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Gov. Dayton faces a tough sell on far-reaching budget ideas

Gov. Dayton faces a tough sell on far-reaching budget ideas
Minnesota House of Representatives Public Information Services
Gov. Mark Dayton knew in advance how his ideas to create what he calls “a better Minnesota” would be greeted.

After spending months painfully putting together a budget and tax reform, Gov. Mark Dayton needs only to sell what he and his administration have created.

But there’s no part of the proposed changes that will be easy to sell.

Initial responses to the Dayton effort, which would raise about $2 billion in new revenue, underscore the reality that nothing comes harder than change.

Here’s what Dayton has going for him: He has much higher approval ratings than the Legislature. He has a bully pulpit, which he will use. He has a surprisingly transparent plan: a fourth income tax tier, a lower/broader sales tax and, to sweeten the pot, $500 for every homeowner in the state as a form of relief from property taxes that have soared in the last decade.

Here’s what he has going against him: Republicans, business interests ranging from big companies to corner barber shops, his recovery from back surgery, members of his own party who on Tuesday were praising the governor’s “bold ideas” while tap-dancing around the proposals.

‘Bold ideas’ quickly draw critics

Dayton knew in advance how his ideas to create what he calls “a better Minnesota” would be greeted.

“Devastating,” Dayton predicted the critics would say. “Ruinous. I’ve heard this for 30 years.”

Need an example? Dayton’s plan to broaden the sales tax to include services brought an instant whine from the state bar association’s president, Robert Enger.

Enger praised the goal of tax reform, but not taxing legal services. “A misery tax,” Enger said in the sort of self-serving statement that’s going to be rumbling through the halls of the Capitol in the coming months.

“Taxing legal services will harm the middle class,” Enger said.

Many probably didn’t know that the state’s attorneys were so interested in the middle class.

 Kurt Daudt, the Republican’s brand-new minority leader, came up with a new version of the old “ruinous’’ refrain.

“This budget is for a better Wisconsin, because that’s where the jobs will go,” Daudt said.

(It should be noted that DFLers have hopes that Daudt will be more moderate than the GOP leaders who preceded him.)

GOP reaction predictable

Credit the Republicans with ho-hum predictability. Neither Daudt nor Sen. David Hann, the Senate’s new minority leader, could find anything positive in the proposal, even though it calls for a 14 percent corporate tax rate, which Dayton claims is the largest decrease in 26 years. The cut would be paid for by eliminating a host of loopholes enjoyed by a small number of powerful businesses.

Dayton challenged Republicans — and those in his own party — to come forward with better ideas if they have them.

Neither Hann nor Daudt was interested in accepting any part of that challenge.

“We don’t have the gavels,” said Hann of the power that comes with being in the majority.

Of course, they did have the gavels for two years and ended up being stripped of power by the public. However, to this day, the Republicans are claiming they did a great job of managing state government. They’re still talking about the surplus they left in the coffers. (It’s a surplus that, to most people, looks like a $1 billion deficit, not counting school fund shifts and other gimmicks.)

Long and short of it, Dayton’s going to get only heated rhetoric from the GOP.

 “What’s the big thing we’re going to gain?” was Hann’s question.

He meant that derisively.

Two big things

But Dayton and even squishy DFL legislators say that the plan delivers two big things to Minnesotans: more money for K-12 education ($300 million more in the coming biennium) and a lowering of property taxes, through the $500 property tax rebate.

Most of all, the governor says, his plan would put the budget in sustainability mode, rather than the constant state of crises of the last decade.

Presumably, if he wasn’t still in recovery from back surgery, Dayton would have left the Capitol late Tuesday to fly around the state to sell, sell, sell.

As it is, his staff has made it clear that the governor will take his case to the people. There’s not a newspaper editor or newscaster in the state who won’t have an opportunity to have a phone conversation with the governor about this plan.

Already, Dayton says that this budget plan is a product of about 150 meetings that Revenue Commissioner Myron Frans had with Minnesotans from across the state in recent months.

“Tax reform has strong support from an ever-increasing number of Minnesotans who believe the current system is unfair to them,” Dayton said. “Most of them are right.”

Dayton and Frans make the claim that most Minnesotans — 98 percent or so — will benefit from the changes in the tax system. Income taxes on the 98 percent won’t increase, and Frans says studies show that the sales tax changes overall will not affect everyday Minnesotans. Yes, they will have to pay a tax for a haircut. But the overall rate paid on most goods will decrease to 5.5 percent from 6.85 per cent. And, of course, there’ll be that $500 property tax check from the state, year after year after year.

That’s the plan, one filled with other goodies to benefit most Minnesotans. But the costs that businesses will pay to purchase services are where the real new revenue is to be created, and Republicans are going to argue that those costs will be passed on to consumers.

Truth be told, DFL legislators are nervous about that, too. In fact, DFL leaders are just plain nervous. They’re only days back in power — much of their power the result of victories by “business-friendly” suburban moderates.

Deluge of data sheets

It’s clear that Dayton will do everything he can to assure DFL legislators that “the people” are on his side. His office is going to release a deluge of “personalized” data sheets on the impact of his proposals in counties across the state.

Example — Dayton’s budget proposal for Moorhead: $500 property tax rebate for all homeowners. 0.7 percent of taxpayers in Clay County will be in the new fourth tier. $314 in new funding per student in Moorhead schools …

But while the governor’s office is spinning, the governor is going to have to do a whole lot of hand holding.

It was interesting to watch the likes of Senate Majority Leader Tom Bakk and House Speaker Paul Thissen dance around the governor’s proposal. Both praised the governor’s “boldness.”

“I haven’t seen this kind of leadership since Rudy Perpich,” said Bakk.

“The governor delivered on what he said he’d deliver,” said Thissen. “He’s laying out choices for Minnesotans. That’s not been done for a long time.”

OK, OK, that’s nice. But is this the sort of plan DFLers can rally around?

There was hemming. And hawing. And more hemming.

Bakk wants to talk to some CEOs. Thissen wants to listen to Minnesotans. Then, they essentially said, “Get back to us in April … and we’ll have a budget.”

Dayton’s DFL challenge

So Dayton’s final challenge will be with his own party. He is not the first governor to suggest that the sales tax should be reshaped. That’s an idea that’s been floating around for decades but, in the end, dies for all sorts of reasons.

Dayton recalled that Perpich, in the 1980s, attempted to put a sales tax on the newsprint that newspapers purchased. Newspaper publishers, waving a First Amendment banner, had a fit.

Dayton recalled Perpich at the end of that losing fight saying, “I won’t try that again.”

His refusal to back down from supporting the Vikings stadium bill last session shows that Dayton is made of stern stuff.

He has a good amount of data on his side.

There are studies showing that Minnesota has fallen from 10th in the nation in per-pupil K-12 spending to 20th.

Other studies show that the sales tax system is antiquated. For example, a half century ago, Minnesotans spent two-thirds of their disposable income on purchasing goods and one-third on services, Frans said. Now the total reverse is true. Yet, our sales tax system still reflects the long-gone spending habits.

Dayton also points out that there is almost no correlation between job growth and tax climate. South Dakota, for example, is 51st in taxes and 44th in job growth.

But he’s seeking change.

Given a chance, legislators will make a lot of noise and fill bills with exclusions and exceptions and hold all-night hearings. But transparent change makes them very, very nervous.

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Comments (7)

property tax & a give back??

Thanks to Doug Grow for a good explanation of the problems Dayton may have in pushing his proposals. As Obama said in his inaugural speech, it's up to all of us--not just our legislators--to make things happen. My small contribution today is to suggest that those of us who believe in government and what it provides should give back our property tax "bonus." The old saying "there's no free lunch" is relevant here. If we want good roads, good schools and everything else government provides we ought to be willing to pay for it, skipping eating out at lunch and back to peanut butter and jelly if that will help us get the services and infrastructure we need and depend on.

Inspiring

Very inspiring comment, Arvonne. I liked your paraphrase of Obama, but it's not too late to change the legislative course of these reforms either as you and others can make it happen by contacting legislators now. The state doesn't receive a lot of revenue from property tax so unlike income tax refunds which are paid out of income tax and sales tax refunds which are paid out of sales tax paid, property tax refunds do not come from property tax revenues. They come from money from other sources, including sales and income taxes, which are intended to pay for the things you describe that we value in government. It does not make sense to me that the state would become the payer of my city and school and county services (levies), which are the primary components of residential property taxes.

~Bob

Ginny

This looks like a sensible, doable plan to me and one that will help education, in particular, and raise revenues without harming the middle and lower classes. I like the idea of a property tax rebate and taxes on things like clothes over $100 for each item.
What does Hann mean, What's the big thing we gain. It looks to me as thought we even out the tax load and tax higher incomes more fairly and, most of all, we increase the education spending. This is so key, I don't know why the repubicans don't see it. Education spending brings in far more than we spend (but not right away, which may be the problem with the republicans).

While I agree that the legal

While I agree that the legal community's opposition to Dayton's proposed tax on legal services may be self-serving - attorneys are worried that business will decrease when the extra expenses show up on their clients' bills - the implication that attorneys are not "interested in the middle class" is misguided. Many attorneys in the state work in solo and small firms primarily serving the middle class, and all of us are adapting to a post-recession legal market where clients are expecting more for less. Additionally, Minnesota attorneys are professionally obligated to dedicate a certain portion of the practice to providing free legal services to those in need. Many attorneys, including Robert Enger himself, go above and beyond what is expected of them in this regard. Despite their popular image, many attorneys are caring and compassionate advocates for their communities and those in need of their services.

Jelly Filled

Does that mean that they no longer invite clients for a doughnut and coffee and then add that to the bill?

Tax the attorneys

Tax the rich attorneys and let the working poor be able to afford clothes that are not taxed.

DFL values, remember?

Four years submerged in an underwater tax jungle

These are my personal opinions.

First, the article states an inaccurate rate: "5.5 percent from 6.85 percent. " The current rate is 6.875 percent or 0.06875. In words, this tax rate goes down to the hundred-thousandth place. This is an issue for point-of-sales and software developers (and obviously their customers and independent small business). For example, I recently made a purchase with a major national food chain that printed the St. Paul tax rate as 7.62%, whereas the rate is actually 7.625%, but because of the limitations (I surmise) of the software developers they only allowed for a reasonably long decimal length to the ten-thousandth decimal place, but not the hundred-thousandth... This simple reform of changing the rate to calculable digits, I believe, is the number one low-hanging fruit in this package. Yay.

Second, the idea is well-intended, but the complexity of tax rate calculation and local taxation, particularly special districts, should be discussed about the proposed new 7-county transit tax of quarter-cent, or 0.25%. Why? Well, this idea is kind of old news: there already exists a 5-county (not Scott or Carver) metro area (special district) "Transit Improvement Area" tax of 0,25% and $20 fee for sales of motor vehicles new and used. These ideas are contrary to the simplification and economic competitiveness because out-of-state businesses, the kind we are trying to require and collect our taxes have never hear of Anoka, Dakota, Hennepin, Ramsey or Washington... and certainly not Brooklyn Center, Shoreview, Maplewood, etc... There are ways to simplify that calculation*, be business-friendly and hypercompetitive in state tax systems. (*I am aware of 9-digit zip code calculation, too. No comment.) Does the 7-county area become the Transit Improvement "Zone"?

Third, as for the projections, I have absolutely no knowledge of them but I have a very hard time believing these are robust projections with the enormity and complexities involved. In my own unqualified mind with an economic's degree, I would think that such a model would have to capture:

(a) the substitution effect of the new increase in prices for all these services (and all available substitutes, principally online digital services?);
(b) the budget constraint effect of increases in one area;
(c) the increase in non-production costs to business that are passed on as general price increases;
(d) all of that on top of the uncertainty of the state and national economic outlook.

These projections are required to justify the rate reduction constitutionally by expanding the base such as to offset the loss in revenue. They should be reviewed carefully with that in mind. Does that projection include the new 7-county quarter-cent rate, for instance?

Which leads to my fourth and final thought regarding the property tax relief. First of all, this credit appears to only affect homeowners (aka homesteads) which doesn't afford any relief for younger people who are struggling and paying rent? Dang. Also, we currently have homeowners property tax refund and renter's rebate (both based on income and property tax (or rent) paid). Do there exist any new ideas in Minnesota tax reform? What will all the work done and benefits gained from the Sales Tax Reform efforts get (projected at (over $2.0B) according to the budget which will be shifted in payments to homeowner's that represents 75% of that revenue gain (~$1.5B) in the form of state rebates (for a tax that benefits local governments, primarily, not the state). Is this a state band-aid over a festering local government wound?

Kind of odd when you see it that way.

So people born after 1980, will you pay more into that $2.0 billion or will you receive more from that $1.5 billion in rebates (maximum $500)? Keep in mind that $500 amounts to about $9,000 (at 5.5% which is lower than the rate most of you would pay) on taxable purchases. How about the people born before 1980? (It's kind of a trick question because the sales tax being larger, obviously on average, we all pay more in and receive less back through the payment shift, which has different administration and compliance costs).

Interested to see how this all plays out...

~Bob