Dayton offers ‘bold’ budget, tax reform

by T.W. Budig

ECM Capitol reporter

Democratic Gov. Mark Dayton’s 2014–15 state budget proposal is the boldest seen since the days of Gov. Rudy Perpich, Democrats say.

“This is bold,” said Senate Majority Leader Tom Bakk, DFL-Cook.

Dayton, in a budget initiative heavy with tax reform, proposes to broaden the state sales tax to services — auto repair, haircuts — and extend the sales tax to clothing items costing $100 or more.

While businesses lose sales-tax exemptions for legal, accounting, and other services, the broadening allows for a state sales-tax rate cut by more than a percent to 5.5 percent — the cut would drop the state’s sales tax from seventh highest in the nation to 27th, Dayton said.

The total amount of sales tax paid by the typical Minnesota consumer under the broadening proposal would remain about the same, according to a Revenue Department estimate.

Food, prescription drugs, medical services and other some items would remain exempt under the proposal.

But Revenue Commissioner Mryon Frans said unless a given service is specifically exempted, the sales tax, as proposed, would likely apply to it.

The sales-tax reform is slated for Jan. 1, 2014.

“That’s goes against my upbringing,” the Dayton’s Department Store heir joked about taxing clothing.

Republicans blasted the sales-tax proposal.

“It’s not the wealthy,” said Senate Minority Leader David Hann, R-Eden Prairie, of people the governor planned to tax.

“It’s everybody,” he said.

In addressing the “most unfair of all state and local taxes” or the property tax, Dayton proposes a $500 property-tax rebate to homestead filers that overall would provide $1.4 billion in tax relief over the biennium.

The rebate would be applied to the first $500 of property taxes paid in 2013 and every year going forward, Dayton said.

Dayton’s budget would fully fund the renters’ property-tax credit.

The credit has been at the center of budget battles in the past.

Dayton’s property-tax initiative includes a $120 million increase to local government aid and county aid.

In easing  the property-tax burden on business by $120 million, Dayton proposes a temporary two-year freeze on rate inflation in the state business property-tax levy.

He also proposes cutting the state corporate income tax from 9.8 percent to 8.4 percent.

This would drop the rate from fourth to the 12th highest in the country, according to the administration.

Dayton proposes cutting unemployment insurance taxes by $346 million over two years.

The administration heralds the move as providing business with more money to invest in the business and the state economy.

“There’s a lot in here for the business community to like,” Bakk said of the governor’s proposal.

Dayton, who ran for office with a tax-the-rich campaign slogan, cites a tax incident study by the Minnesota Department of Revenue showing the Minnesota middle class paying about 12.3 percent of its income on state and local taxes while the wealthiest 2 percent paid 9.7 percent.

“That is not fair,” said Dayton.

The governor proposes crafting a fourth-tier income-tax bracket with an additional 2 percent on the wealthiest 2 percent of high-end earners. The fourth tier bracket would be at 9.85 percent.

It would apply only to married couples earning more than $250,000 in taxable income, single people earning more than $150,000.

The tax would capture an additional $1.1 billion over the upcoming two-year budget cycle.

The fourth-tier proposal would place the state’s upper tax rate in the top five nationally, according to an administration official.

“Let me repeat that: My proposal does not raise income taxes on 98 percent of Minnesota citizens,” Dayton said of his income tax proposal.

Indeed, if the $500 property-tax rebate is considered, taxes for many Minnesotans will go down, the governor argues.

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Additionally, Dayton is proposing a 94-cent-per-pack state tax increase on cigarettes that would bring in about $370 million over two years.

The revenue would be spent on health care.

“I must say I had to be talked into that this time,” Dayton said of increasing the tax on a pack of smokes.

Historically, he has not favored such an increase, he said.

All told, the income-tax increase on top earners, sales-tax expansion, cigarette-tax increase, and a minor change to the corporate income tax will bring in an additional $2.1 billion over the upcoming two-year spending cycle.

This is after $1.4 billion in property-tax rebates is paid for.

He realized his tax reform proposal will run into stiff opposition, Dayton explained.

“I expect that significant tax reform will be very difficult to achieve in this legislative session,” he said.

Powerful individuals and business interests oppose it.

Plus there’s the additional burden of needing to make good a $1 billion budget deficit.

The Minnesota State Bar Association immediately voiced its strong opposition to extending the sales tax to citizens and businesses needing legal services.

Another hurdle for Dayton’s proposed budget is the Minnesota Legislature.

Democratic legislative leaders, while praising Dayton for perceived boldness and a proper focus on the middle class, indicated the governor’s tax reform proposal will face scrutiny and change.

No one should have any illusions otherwise, House Speaker Paul Thissen, DFL-Minneapolis, explained.

Indeed, Bakk indicated the governor’s proposed sales-tax extension to clothing could be facing long odds.

“(It’s) a pretty steep hill to climb,” said Bakk of passing such a provision.

Dayton’s proposed two-year state budget calls for $38 billion in spending.

There are no gimmicks in it, said Finance Commissioner Jim Schowalter.

The governor heralds his budget proposal as cutting millions of dollars in state spending.

He points to tighter contracts with HMOs and long-term care reform as saving more than $1 billion.

State government departments must absorb some $890 million in inflationary costs, as the cost of inflation is not included in the budget, administration officials explain.

In other areas, the governor proposes spending about $86 million on economic development that will leverage some $1.4 billion in additional private investment, according to the administration.

He proposes slating $80 million in additional spending apiece for the University of Minnesota and Minnesota State Colleges and Universities (MnSCU).

In a change affecting Greater Minnesota, Dayton proposes replacing Republican Gov. Tim Pawlenty’s signature rural development program Job Opportunity Building Zones (JOBZ) with the Minnesota Job Creation Fund, which provides more accountability, according to the administration.

In another economic development measure, Dayton would slate $1.5 million into a Global Competitiveness Initiative to increase exports and foreign investment in Minnesota.

In the area of transportation, Dayton proposes a quarter cent local sales tax increase in the seven-county metro area to bolster transit development and cover the operational costs of existing transit.

Specifically, the extra funding would be slated toward fully funding Southwest Light Rail capital and operating costs, improve neighborhood bus services and eliminate current transit operating structural debt.

Legislative committees will immediately begin holding hearings on Dayton’s proposed 2014–15 state budget.

Democratic leaders indicated they planned to travel the state in upcoming weeks to discuss the budget with voters.