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Dayton, Senate Democrats cool to House surtax plan

bakk portrait
MinnPost file photo by James Nord
Senate Majority Leader Tom Bakk said the surtax likely would not be included in the Senate tax plan.

Gov. Mark Dayton and Senate Democrats reacted coolly Wednesday to a House plan for a temporary surtax on high-income Minnesotans.

The funding mechanism would be used to pay back about $800 million the government still owes the state school system.

On Tuesday, the House proposed a “blink-off” surcharge on the top 1 percent of Minnesotans — in addition to a permanent income tax hike on high earners – as part of its budget plan.

On Wednesday, Senate Democrats released their budget outline, which will rely on roughly $2 billion in new taxes to fund increased spending for education, economic development and property tax relief.

Senate Majority Leader Tom Bakk said the surtax likely would not be included in the Senate tax plan, which hasn’t been unveiled yet.

Dayton told reporters on Wednesday that current law is already repaying the shifted funds and said that if the state’s economic picture keeps improving, lawmakers won’t have to take additional action.

Both the Senate and House plans tackle the state’s $627 million budget deficit for the next two years.

Surtax goes too far?

“I’m not enthusiastic about it [the surcharge],” said Dayton, whose budget includes a $1.1 billion income tax hike on the top 2 percent of Minnesotans. “I do think it goes too far in increasing the rate on the top earners.”

Speaker Paul Thissen, who didn’t specify how the House would tackle its permanent income tax increase, called the surcharge a “very elegant solution” on Tuesday. As House Democrats explained it, the rate would reflect the state’s obligation to schools, and the tax would expire once the shift had been repaid.

“We think the responsible thing is to pay that off and to do it with this one-time surtax,” Speaker Paul Thissen told reporters on Tuesday of the House plan.

House members from both sides of the aisle have been clamoring to pay back the school shift since before session began. Dayton and the Senate, however, consider the obligation as less of a priority to accomplish within the next two years.

Senate Taxes Committee Chairman Rod Skoe, a key player in designing that body’s tax proposal, demurred when asked to comment on the House surtax.

“I’m giving the House credit for being creative,” Skoe added. “It’s important for them to pay the shift back, so they’re doing what they think is important for them.”

The Senate, he said, hasn’t finalized how it will raise the revenue for a $486 million investment in education, a $262 million boost in higher education funding, $135 million for economic development and $464 million in tax relief.

Dayton said Wednesday morning that he hadn’t yet seen the Senate tax plan.

But Bakk offered some possibilities. The Democrat from Cook said Senate Democrats would likely raise revenue through a progressive income tax hike, cigarette tax increases and the so-called “Amazon tax” on Internet sales.

Senate Budget Targets

Budget Sector
February Forecast Base
Senate Targets
Senate Change from Base
E-12 Education$15,177.30$15,663.70$486.40
Higher Education$2,565.30$2,828.00$262.70
Health & Human Services$11,362.50$11,209.60($152.80)
Environment, Economic Development & Agriculture$523.20$658.50$135.30
State Departments and Veterans$898.30$926.30$28.00
Transportation and Public Safety$333.40$320.50($12.80)
Judiciary$1,672.10$1,760.00$88.00
Tax Aids and Credits$2,710.90$3,174.50$463.60
Capital Projects/Bonding/Other Bills$1,500.80$1,610.80$110.00
Total$36,743.70$38,152.00$1,408.30

Possible sales tax changes

Some sales tax reform is also on the table, Bakk said, but he stressed that any changes — such as expanding the tax to consumer services – would be revenue neutral through a lower rate.

“Our position right now today is anything we do relative to the sales tax expansion would reduce the rate by a corresponding amount,” he said. “It would not generate revenue to pay for spending.”

Likewise, Bakk said, closing corporate tax loopholes would also result in a lower tax rate on businesses. House Democrats have said they may attempt to capture revenue by closing loopholes, and the proposal is included in the governor’s newest budget.

Bakk said Senate lawmakers were torn between funding property tax relief and paying back the school shift. In the end, they chose payments to local governments and other property tax relief programs over refunding the education system.

“We just couldn’t figure out how we could raise enough money to do both the property tax relief and pay back the school shift,” Bakk said.

Senate Democrats said they were shocked to see how closely the House, Senate and governor’s budget targets came on such priorities as education, economic development and property tax relief.

But there is some room for disagreement.

Bakk said the Senate had considered applying its income tax proposal to more than just the top 2 percent of Minnesotans, as the governor proposes. The Senate number could be closer to the top 5 percent of earners.

“There may be some room to get below the $250,000 number and expand it to a slightly larger number of Minnesotans than the top 2 percent,” he said.

Sen. Dick Cohen, the Senate Finance chairman who helped develop the budget targets, highlighted the budget’s spending on education. He said the E-12 target allowed for serious investments in early education.

The Senate’s $486 million investment in education is slightly less than the $550 million pledged in the House, which would fully fund voluntary all-day kindergarten.

Both bodies have also proposed $150 million reductions in Health and Human Services spending. Cohen said on Wednesday that the Senate might look to tap a surplus in the Health Care Access Fund, which supports the outgoing MinnesotaCare public health program, to refinance that number.

Senate Republicans plan to release a framework budget of efficiencies and cuts, rather than tax increases. Senate Minority Leader David Hann said he would wait until the Democrats release a full budget before outlining GOP priorities.

hann portrait
MinnPost file photo by James Nord
Senate Minority Leader David Hann said he would wait until the Democrats release a full budget before outlining GOP priorities.

House and Senate Republicans have criticized their counterparts’ budgets over the last two days as simply massive spending and tax hikes without any meaningful reform.

“The real question is how does more taxation help the economy?” Hann asked. “That’s the question they have to answer.”

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House Democrat's plan

The Senate AND the House are controlled by the Democrats.