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Dayton budget would boost spending and increase high-income taxes

The governor’s plan also offers property tax relief and lowers – but broadens – Minnesota’s sales tax.

Gov. Dayton challenged his critics to specify exactly where they would make further cuts.
MinnPost photo by James Nord

Gov. Mark Dayton outlined his “Budget for a Better Minnesota” plan [PDF] Tuesday, recommending substantial tax changes, including the promised higher income taxes on top income-earners, property tax relief and lower — but broader — sales tax.

Dayton proposed spending $37.9 billion in the next biennium, an increase of 7.6 percent over the current biennium. He also called for $3.6 billion in tax increases, $1.4 billion in property tax relief and $1 billion in new spending, plus $225 million in spending cuts.

Included in the budget “package” [PDF] — which also fills in a projected $1.1 billion budget deficit — are:

  • An income tax hike on the top 2 percent of Minnesotans — couples with taxable income of $250,000 or more — totaling $1.1 billion. (Individuals with taxable income of more than $150,000 also would be affected.)
  • A broadening of the sales tax base to include clothing costing more than $100 and online goods and services, with a reduction of the rate from 6.875 percent to 5.5 percent, resulting in $2.1 billion in new revenue.
  • Property tax relief of up to $500 per family, totaling a $1.4 billion reduction.
  • A 94-cent tax increase for tobacco, totaling $370 million.
  • A $300 million increase in K-12 education funding, $240 million in new money for higher education and $120 million for Local Government Aid and County Program Aid.

“Some will say we spend too much in this budget, and some will say we don’t spend enough,” Dayton said. “To those who claim this spending is too high, I challenge you to say exactly where more cuts should be made. And to those who say we need to spend more, I challenge you to say exactly where the money should come from.”

Expenditure growth in Governor’s proposal over current biennium

chart of expenditures in 2014–15 budget
Source: Minnesota Management & Budget
*Debt service and all other areas (capital projects) growth distorted by use use of tobacco/appropriation bonds in FY 2012-13 budget solution

The governor said his budget plan will end the “fiscal games, accounting gimmicks, payment delays and other financial manipulations” of the last decade.

Dayton’s proposal marks the starting point for legislative negotiations over the state’s two-year budget. Legislative committees are scheduled to begin picking through the specifics of the proposal on Wednesday. Last week, lawmakers started considering tax changes that they expected would be included in Dayton’s larger package.

Although the governor enjoys friendly majorities in the House and Senate for the first time in two decades, political and geographic considerations all but ensure a messy path toward a finished budget deal.

Republicans are poised to oppose DFL-backed tax increases, and the governor himself has rejected some plans — such as a proposed gas tax hike to fund Minnesota’s ailing roads and bridges.

Revenue growth in Governor’s proposal over current biennium

Revenue growth over current biennium
Source: Minnesota Management & Budget

Some of the key seats DFLers picked up in November to regain control of the Legislature are occupied by suburbanites who may be reluctant to support some of Dayton’s tax proposals.

Lawmakers may also face difficulty selling the expanded sales tax to businesses and Minnesotans who are accustomed to the exemptions on clothes and services. Expanding state taxes to online purchases may face an easier path because it has business community support and has been framed as a fairness issue for local businesses.

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On top of the medley of tax increases and spending cuts, herding 201 lawmakers toward a final product will pose logistical challenges. The DFL lawmakers in charge of legislative policy areas — from Health and Human Services to the powerful Senate Finance Committee — have significantly more experience than the governor in state budgeting, a departure from the relatively fresh class of GOP lawmakers that took over last session.

Legislative priorities – highlighted in some of the first bills of the session — range from paying back the school shift to property tax relief. Dayton’s proposal doesn’t include funding to pay back the shift.

DFL lawmakers complained during the governor’s first budget negotiations — which came in the midst of the painful 2011 government shutdown — that Dayton ignored the minority caucuses when he struck a controversial deal with Republicans to solve the state’s then-$5 billion shortfall and end the government shutdown.

It’s unclear how the governor and the newly graduated DFL leaders will grow into their fresh negotiating roles — though Dayton, House Speaker Paul Thissen and Senate Majority Leader Tom Bakk have said they got to know each other well during the 2010 gubernatorial campaign, which they’ve stressed will come in handy.

House and Senate Democrats and Republicans are offering their early reactions to the governor’s Tuesday afternoon.

Bakk has said Dayton enjoys an advantage in the budgeting process because he has direct access to the state agencies. Lawmakers mostly spent the first two weeks of session reviewing the November budget forecast and getting acquainted with their committees’ budget sectors while Dayton put the finishing touches on his proposal.

Despite the governor’s exhaustive budget planning, drastic fluctuations in the national economy could mean the package lawmakers ultimately pass closer to May will look a lot different than the one unveiled today.

State finance officials said the November economic forecast, which helped shape the governor’s budget proposal, was one of the shakiest projections they had ever seen.

“In my tenure here, I cannot remember a forecast with so much uncertainty built in,” Bakk told reporters after it was released in early December.

Uncertainty over the fiscal cliff crisis and other federal budget negotiations led state officials in December to conclude that the next economic forecast – set for release on Feb. 28 – would be key in budget decisions.

But with the national uncertainty delayed rather than solved, the February forecast might not provide the clarity that lawmakers are counting on.

Current projections indicate the state will have roughly $35.8 billion to spend over the next two years, but the forecast shows $36.9 billion in revenue needed to maintain current funding levels.

“The future really is at stake,” Dayton said in explaining why he wants to boost spending to $37.9 billion.