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‘Budget Plan C’? Legislators already working on alternatives to Dayton’s proposals

His business-services sales tax is drawing the most flak, and some DFLers even want to tweak his high-income tax increase.

Legislators will be hard at work coming up with anything to avoid Dayton’s “Plan A,” which involves broadening the sales tax to include services, including business-to-business functions.
Courtesy of MN House Public Information Services/Andrew VonBank

During his State of the State address, Gov. Mark Dayton invited legislators to come up with a “Plan C” if they didn’t like his budget plan.

No problem there.

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In coming weeks, it’s clear that legislators are going to be coming up with Plans “C,” “D,” “E,” “F” and more …

Anything, to avoid Dayton’s “Plan A,” which involves broadening the sales tax to include services, including business-to-business functions. (Plan B, Dayton says, is to continue to budget the way the state has in the last 10 years, relying on fund shifts and other gimmicks. He says that’s “unacceptable.”)

Before the session ends, expect legislators to broach such options as an across-the-board income tax surcharge and plans that would eliminate at least large portions of the business-to-business sales tax.

The Minnesota Chamber of Commerce will get into the act, too, coming up with a budget plan that — surprise, surprise — would not increase taxes but would increase spending on chamber priorities.

Business sales tax DOA? Or DBA?

Rep. Matt Dean
MinnPost/James Nord
Rep. Matt Dean

Rep. Matt Dean, R-Dellwood, was asked if the Dayton sales tax plan was DOA — dead on arrival.

“It’s DBA,” replied Dean.

DBA?

“Dead before arrival,” Dean said.

That a Republican opposes Dayton’s plan to increase state revenues by $2 billion, mostly through the business-to-business tax, isn’t a surprise.

But DFLers are struggling with the Dayton plan, too.

The “new DFLers” came to the Legislature from places like Edina (Sen. Melisa Franzen) and Eagan (Rep. Laurie Halverson) after winning races in which they campaigned as pro-business moderates. It was this new breed of DFLer that returned the party to majority status in both the House and Senate.

No ‘pressure’ from Dayton

Dayton understands that. Neither he nor legislative leaders are putting pressure on their colleagues to fall in line behind the governor’s plan.

“When the governor presented the budget to our caucus,” Halverson said, “he was very matter of fact. Then, at the end of his presentation, he said, ‘Now, go and represent your district.’ ”

Both Franzen and Halverson say they’d have difficulty supporting Dayton’s Plan A, including the fourth-tier income tax for those couples being paid more than $250,000.

But both also say that what separates them from their Republican predecessors is that they’re not going to “just say ‘no’ ” to every proposal that might include a tax increase.

Sen. Melissa Franzen
Sen. Melissa Franzen

“Moderate,” said Franzen. “What does that mean? To me, it means you have to look for compromises. The governor has some great ideas in his plan. But at what price? We have to be stewards of the taxpayer’s dollars.”

Halverson sees a certain amount of humor in the dilemma. Businesses, especially, are howling about the Dayton plan because of the business-to-business sales tax provision. At the same time, businesses have wish lists, too. The business wish lists don’t just include more tax breaks.

“Everybody has ‘asks,’ ” said Halverson. “Nobody wants to pay for them.”

So how does this work out?  Surely, Dayton will have to get something from a Legislature now controlled by the DFL.

‘Moderate’ DFL support at issue

In conversations with a number of legislators and lobbyists, most of whom don’t want to be named, it does appear likely that Dayton will get his fourth tier on income taxes.

At this point, however, those moderate DFLers from the suburbs don’t think they can support the current proposal, so that likely will mean a shift upward from Dayton’s desire to hit couples’ taxable earnings of $250,000 or more.

Remember, by the end of the last budget go-around, Dayton was willing to compromise and only add a fourth tier for those with taxable income of more than $1 million. Obviously, though, that would mean far less revenue than the $1 billion Dayton seeks from the fourth tier. The GOP, which held majorities in those negotiations, refused even that amount.

The big issue, though, is the big revenue producer: the business service sales taxes on businesses.

The blowback on that is just beginning, according to Dave Olson, head of the Minnesota Chamber of Commerce.

“I was shocked by that proposal,” Olson said. “The message he delivered with that is just terrible to business. I’m hearing from all sorts of companies saying, ‘What’s with this state?’ ”

Olson said the Chamber is forming a coalition that will build ever-more pressure on legislators to toss out this idea entirely.

Investments without more revenue?

At the same time, he did say that most Chamber members do want “investment” in many of the things that Dayton wants — transportation, higher ed, pre-school programs, job training and job creation.

So how do you get those items without more revenue?

“Priorities,” said Olson, promising that the Chamber will come up with a plan that would allow more investment in the things businesses want without raising taxes.

Already legislators have begun trying to figure out how to broaden the sales tax without getting the ever-growing blowback from business.

Under the Dayton plan, all sales taxes would be decreased to 5.5 percent. Some moderate legislators believe they could get some of that revenue from reducing the sales tax from the current 6.875 percent to 6 percent and then adding some exclusions to the plan. For example, one legislator noted that advertising agencies, which would face a pyramid of sales taxes under the Dayton plan, could be excluded.  Business-to-business services involving computers could also be excluded.

An even more radical idea being discussed would eliminate the business-to-business sales tax but broaden the sales tax base by having individuals pay a sales tax  for some of the professional services. For example, there would be no sales tax charged to a business hiring attorneys, but it might apply in cases of individuals hiring attorneys or using other professional services.

Obviously, that type of radical change in Dayton’s Plan A would reduce revenues substantially. Such a change, though, also would create a backlash from progressives across the state and seem to go contrary to Dayton’s own populist beliefs.

There are at least some of the state’s more populist legislators ready to dump any sales tax changes and create revenue with both a fourth-tier income tax AND an income tax surcharge across all tax tiers.

“It would be a blink-on, blink-off tax,” suggested a DFL legislator, who said he’ll begin working with progressive DFLers to push forward a plan.

The idea behind that approach would be transparency and progressivity, the legislator said. It would be used until the state’s deficit is wiped out.

A final budget no one ‘likes’

All of these “Plan Cs’’ are in the earliest stages in a long process that will be filled with committee meetings, debates, angst and ultimately a package.

“A DFL legislator will have to give their governor some of what he wants,” said one longtime lobbyist who believes much of Plan A will survive.

Ultimately, legislators will agree — likely on a straight party-line vote — to a budget package that nobody likes all that much.

One lobbyist pointed out the way the process works. Budget/tax proposals are filled with things individual legislators dislike. But the key is if, in total, there’s more good (in the eyes of legislators) than bad. For example, if education funding ultimately is seen as a greater positive than the negatives involved in  tax hikes.

The job of even moderate DFL legislators in coming weeks will be to sell their constituents on the idea that some new revenues are needed.

In her first weeks on the job, for example, Halverson has been impressed by the legitimate needs being expressed by various groups. Ten years of neglect and cuts, she said, have created needs across the board.

In her Eagan district, for example, health care providers are making compelling cases for more state support. And nothing is more important in her district than additional support for education, she said.

“Eagan had to borrow money because of the shift,” she said.

Additionally, Eagan, like most districts, has made painful cuts in its schools, where class sizes are “too large” and teachers are being forced to pay for too many basics out of their own pockets. Also, fees for activities have made participation in after-school activities too expensive for too many students.

Beyond something so fundamental as education, Halverson sees a great need in her district for state support for housing for homeless kids.

“We need to work on solutions together,” she said. “The reaction I receive from most people is that they understand that we’re out of rabbits to pull out of the hat when it comes to balancing the budget. They also understand there are investments we need to make.”

Franzen, the Edina senator who defeated uber-conservative Keith Downey, agrees with much of what Halverson says.

“As you know, my background is in business,” said Franzen, an attorney for Target. “I do believe there are some good things in the governor’s budget, but there are some bad things, too. The concern I have with the business-to-business tax is that the consumer ends up paying. I need to understand more of the unintended consequences …

“But the fact is we’ve been cutting for so many years. The state’s foundation is crumbling. Every single group that testifies is saying, ‘We have to start fixing things and building things if we’re going to remain competitive.’ ”

Franzen, who typically is putting in 13 hour days at the Capitol, calls the governor’s Plan A “a good start.”

But Plans C, D, E, F and more are in the works.