1.1                          A bill for an act 
  1.2             relating to taxation; allowing cities to provide a 
  1.3             two-year property tax exemption for newly constructed 
  1.4             homes in certain border cities; providing an income or 
  1.5             corporate franchise tax exemption for certain rental 
  1.6             income; authorizing tax incentives for housing in 
  1.7             border city development zones; amending Minnesota 
  1.8             Statutes 2000, sections 272.0212, subdivisions 1, 4, 
  1.9             by adding a subdivision; 469.1735, by adding a 
  1.10            subdivision; Minnesota Statutes 2001 Supplement, 
  1.11            sections 290.01, subdivisions 19b, 19d; 469.1734, 
  1.12            subdivision 6. 
  1.13  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.14     Section 1.  Minnesota Statutes 2000, section 272.0212, 
  1.15  subdivision 1, is amended to read: 
  1.16     Subdivision 1.  [EXEMPTION.] All qualified property in a 
  1.17  zone is exempt to the extent and for the duration provided by 
  1.18  the zone designation and under sections 469.1731 to 469.1735 to 
  1.19  the extent limited by this section. 
  1.20     <b>[EFFECTIVE DATE.]</b> This section is effective the day 
  1.21  following final enactment. 
  1.22     Sec. 2.  Minnesota Statutes 2000, section 272.0212, 
  1.23  subdivision 4, is amended to read: 
  1.24     Subd. 4.  [DEFINITIONS.] (a) For purposes of this section, 
  1.25  the following terms have the meanings given. 
  1.26     (b) "City" means a statutory or home rule charter city. 
  1.27     (c) "Qualified property" means class 3 and: 
  1.28     (1) class 1, 3, 4, and 5 property as defined in section 
  1.29  273.13 that is located in a zone and is newly constructed after 
  2.1   the zone was designated, including the land that contains the 
  2.2   improvements; and 
  2.3      (2) property qualifying under subdivision 6. 
  2.4      (c) (d) "Zone" means a border city development zone 
  2.5   designated under the provisions of section 469.1731. 
  2.6      <b>[EFFECTIVE DATE.]</b> This section is effective beginning for 
  2.7   assessment year 2003. 
  2.8      Sec. 3.  Minnesota Statutes 2000, section 272.0212, is 
  2.9   amended by adding a subdivision to read: 
  2.10     Subd. 6.  [NEWLY CONSTRUCTED HOMES.] (a) This subdivision 
  2.11  applies in the following cities: 
  2.12     (1) The governing body of a city containing a zone may, by 
  2.13  resolution, grant an exemption under the provisions of this 
  2.14  subdivision. 
  2.15     (2) The governing body of a city, other than a city 
  2.16  containing a zone, that is located in a county containing a zone 
  2.17  may, by resolution, grant an exemption under the provisions of 
  2.18  this subdivision if the governing body of the county, by 
  2.19  resolution, has authorized the city to exercise the powers 
  2.20  granted by this subdivision. 
  2.21     (b) The authority under this subdivision applies only to 
  2.22  property taxes payable in a year that includes the duration of a 
  2.23  zone in the city or county.  The authority under this 
  2.24  subdivision applies to the entire area of the city and is not 
  2.25  limited to the designated area of a zone. 
  2.26     (c) An exemption under this subdivision may only be granted:
  2.27     (1) to property, excluding land, that is not qualified 
  2.28  property under subdivision 4, paragraph (c), clause (1), and 
  2.29  that is classified as: 
  2.30     (i) class 1 under section 273.13, subdivision 22; 
  2.31     (ii) class 2 for the house and garage only under section 
  2.32  273.13, subdivision 23; or 
  2.33     (iii) class 4 for the portion of the property used for 
  2.34  residential occupancy under section 273.13, subdivision 24; and 
  2.35     (2) for the first two assessment years after the property 
  2.36  is newly constructed and occupied or the assessor increases the 
  3.1   estimated market value of the property for new improvements by 
  3.2   at least $25,000, whichever occurs first. 
  3.3      (d) In order to grant an exemption under this subdivision, 
  3.4   the city must approve the exemption before building permits are 
  3.5   issued for construction of the home.  The city must notify the 
  3.6   official, designated by the governing body of the county, of 
  3.7   each exemption by no later than June 1 of the first assessment 
  3.8   year to which the exemption applies. 
  3.9      (e) The provisions of subdivision 2, clauses (2) and (3), 
  3.10  and subdivision 5, do not apply to this subdivision. 
  3.11     <b>[EFFECTIVE DATE.]</b> This section is effective beginning for 
  3.12  assessment year 2003. 
  3.13     Sec. 4.  Minnesota Statutes 2001 Supplement, section 
  3.14  290.01, subdivision 19b, is amended to read: 
  3.15     Subd. 19b.  [SUBTRACTIONS FROM FEDERAL TAXABLE INCOME.] For 
  3.16  individuals, estates, and trusts, there shall be subtracted from 
  3.17  federal taxable income: 
  3.18     (1) interest income on obligations of any authority, 
  3.19  commission, or instrumentality of the United States to the 
  3.20  extent includable in taxable income for federal income tax 
  3.21  purposes but exempt from state income tax under the laws of the 
  3.22  United States; 
  3.23     (2) if included in federal taxable income, the amount of 
  3.24  any overpayment of income tax to Minnesota or to any other 
  3.25  state, for any previous taxable year, whether the amount is 
  3.26  received as a refund or as a credit to another taxable year's 
  3.27  income tax liability; 
  3.28     (3) the amount paid to others, less the amount used to 
  3.29  claim the credit allowed under section 290.0674, not to exceed 
  3.30  $1,625 for each qualifying child in grades kindergarten to 6 and 
  3.31  $2,500 for each qualifying child in grades 7 to 12, for tuition, 
  3.32  textbooks, and transportation of each qualifying child in 
  3.33  attending an elementary or secondary school situated in 
  3.34  Minnesota, North Dakota, South Dakota, Iowa, or Wisconsin, 
  3.35  wherein a resident of this state may legally fulfill the state's 
  3.36  compulsory attendance laws, which is not operated for profit, 
  4.1   and which adheres to the provisions of the Civil Rights Act of 
  4.2   1964 and chapter 363.  For the purposes of this clause, 
  4.3   "tuition" includes fees or tuition as defined in section 
  4.4   290.0674, subdivision 1, clause (1).  As used in this clause, 
  4.5   "textbooks" includes books and other instructional materials and 
  4.6   equipment purchased or leased for use in elementary and 
  4.7   secondary schools in teaching only those subjects legally and 
  4.8   commonly taught in public elementary and secondary schools in 
  4.9   this state.  Equipment expenses qualifying for deduction 
  4.10  includes expenses as defined and limited in section 290.0674, 
  4.11  subdivision 1, clause (3).  "Textbooks" does not include 
  4.12  instructional books and materials used in the teaching of 
  4.13  religious tenets, doctrines, or worship, the purpose of which is 
  4.14  to instill such tenets, doctrines, or worship, nor does it 
  4.15  include books or materials for, or transportation to, 
  4.16  extracurricular activities including sporting events, musical or 
  4.17  dramatic events, speech activities, driver's education, or 
  4.18  similar programs.  For purposes of the subtraction provided by 
  4.19  this clause, "qualifying child" has the meaning given in section 
  4.20  32(c)(3) of the Internal Revenue Code; 
  4.21     (4) contributions made in taxable years beginning after 
  4.22  December 31, 1981, and before January 1, 1985, to a qualified 
  4.23  governmental pension plan, an individual retirement account, 
  4.24  simplified employee pension, or qualified plan covering a 
  4.25  self-employed person that were included in Minnesota gross 
  4.26  income in the taxable year for which the contributions were made 
  4.27  but were deducted or were not included in the computation of 
  4.28  federal adjusted gross income, less any amount allowed to be 
  4.29  subtracted as a distribution under this subdivision or a 
  4.30  predecessor provision in taxable years that began before January 
  4.31  1, 2000.  This subtraction applies only for taxable years 
  4.32  beginning after December 31, 1999, and before January 1, 2001.  
  4.33  If an individual's subtraction under this clause exceeds the 
  4.34  individual's taxable income, the excess may be carried forward 
  4.35  to taxable years beginning after December 31, 2000, and before 
  4.36  January 1, 2002; 
  5.1      (5) income as provided under section 290.0802; 
  5.2      (6) to the extent included in federal adjusted gross 
  5.3   income, income realized on disposition of property exempt from 
  5.4   tax under section 290.491; 
  5.5      (7) to the extent not deducted in determining federal 
  5.6   taxable income or used to claim the long-term care insurance 
  5.7   credit under section 290.0672, the amount paid for health 
  5.8   insurance of self-employed individuals as determined under 
  5.9   section 162(l) of the Internal Revenue Code, except that the 
  5.10  percent limit does not apply.  If the individual deducted 
  5.11  insurance payments under section 213 of the Internal Revenue 
  5.12  Code of 1986, the subtraction under this clause must be reduced 
  5.13  by the lesser of: 
  5.14     (i) the total itemized deductions allowed under section 
  5.15  63(d) of the Internal Revenue Code, less state, local, and 
  5.16  foreign income taxes deductible under section 164 of the 
  5.17  Internal Revenue Code and the standard deduction under section 
  5.18  63(c) of the Internal Revenue Code; or 
  5.19     (ii) the lesser of (A) the amount of insurance qualifying 
  5.20  as "medical care" under section 213(d) of the Internal Revenue 
  5.21  Code to the extent not deducted under section 162(1) of the 
  5.22  Internal Revenue Code or excluded from income or (B) the total 
  5.23  amount deductible for medical care under section 213(a); 
  5.24     (8) the exemption amount allowed under Laws 1995, chapter 
  5.25  255, article 3, section 2, subdivision 3; 
  5.26     (9) to the extent included in federal taxable income, 
  5.27  postservice benefits for youth community service under section 
  5.28  124D.42 for volunteer service under United States Code, title 
  5.29  42, sections 12601 to 12604; 
  5.30     (10) to the extent not deducted in determining federal 
  5.31  taxable income by an individual who does not itemize deductions 
  5.32  for federal income tax purposes for the taxable year, an amount 
  5.33  equal to 50 percent of the excess of charitable contributions 
  5.34  allowable as a deduction for the taxable year under section 
  5.35  170(a) of the Internal Revenue Code over $500; 
  5.36     (11) for taxable years beginning before January 1, 2008, 
  6.1   the amount of the federal small ethanol producer credit allowed 
  6.2   under section 40(a)(3) of the Internal Revenue Code which is 
  6.3   included in gross income under section 87 of the Internal 
  6.4   Revenue Code; and 
  6.5      (12) for individuals who are allowed a federal foreign tax 
  6.6   credit for taxes that do not qualify for a credit under section 
  6.7   290.06, subdivision 22, an amount equal to the carryover of 
  6.8   subnational foreign taxes for the taxable year, but not to 
  6.9   exceed the total subnational foreign taxes reported in claiming 
  6.10  the foreign tax credit.  For purposes of this clause, "federal 
  6.11  foreign tax credit" means the credit allowed under section 27 of 
  6.12  the Internal Revenue Code, and "carryover of subnational foreign 
  6.13  taxes" equals the carryover allowed under section 904(c) of the 
  6.14  Internal Revenue Code minus national level foreign taxes to the 
  6.15  extent they exceed the federal foreign tax credit; and 
  6.16     (13) net rents, to the extent included in federal taxable 
  6.17  income, from an apartment building located in a border city 
  6.18  development zone, designated under section 469.1731, but not to 
  6.19  exceed $10,000 per year for each rental unit and only for the 
  6.20  first five taxable years after the building is newly constructed 
  6.21  and first occupied for residential purposes. 
  6.22     <b>[EFFECTIVE DATE.]</b> This section is effective for taxable 
  6.23  years beginning after December 31, 2002. 
  6.24     Sec. 5.  Minnesota Statutes 2001 Supplement, section 
  6.25  290.01, subdivision 19d, is amended to read: 
  6.26     Subd. 19d.  [CORPORATIONS; MODIFICATIONS DECREASING FEDERAL 
  6.27  TAXABLE INCOME.] For corporations, there shall be subtracted 
  6.28  from federal taxable income after the increases provided in 
  6.29  subdivision 19c:  
  6.30     (1) the amount of foreign dividend gross-up added to gross 
  6.31  income for federal income tax purposes under section 78 of the 
  6.32  Internal Revenue Code; 
  6.33     (2) the amount of salary expense not allowed for federal 
  6.34  income tax purposes due to claiming the federal jobs credit 
  6.35  under section 51 of the Internal Revenue Code; 
  6.36     (3) any dividend (not including any distribution in 
  7.1   liquidation) paid within the taxable year by a national or state 
  7.2   bank to the United States, or to any instrumentality of the 
  7.3   United States exempt from federal income taxes, on the preferred 
  7.4   stock of the bank owned by the United States or the 
  7.5   instrumentality; 
  7.6      (4) amounts disallowed for intangible drilling costs due to 
  7.7   differences between this chapter and the Internal Revenue Code 
  7.8   in taxable years beginning before January 1, 1987, as follows: 
  7.9      (i) to the extent the disallowed costs are represented by 
  7.10  physical property, an amount equal to the allowance for 
  7.11  depreciation under Minnesota Statutes 1986, section 290.09, 
  7.12  subdivision 7, subject to the modifications contained in 
  7.13  subdivision 19e; and 
  7.14     (ii) to the extent the disallowed costs are not represented 
  7.15  by physical property, an amount equal to the allowance for cost 
  7.16  depletion under Minnesota Statutes 1986, section 290.09, 
  7.17  subdivision 8; 
  7.18     (5) the deduction for capital losses pursuant to sections 
  7.19  1211 and 1212 of the Internal Revenue Code, except that: 
  7.20     (i) for capital losses incurred in taxable years beginning 
  7.21  after December 31, 1986, capital loss carrybacks shall not be 
  7.22  allowed; 
  7.23     (ii) for capital losses incurred in taxable years beginning 
  7.24  after December 31, 1986, a capital loss carryover to each of the 
  7.25  15 taxable years succeeding the loss year shall be allowed; 
  7.26     (iii) for capital losses incurred in taxable years 
  7.27  beginning before January 1, 1987, a capital loss carryback to 
  7.28  each of the three taxable years preceding the loss year, subject 
  7.29  to the provisions of Minnesota Statutes 1986, section 290.16, 
  7.30  shall be allowed; and 
  7.31     (iv) for capital losses incurred in taxable years beginning 
  7.32  before January 1, 1987, a capital loss carryover to each of the 
  7.33  five taxable years succeeding the loss year to the extent such 
  7.34  loss was not used in a prior taxable year and subject to the 
  7.35  provisions of Minnesota Statutes 1986, section 290.16, shall be 
  7.36  allowed; 
  8.1      (6) an amount for interest and expenses relating to income 
  8.2   not taxable for federal income tax purposes, if (i) the income 
  8.3   is taxable under this chapter and (ii) the interest and expenses 
  8.4   were disallowed as deductions under the provisions of section 
  8.5   171(a)(2), 265 or 291 of the Internal Revenue Code in computing 
  8.6   federal taxable income; 
  8.7      (7) in the case of mines, oil and gas wells, other natural 
  8.8   deposits, and timber for which percentage depletion was 
  8.9   disallowed pursuant to subdivision 19c, clause (11), a 
  8.10  reasonable allowance for depletion based on actual cost.  In the 
  8.11  case of leases the deduction must be apportioned between the 
  8.12  lessor and lessee in accordance with rules prescribed by the 
  8.13  commissioner.  In the case of property held in trust, the 
  8.14  allowable deduction must be apportioned between the income 
  8.15  beneficiaries and the trustee in accordance with the pertinent 
  8.16  provisions of the trust, or if there is no provision in the 
  8.17  instrument, on the basis of the trust's income allocable to 
  8.18  each; 
  8.19     (8) for certified pollution control facilities placed in 
  8.20  service in a taxable year beginning before December 31, 1986, 
  8.21  and for which amortization deductions were elected under section 
  8.22  169 of the Internal Revenue Code of 1954, as amended through 
  8.23  December 31, 1985, an amount equal to the allowance for 
  8.24  depreciation under Minnesota Statutes 1986, section 290.09, 
  8.25  subdivision 7; 
  8.26     (9) amounts included in federal taxable income that are due 
  8.27  to refunds of income, excise, or franchise taxes based on net 
  8.28  income or related minimum taxes paid by the corporation to 
  8.29  Minnesota, another state, a political subdivision of another 
  8.30  state, the District of Columbia, or a foreign country or 
  8.31  possession of the United States to the extent that the taxes 
  8.32  were added to federal taxable income under section 290.01, 
  8.33  subdivision 19c, clause (1), in a prior taxable year; 
  8.34     (10) 80 percent of royalties, fees, or other like income 
  8.35  accrued or received from a foreign operating corporation or a 
  8.36  foreign corporation which is part of the same unitary business 
  9.1   as the receiving corporation; 
  9.2      (11) income or gains from the business of mining as defined 
  9.3   in section 290.05, subdivision 1, clause (a), that are not 
  9.4   subject to Minnesota franchise tax; 
  9.5      (12) the amount of handicap access expenditures in the 
  9.6   taxable year which are not allowed to be deducted or capitalized 
  9.7   under section 44(d)(7) of the Internal Revenue Code; 
  9.8      (13) the amount of qualified research expenses not allowed 
  9.9   for federal income tax purposes under section 280C(c) of the 
  9.10  Internal Revenue Code, but only to the extent that the amount 
  9.11  exceeds the amount of the credit allowed under section 290.068; 
  9.12     (14) the amount of salary expenses not allowed for federal 
  9.13  income tax purposes due to claiming the Indian employment credit 
  9.14  under section 45A(a) of the Internal Revenue Code; 
  9.15     (15) the amount of any refund of environmental taxes paid 
  9.16  under section 59A of the Internal Revenue Code; 
  9.17     (16) for taxable years beginning before January 1, 2008, 
  9.18  the amount of the federal small ethanol producer credit allowed 
  9.19  under section 40(a)(3) of the Internal Revenue Code which is 
  9.20  included in gross income under section 87 of the Internal 
  9.21  Revenue Code; and 
  9.22     (17) for a corporation whose foreign sales corporation, as 
  9.23  defined in section 922 of the Internal Revenue Code, constituted 
  9.24  a foreign operating corporation during the taxable years ending 
  9.25  during calendar year 1992 and a return was filed by August 15, 
  9.26  1996, claiming the deduction under this subdivision for income 
  9.27  received from the foreign operating corporation, an amount equal 
  9.28  to 1.23 multiplied by the amount of income excluded under 
  9.29  section 114 of the Internal Revenue Code, provided the income is 
  9.30  not income of a foreign operating company; and 
  9.31     (18) net rents, to the extent included in federal taxable 
  9.32  income, from an apartment building located in a border city 
  9.33  development zone, designated under section 469.1731, but not to 
  9.34  exceed $10,000 per year for each rental unit and only for the 
  9.35  first five taxable years after the building is newly constructed 
  9.36  and first occupied for residential purposes. 
 10.1      <b>[EFFECTIVE DATE.]</b> This section is effective for taxable 
 10.2   years beginning after December 31, 2002. 
 10.3      Sec. 6.  Minnesota Statutes 2001 Supplement, section 
 10.4   469.1734, subdivision 6, is amended to read: 
 10.5      Subd. 6.  [SALES TAX EXEMPTION; EQUIPMENT; CONSTRUCTION 
 10.6   MATERIALS.] (a) The gross receipts from the sale of machinery 
 10.7   and equipment and repair parts are exempt from taxation under 
 10.8   chapter 297A, if the machinery and equipment: 
 10.9      (1) are used in connection with a trade or business; 
 10.10     (2) are placed in service in a city that is authorized to 
 10.11  designate a zone under section 469.1731, regardless of whether 
 10.12  the machinery and equipment are used in a zone; and 
 10.13     (3) have a useful life of 12 months or more. 
 10.14     (b) The gross receipts from the sale of construction 
 10.15  materials are exempt, if they are used to construct: 
 10.16     (1) a facility for use in a trade or business located in a 
 10.17  city that is authorized to designate a zone under section 
 10.18  469.1731, regardless of whether the facility is located in a 
 10.19  zone; or 
 10.20     (2) housing that is located in a zone.  
 10.21  The exemptions under this paragraph apply regardless of whether 
 10.22  the purchase is made by the owner, the user, or a contractor. 
 10.23     (c) A purchaser may claim an exemption under this 
 10.24  subdivision for tax on the purchases up to, but not exceeding: 
 10.25     (1) the amount of the tax credit certificates received from 
 10.26  the city, less 
 10.27     (2) any tax credit certificates used under the provisions 
 10.28  of subdivisions 4 and 5, and section 469.1732, subdivision 2. 
 10.29     (d) The tax on sales of items exempted under this 
 10.30  subdivision shall be imposed and collected as if the applicable 
 10.31  rate under section 297A.62 applied.  Upon application by the 
 10.32  purchaser, on forms prescribed by the commissioner, a refund 
 10.33  equal to the tax paid shall be paid to the purchaser.  The 
 10.34  application must include sufficient information to permit the 
 10.35  commissioner to verify the sales tax paid and the eligibility of 
 10.36  the claimant to receive the credit.  No more than two 
 11.1   applications for refunds may be filed under this subdivision in 
 11.2   a calendar year.  The provisions of section 289A.40 apply to the 
 11.3   refunds payable under this subdivision.  There is annually 
 11.4   appropriated to the commissioner of revenue the amount required 
 11.5   to make the refunds, which must be deducted from the amount of 
 11.6   the city's allocation under section 469.169, subdivision 12, 
 11.7   that remains available and its limitation under section 469.1735.
 11.8   The amount to be refunded shall bear interest at the rate in 
 11.9   section 270.76 from the date the refund claim is filed with the 
 11.10  commissioner. 
 11.11     <b>[EFFECTIVE DATE.]</b> This section is effective for sales made 
 11.12  after June 30, 2002. 
 11.13     Sec. 7.  Minnesota Statutes 2000, section 469.1735, is 
 11.14  amended by adding a subdivision to read: 
 11.15     Subd. 5.  [HOUSING AND REDEVELOPMENT AUTHORITIES; USE OF 
 11.16  FUNDS.] The governing body of a city authorized to designate 
 11.17  zones under section 469.1731 may, by resolution, authorize its 
 11.18  housing and redevelopment authority to use all or part of the 
 11.19  city's allocation for tax reductions for border city development 
 11.20  zones under section 469.169.  These funds may be used to 
 11.21  reimburse the authority for costs it incurs in providing 
 11.22  development incentives and assistance under this chapter or a 
 11.23  special law that applies to the authority.  The commissioner of 
 11.24  revenue shall reimburse the authority for these costs to the 
 11.25  extent money remains available under the city's allocation and 
 11.26  the costs are adequately substantiated. 
 11.27     <b>[EFFECTIVE DATE.]</b> This section is effective the day 
 11.28  following final enactment.