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Minnesota budget: How Dayton’s team put the ‘Big Plan’ together

The governor told Revenue Commissioner Frans to get the basic principles “right” and not worry about how the politics play out.

It didn’t take long for Revenue Commissioner Myron Frans to find the hot spot: property taxes.
Office of the Governor

In November 2011, Gov. Mark Dayton told Revenue Commissioner Myron Frans to pack a bag and hit the road.

This was to be something more than one of those “listening tours” that fast-talking pols always chatter about.

Frans was to travel around the state and come back to St. Paul and design a revenue model that would encompass Dayton’s “tax the rich” 2010 campaign theme in time for the governor’s 2013 budget proposal.

But beyond that, Frans was to come up with revenue plans that would make Minnesota budgets sustainable and, in the governor’s eyes, “fair” into the future.

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Frans was also expected to listen.

“The governor told me, ‘Let’s hear what the people are saying,’ ” Frans recalled. “He said, ‘We need to know what the hot spots are.’ ”

First ‘hot spot’: property taxes

It didn’t take long for Frans to find the hot spot: property taxes. People wanted relief. Over and over, Frans heard that, which explains how the $500 rebate came into place and how the re-formulation of Local Government Aid became part of the package.

But there was one other thing Frans consistently heard from the start of his year-long tour.

Minnesotans are weary of living in a state which lurches from one budget crisis to the next.

“Fix it,” Frans was told.

What neither Dayton nor Frans even considered when the revenue commissioner started his journey was that the Big Plan they were trying to create ultimately would be introduced to a DFL-controlled Legislature. Dayton told Frans not to concern himself with how a plan would play out in the Legislature.

Instead, he told his revenue commissioner “to get it right” and then the politics would just have to play out.

As Frans was heading out of St. Paul (first stop, Moorhead), Dayton’s commissioners and scores of other state officials began a series of meetings about government agency “outcomes.” This sounds like 21st Century poli-speak, and perhaps it is.

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But, according to Tina Smith, Dayton’s chief of staff, the purpose of these meetings was to make government more effective and efficient.

Outcome-based budgeting

Dayton didn’t want state agencies to merely receive funding based on the previous budget but, rather, on outcomes.

At these meetings, officials were expected to ask the big questions: How well are we doing?  What programs are working? Where is the state doing better than most?  Where is it falling behind?

What these working groups decided, however, is that deep budget cuts of the last session already had created substantial changes in government operations. There was little left for trimming.  Dayton’s budget proposal, however, does pass inflationary costs on to the agencies, which effectively means more cuts.

The agencies were coming up with one series of reports, which the governor would use to assign budget numbers. Meantime, Frans was getting an earful, not only from citizens but from financial gurus of previous administrations.

Those two separate chains of events led to the single budget proposal that Dayton came forward with on Tuesday.

Remarkably, it wasn’t until the November economic forecast (which showed a $1.1 billion deficit for the coming biennium) that Frans’ revenue models and the state’s overall budget were tied together.

“I was never told to generate X-amount of dollars,” Frans said. “I was to get together the model, which would work to get the [budget] number he wanted to hit.  I was disappointed with that November forecast. It would have been nice to have an extra $200 million or so to work with.”

Dayton active throughout process

Dayton’s fingerprints are all over both the revenue and spending sides of the budget, which reflects some of the principles he campaigned on. There’s the “fairness” issue, reflected in the addition of a fourth income tax tier (“tax the rich”). That’s meant to more evenly distribute taxpayers’ income tax load.

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And most of the new revenue not used to pay off the deficit would go to education from pre-school through college.

Beyond Dayton campaign promises and political philosophy, the budget reflects the reality that he is a hands-on governor.

For months, meetings were held in “the budget basement,’’ which is what a conference room on the main floor of the governor’s residence came to be called in the days that the two plans  — revenue and policy — were moving toward a single proposal.

Dayton attended almost all of those sessions, but scores of others played roles of all sizes.

A change of mind

The governor, for example, initially opposed the idea of putting another 94-cent tax on a pack of cigarettes. In his gut, he considers this a regressive tax that hits hardest those stuck with an awful addiction.

But he met with Ed Ehlinger, commissioner of the Department of Health, who eventually convinced Dayton that, in the long run, a cigarette tax was morally right.

Tina Smith
Tina Smith

“He told the governor that the tobacco companies are aiming at the 15- and 16-year-old kid,” said Smith.

Those kids, Ehlinger went on to explain, can be most easily discouraged from smoking by price.

The tax, then, wasn’t seen so much as a revenue producer as a way to reduce smoking.

Nonetheless, the tax will put Minnesota cigarettes in line with the cost of a pack of cigarettes in Wisconsin, meaning it shouldn’t affect competitiveness for small stores along the Wisconsin-Minnesota border.

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Sales tax controversy

Frans’ most controversial proposal — accepted by the governor — is the combo package of lowering the sales tax rate while broadening the base.  But there’s nothing new about this idea.

For years, he said, various commissions, blue-ribbon committees and task forces of both parties have been saying that the broadening of the sales tax is the only way to bring sustainability to the state budget.

Frans met with several finance experts from previous administrations. All agreed that broadening the tax to include services was sound policy but might prove to be impossible politics.

The sales tax — and the portion that includes charging sales tax on many business-to-business services — remains the linchpin of the whole package.

That’s why the outcry from a broad range of business sectors comes as no surprise.

“Look,” said Frans of the blowback, “if I’d never been taxed in 46 years, I wouldn’t want to pay the tax now either.”

Without trying to minimize the critics of the sales tax expansion, the administration does point out that the amount collected — about $2 billion — is about a quarter of 1 percent of the $597 billion in business activity in the state.

“This is not Armageddon,” Smith said.

There are those who differ.

Business pushback

On Thursday, it was a group of newspaper executives who were moaning — self-righteously — to Dayton. The governor spoke to those attending a convention of the Minnesota Newspaper Association in the Twin Cities and, after giving what has quickly become his stump speech on his proposal, took questions, according to several press accounts.

They were predictable.

There was Tom West, general manager of the Morrison County Record, who got applause from his fellow executives when he talked of how Dayton’s tax — which would extend to newspaper subscriptions, advertising and newsprint — would cheat the readers of the state.

“If you tax something, you get less of it,” West said. “We are the ones who cover local government and state government. How do you think it would be a good idea to have less information about government?”

Gov. Mark Dayton
Office of the GovernorBeyond Dayton campaign promises and political philosophy, the budget reflects the reality that he is a hands-on governor.

Dayton asked for better ideas. He doesn’t expect to receive many. As he was leaving the convention, he told a group of executives and reporters that “everybody supports change as long as it doesn’t happen to them.”

Lawyers, advertising agency executives, accounting firms and business associations all have predicted gloom and doom. And all will surely spend a lot of money on lobbyists to save them from the Dayton sales tax expansion. (Presumably, many in those groups also will lobby hard for the corporate tax breaks that Dayton proposes.)

In fact, Frans said that as the sales tax plan was being put together, members of his office and the people from the office of Minnesota Management and Budget, tried hard to create exceptions to the sales tax plan.

“But where do you draw a line?” Frans asked. “The more lines you draw, the more everything falls apart. It just wasn’t working. Finally we said, ‘What if we don’t draw lines at all?’ ”

Of course, nervous legislators are expected to draw lines all over the place. The problem is, once the line-drawing and the exceptions start to take shape, the math behind the whole problem falls apart.

‘Progressive elements’

Although he tries to avoid the politics of taxation and budgets, Frans does count off the “progressive elements” of the Big Plan.

“Fourth tier,” he says. “Property tax relief. Increase in LGA. Lower sales tax rate.”

But he admits that the spread of sales taxes to clothing items of more than $100 represents “regressive” taxation.

He also admits that even bigger plans for tax reform were set aside quickly. In early meetings, Frans said, there was talk that the administration should tackle simplying both the income tax and property tax codes.

“We simply decided we couldn’t do that,” Frans said. “You can’t make those reforms at a time of deficits because to do reforms usually costs more than you initially gain.”

All who participated in this massive undertaking understand that the process has just begun. The governor, Smith and Frans all have said that they expect “tweaking.”

But they don’t know how much tweaking the proposal can handle.

“Everything is in there for a reason,’’ Smith said. “It does have to hang together, or everything collapses.”