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Minnesota budget forecast sets the stage for the state’s next big political debate

With the DFL in charge at the Capitol, Gov. Dayton will be pushing “fairness” in efforts to stabilize the state’s spending and budget process.

Gov. Mark Dayton’s big idea is to create revenue streams that will be both greater and more stable than in recent years, when the state budget has been cobbled together with duct tape and borrowing.
MinnPost photo by James Nord

Wednesday’s release of Minnesota’s economic forecast will be only the first step in what will be a major political debate over the coming months.

For a decade, the state has been led by those who believe that government is an impediment to growth.

For eight years, Republican Gov. Tim Pawlenty argued that too much government — and too much public spending — was costing Minnesota jobs and prosperity. Then, in the past two years, a GOP-controlled Legislature was even more vociferous in demanding that government should spend less and “get out of the way” of business.

Such GOP leaders as House Speaker Kurt Zellers argued that Minnesota should compare itself to low-tax states — Indiana, Texas, even South Dakota — if it is to remain economically competitive.

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Suddenly, though, everything has changed. The progressives, or at least political moderates, will be in charge.

Dayton’s ‘quiet campaign’

For months, Gov. Mark Dayton and key members of his administration quietly have been campaigning for Minnesotans to look back to a time when residents saw their state as unique.

The message: Minnesotans should look at the role government can play in “investing” in the state’s public institutions as a way to create an environment that will allow the state to be a national leader in everything from public education to infrastructure — all helping to make the state an attractive place where businesses will want to build or expand.

Dayton’s big idea is to create revenue streams that will be both greater and more stable than in recent years, when the state budget has been cobbled together with duct tape and borrowing.

That means major tax reform will be an integral part of what he proposes to state legislators when they convene in January.

This week’s economic forecast will show how big a deficit is expected for the next biennium.  Most believe that deficit will be around $1 billion, excluding the $2.4 billion “borrowed” from public schools to “balance” the current budget.

Given deficits of the past, $1 billion almost seems modest. Recall that just two years ago, the Legislature was grappling with a $5 billion deficit. There was a government shutdown before that large math problem was resolved in a patchwork fashion that pleased no one.

Dayton has told Minnesotans that the GOP has done little except “kick the budget can down the road.” In coming months, he will argue that it’s time for the Legislature to adopt a system that will create budgeting stability.

GOP warns of DFL plans

Since Election Day, however, Republicans have been saying that Minnesotans will rue the day they put the DFL back in the legislative majority.

In a recent statement, GOP Chairman Pat Shortridge put it this way:

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“The next two years will provide a very clear picture about what life looks like under Democrats – higher taxes, fewer jobs, bigger government budgets, less take-home pay for family budgets.”

But in a campaign year filled with noise and slogans, Dayton unleashed an under-the-radar campaign of his own.

Commissioner Myron Frans
Commissioner Myron Frans

Revenue Commissioner Myron Frans, other commissioners and members of Dayton’s staff toured the state, meeting with small groups of community leaders. Their message: Government should not be seen as a problem; rather, it should be a partner. In fact, it’s that partnership that has made Minnesota’s economy stronger than the rest of the nation’s.

A major part of the quiet campaign also has been focusing on the need for Minnesota tax reform to create more “fairness.”

Wherever he travels, Frans carries two three-legged stools. The legs of the stools represent the state’s three major revenue streams: Sales taxes, income taxes and property taxes.

The 1999 stool shows that the legs were nearly equal. The 2010 stool, though, is unbalanced. The sales tax leg represents 26 percent of state revenue, the income tax leg represents 34 percent, the property tax leg represents 40 per cent of the local and state taxes collected in Minnesota.

The stools are a nice visual aide, almost as effective as the GOP’s oft-used kitchen-table analogy.

Remember how that went? The state should balance its budget in the same way Mr. and Mrs. Johnson sit around the kitchen table and balance the family budget.

Actually, though, the GOP did end up using the same technique many Minnesota families do when sitting around the kitchen table. They put everything on a credit card and said, “We’ll worry about it next month.”

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Anyhow, like the kitchen table, the stools don’t stand up well when inspected closely because those legs never will be balanced, not at least in terms of the state’s general fund. What the revenue legs do represent is a big-picture look at the amount of tax money collected in the state.

Local governments collect about $8 billion a year in property taxes, but only about $800 million of that ends up in the general fund.

The state’s impact on property taxes is mostly indirect. When the state offers more services and aid to local governments, property taxes in theory can be lowered or at least held flat. When the state cuts back on helping local governments — as has been the case in the last 10 years — property taxes increase.

Rebalancing revenue mix

The Dayton administration vows to get those legs balanced again. The implied message, by the way, is to also increase state revenue.

Almost certainly Step One of the balancing process will be measures aimed at lowering local property taxes through such things as the homestead credit or more local aid.

Given that DFL legislators almost universally ran on this and given that the GOP hardly is in a position to argue against lower taxes of any sort, this effort should face little opposition.

A bigger battle, though, awaits on Dayton’s campaign to tax the rich. His big plan will include a fourth income tax bracket, to be paid by Minnesota’s wealthiest. Additionally, there likely will be an effort to broaden the sales tax to include services, such as legal fees.

But with each swallow of tax vinegar, there also will be some sugar. Increased taxes on the wealthiest will come with a proposal to lower corporate tax rates. Broadening the sales tax likely will include lowering the overall rates.

Additionally, Dayton has said that his commissioners, coupled with public employee unions, have been meeting regularly to work together to find ways to do their work more efficiently.

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Tax fairness, government efficiency and budget stability will be talked about extensively by the administration. An increase in revenue generated by reform will be talked about extensively by the GOP.

It has been the job of Frans and others in the administration to soften the opposition with the quiet campaign. They’ve held about 150 meetings in 49 cities and towns around the state in recent months. Those meetings have involved more than 7,000 people.

The idea behind all of these meetings is to create a grass-roots movement that will allow reform to move ahead. Can’t get the leaders of the state Chamber of Commerce to buy in? Go for the Main Street business people.

“We’ve seen cynicism about government,’’ Frans said. “But what’s been so great is that people are willing to share their ideas. They’ve shown they’re hungry for information. They want to hear facts, not just the rhetoric of ideologues.’’

With the unveiling of the economic forecast, the “big idea” should start to have more specifics.