning after December 31, Section 6. Financial institution definition. Amends Minn. Stat , subd. 4a, to modify the definition of financial institution. Financial institutions apportion income differently than other companies. Under the current law only certain types of corporations are considered financial institutions. Under the proposed law, the term financial institution would include any entity registered as a bank, savings association, or other similar organization under state or federal law. Additionally, under the new definition, entities and individuals who derive 50% or more of their income from activities commonly conducted by financial institutions will also be treated as financial institutions unless they provide clear and convincing evidence to the commissioner that they do not substantially compete with financial institutions in the market. Effective for taxable years beginning after December 31, Section 7. Accelerated recognition of certain installment sale gains. Amends Minn. Stat , by adding subdivision 19i, which will require nonresident owners of pass-through entities, and owners who become nonresidents to recognize future year gains following the sale of an interest in a pass through entity when they use the installment sale method of reporting income from the sale. The provision also allows taxpayers to elect out of early recognition by agreeing to continue filing Minnesota tax returns and recognizing future year installment sale gains in the year that they are recognized federally. The provision also provides that taxpayers who do not elect out of early recognition will not be taxed twice on the gains recognized early if they continue to file Minnesota income tax returns in future years. Effective for taxable years beginning after December 31, Section 8. Research credit. Amends Minn. Stat , subd. 2(c) to give the taxpayer a base percentage of 16% when its accounting records for the base year are unavailable or inadequate. Effective for taxable years beginning after December 31, Section 9. Insurance company utilized to shelter income. Amends Minn. Stat , subd. 4 to provide a more narrow definition of the term insurance company. Generally, insurance companies are excluded from the unitary groups of businesses who pay franchise tax under chapter 290. Under the proposed definition, that exclusion would only apply to insurance companies that are admitted to practice the business of insurance in Minnesota, or licensed to practice the business 5

12 of insurance in another state that has reciprocal agreement with Minnesota not to impose retaliatory taxes. Effective for taxable years beginning after December 31, Section 10. Apportionment sales factor. Amends Minn. Stat , subd. 5 to exclude the sale of derivatives, such as options and swaps, from the sales apportionment factor. Effective for taxable years beginning after December 31, Section 11. Dividend received deduction. Amends Minn. Stat , subd. 4 to bring the statute into conformity with Internal Revenue Code section 246A, which disallows a dividend received deduction for dividends paid from stock that is debt-financed. Effective for taxable years beginning after December 31, ARTICLE 4: MISCELLANEOUS Section 1. Working family credit for nonresidents. Amends Minn. Stat , subd. 1 so that full year non-residents of Minnesota will no longer be eligible for the Minnesota working family credit. Effective for taxable years beginning after December 31, Section 2. Computation of household income for property tax refund. Amends Minn. Stat. 290A.03, subd. 13 to require taxpayers to reduce the property taxes payable or rent constituting property taxes on their homestead to account for business use of the homestead even if they elect to deduct business expenses under section 280A of the Internal Revenue Code rather than depreciating part of the home. Effective for refunds based on property taxes payable after December 31, 2014 or rent constituting property tax paid after December 31, Section 3. Senior Citizen Property Tax Deferral Program qualifications. Amends Minn. Stat. 290B.03, subd. 1, by reducing the number of years that an applicant to the Senior Citizen Property Tax Deferral Program must have owned and occupied the applicant s homestead from fifteen to five years. Effective for applications for deferral of taxes payable in 2016 and thereafter. Section 4. Senior Citizen Property Tax Deferral Program application deadline. Amends Minn. Stat. 290B.04, subd. 1, by changing the deadline for applying to the Senior Citizen Property Tax Deferral Program from July 1 to November 1. Effective for applications for deferral of taxes payable in 2016 and thereafter. Section 5. Estate tax effects of eminent domain acquisitions. Amends Minn. Stat by adding subdivision 12, which provides that taxable estates electing to exclude qualified farm property will not become liable for the 16% recapture tax solely because the property was acquired by an entity with the power of eminent domain within the three year holding period. Effective retroactively for estates of decedents dying after June 30, Section 6. Petroleum tax; compressed natural gas. Amends Minn. Stat. 296A.01, subd. 12, which defines compressed natural gas, to change the energy content from 1,000 BTU s per cubic feet to 900 BTU s per cubic feet to be consistent with the IRS standard and the International Fuel Tax Agreement (IFTA). Effective for sales and purchases made after June 30, Section 7. Petroleum tax; compressed natural gas rate of tax. Amends Minn. Stat. 296A.08, subd. 2, to correct a calculation error in the rate of tax applicable to compressed natural gas and 6

13 bring the tax rate in line with the energy content of other fuel types. Effective for sales and purchases made after June 30, Section 8. Motor vehicle lease sales tax revenues. Amends Minn. Stat. 297A.815, subd. 3, to clarify that the amounts to be transferred from the general fund to the county state-aid highway fund and to the greater Minnesota transit account are limited to the motor vehicle lease sales tax revenues generated from the sales tax imposed under 297A.62, subd. 1 (6.5 percent rate). The amount to be deposited in this fund does not include the revenue generated by the sales tax imposed under 297A.62, subd. 1a (0.375 percent rate), which must be deposited as provided in the Minnesota Constitution. Effective the day following final enactment. Section 9. Deposit of sales tax revenues. Amends Minn. Stat. 297A.94, to clarify that whenever a provision in the sales and use tax chapter specifies that the revenue derived from that provision must be deposited in, transferred to, or credited to a fund other than the general fund, the revenue does not include the revenues generated by the sales tax imposed under 297A.62, subd. 1a (0.375 percent rate), which must be deposited as provided in the Minnesota Constitution. Effective the day following final enactment. Section 10. Solid waste management tax rate; construction debris. Amends Minn. Stat. 297H.04, subd. 2, to provide that the commissioner of revenue after consultation with the commissioner of the Pollution Control Agency, shall determine, and may publish by notice, a conversion schedule for construction debris. Effective for sales and purchases made after June 30, Section 11. Appropriation. This provision appropriates $35,000 from the general fund to the commissioner of revenue to carry out the changes made to the working family credit found in Article 4, section 1. Effective the day following final enactment. 7