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One attempt at a Plan C: Brick City Budget

During his State of the State address a couple of weeks ago, Governor Mark Dayton asked for critics of his budget plan to come up with their own “Plan C” (Plan A being the Governor’s budget, and Plan B being a spending-cut only response to the projected $1.095 billion deficit).

So, I’ve taken a shot at it — call it the Brick City Budget.  (The StarTribune did as well.) These are the things I tried to do:

  • Minimize middle-class impacts as it relates to sales tax changes
  • Make a meaningful payment towards the remaining K-12 school funding shifts
  • Minimize negative impacts that come with expansion of sales taxes to B2B services

Revenue

Taxes

Dayton

Brick City

Income Tax 4th bracket

1,098.8

1,098.8

Property tax refund

(1,438.6)

Snowbird tax

30.0

Business sales tax

3,200.0

782.3

Consumer sales tax

1,060.0

1,116.8

Digital products

31.2

31.2

Sales tax rate reduction

(2,137.5)

(649.6)

Rental car tax

15.0

15.0

Sin taxes

369.9

369.9

Net corp income tax changes

4.9

4.9

Other revenue changes

(38.8)

(38.8)

Income tax cut

(650.0)

TOTAL

2,194.9

2,080.5

$ in millions; amounts represent change from the November 2012 forecast

There are some significant changes to the Governor’s proposal.  Let’s take them one-by-one.

First, I remove entirely the $500 per homeowner property tax relief the Governor proposed.  While I applaud the Governor’s instincts and recognition of escalating property taxes as an issue, this is not an efficient way to address the problem and it leaves our overly complex property tax system untouched.

Second, I change the new base sales tax rate from 6.85% to 6.25% instead of 5.5%.  This was done to facilitate some of the other changes listed below.

Third, I remove most of the Governor’s proposed business service sales tax expansion.  The remaining categories being taxed (management & other consulting, business support services, office administrative services, specialized deign services, and facilities support among them) are less likely to put Minnesota businesses at a disadvantage compared to competing firms as well as being less likely to disadvantage small businesses versus large businesses.  The new revenue raise by this tax is less than a quarter of the Governor’s proposal, and covers a smaller range of B2B services than similar business sales tax expansion proposals from the Republican governors of Ohio, Nebraska, and Louisiana.

Fourth, I keep clothing exempt from sales tax.

Fifth, I remove the so-called “snowbird” tax that would be levied on gains from stocks and bonds and dividends earned by people who reside in Minnesota for less than half of the year.

Sixth, I would change the composition of Dayton’s increase in “sin taxes”.  Dayton’s increases are solely in cigarettes and tobacco — I would add an increase in Minnesota’s liquor excise tax of $75 million and reduce the increase in cigarettes and tobacco.

Finally, I would offer $650 million in income tax relief to be implemented through cuts in the rates of the lowest two tax brackets.  This would primarily be designed to help offset the impacts of the sales tax expansion for lower- and middle-income tax payers, although all taxpayers would benefit from this change as tax rates on a married couple’s first $135,000 in income would be cut by this proposal.

In total, the Brick City Budget would net about $114 million less than Gov. Dayton’s proposal.

Spending

Spending

Dayton

Brick City

K-12

344.2

493.0

Higher Ed

250.4

200.0

Property Tax Aid & Credit

117.1

60.0

HHS

128.3

100.0

Public Safety

86.1

65.0

Transportation

(25.6)

(25.6)

Economic Development

70.1

50.0

Debt Service

28.5

28.5

Environment & Energy

17.6

7.5

State Government

13.9

Agriculture

0.7

0.7

TOTAL

1,031.3

979.1

NET CHANGE

1,163.6

1,101.4

$ in millions; amounts represent change from the November 2012 forecast

On the spending side of the ledger, the major change is in K-12 education.  Instead of increasing the basic formula rate $52 per pupil at an expense of $119 million for the biennium, I instead pay back $275 million of the outstanding $1.1 billion school shift, while keeping the Governor’s investments in optional all-day kindergarten and increased funding for special education and early childhood programs.  While some school officials rightly point out that the basic formula rate has lagged inflation for the last decade, political realities dictate that the state needs to make some headway on getting the shift behind it in a reasonable timeframe.

Most other categories of the budget see reductions from the Dayton proposal — in fact, excluding K-12, spending in my proposal is $200 million lower than Dayton’s, while still making significant investments in critical areas.  While investments in local government aid are less than half of the governor’s proposed levels, a $60 million increase should help relieve some pressure in local budgets.  Meanwhile, the $50 million reduction in higher education could be expected to come largely out of the University of Minnesota’s budget, pending completion of the review of their administrative staffing and expenses.

Recap

This Brick City “Plan C” is an attempt to rectify some of the weaknesses of the Dayton budget proposal. Like any budget, it involves significant tradeoffs, and not all of the options available are good ones and all are open to debate.  What do you think?  Leave your comments below.

(The figures above represent my best attempt to calculate what the numbers would be, which is not always straightforward.  Any errors, as such, are inadvertent.)

This post was written by Sean Olsen and originally published on Brick City Blog. Follow Sean on Twitter: @sean_olsen

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