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House DFL proposes surtax on high incomes to pay back schools

MinnPost photo by James Nord
If lawmakers continue to see a surplus in Minnesota’s economic forecasts, the surtax rate would tick down to reflect the lower obligation, Speaker Paul Thissen said.

House Democrats are willing to  make Minnesota temporarily one of the highest-taxed states in the nation to fulfill their campaign promise of paying back money lawmakers borrowed from schools to solve the state’s fiscal woes.

They go a step further than Gov. Mark Dayton – who proposed a $1.1 billion fourth-tier income tax hike on the top 2 percent of Minnesotans – by attempting to tackle the $800 million school shift in two years with an additional “blink-off” income tax surcharge on the wealthiest 1 percent of state residents.

“Minnesotans value our education, and that’s why we’re paying back the shift in full,” House Majority Leader Erin Murphy told reporters.

DFLers in the lower chamber outlined their budget targets on Tuesday. Senate Democrats will release a similar picture of proposed tax hikes and spending aims on Wednesday.

$2.4 billion in new revenue

House Democrats want to raise roughly $2.4 billion in new revenue — $600 million more than Dayton — to fund education, economic development and property tax relief programs — as well as pay back the state school shift.

Lawmakers must also tackle a projected $627 million budget deficit for the next biennium.

House leaders said the plan likely would include the new income tax tier on Minnesota’s highest earners to fund their priorities. It projects roughly $1 billion in new spending overall, with $550 million for education, $150 million for higher education and $250 million in property tax relief.

If Dayton’s fourth-tier tax hike — with the House surtax on top of it — becomes law, the tax rate for high-income earners in Minnesota could top out at 11 percent. That would move Minnesota tax rates in the neighborhood of those in California, Hawaii and Oregon.

If lawmakers continue to see a surplus in Minnesota’s economic forecasts, the surtax rate would tick down to reflect the lower obligation, Thissen said.

A “blink-off” income tax surcharge on Minnesotans with net incomes of more than $500,000 would go toward paying down the roughly $800 million that remains in borrowed school funds over the next two years. Dayton had recommended repaying those funds in the 2016-17 biennium.

Rep. Erin Murphy
MinnPost photo by James Nord“Minnesotans value our education, and that’s why we’re paying back the shift in full,” House Majority Leader Erin Murphy told reporters.

Current law directs extra state money to repaying the schools. Recent positive economic forecasts have resulted in partial repayment, but DFLers want to complete it even faster.

“We think the responsible thing is to pay that off and to do it with this one-time surtax,” Speaker Paul Thissen told reporters of the House plan. “This is a very elegant solution.”

Thissen said more details of the plan would come out through the legislative process, and said the House Taxes Committee would be responsible for coming up with specific revenue proposals. Other tax revenue, he said, could come from closing corporate tax loopholes.

House budget targets

Budget Sector
February Forecast Base
Proposed House Target
House Change from Base
Education – Net$15,177,280$15,727,480$550,200
Taxes – Tax Aids & Credits, Property tax Relief$2,658,924$2,908,924$250,000
Higher Education – Net$2,565,262$2,715,262$150,000
Health & Human Services – Net$11,362,473$11,212,473($150,000)
Environment & Agriculture – Net$339,658$362,658$23,000
Transportation – Net$180,050$160,050($20,000)
Judiciary – Net$737,580$767,580$30,000
Public Safety – Net$1,087,799$1,137,299$49,500
Jobs & Economic Development – Net$89,176$135,176$46,000
Housing – Net$76,096$98,096$22,000
Commerce – Net$73,212$78,212$5,000
State Government – Net$895,368$921,368$26,000
Capital Investment – Net$1,520,590$1,582,086$61,496
Claims, Pensions and Other Bills$0$52,000$52,000
Dedicated Revenue Spending$190$190$0
Total – Net Spending$36,743,658$37,838,854$1,095,196

Targets will also eliminate the education shift at $854.2 million and cover the forecasted deficit of $626.7 million.

House priorities

Key policies in the House proposal include fully funded all-day kindergarten and property tax relief plans, both through increased government aid and direct credits for homeowners and renters.

There’s also additional money for such economic development incentives as the Minnesota Trade Office — all priorities for House Democrats since the beginning of session.

The House budget proposes spending increases in roughly the same sectors that Dayton has targeted. It’s also likely that Senate DFLers will look at investments in the same areas.

That means the biggest challenge for Democrats will be finding agreement on a revenue mechanism among both chambers of the Legislature and the governor.

Rep. Kurt Daudt
MinnPost photo by James NordHouse Minority Leader Kurt Daudt: “There’s nothing more permanent than a temporary tax.”

Senate Democrats have made it clear that they will likely move forward with some sales tax changes. Dayton recently dropped a roughly $2 billion sales tax revenue increase when it became clear to him that the plan — particularly taxes on business-to-business services — lacked public and legislative support.

“I think the business-to-business sales taxes are off the table, but the rest of this is going to be up to the tax committee,” Thissen said Tuesday, reiterating that House Democrats’ shared concerns over the business taxes with the governor.

House Republicans blasted the proposal, saying it would make Minnesota unable to compete with many states that are lowering taxes.

They repeated harsh criticisms that DFLers are employing tax increases at a time when Republican policies of no new taxes and government efficiency have been working to improve Minnesota’s economy.

House Minority Leader Kurt Daudt said the DFL’s tax proposals would make Minnesota an “outlier” and said: “There’s nothing more permanent than a temporary tax.”

“Democrats want Minnesota to be No.1 in higher taxes,” Daudt told reporters on Tuesday. “Republicans want Minnesota to be No.1 in job opportunities.”

Comments (2)

  1. Submitted by James Hamilton on 03/20/2013 - 03:58 pm.

    We all dodged the tax bullet

    during the Pawlenty years. It makes sense to me that we all pay a surtax to cover the deficit we allowed to accumulate. Simply add a straight percentage to the net tax due on our 2013 through 2015 returns and then let it expire. Perhaps by then our legislature will have taken its collective head out of the sand long enough to restructure our entire tax system. They might even take a comprehensive look at our expenses, to determine which programs are paying off and which aren’t. Or does that make too much sense?

    • Submitted by Joseph Skar on 03/21/2013 - 07:55 am.

      Deposit Tax

      If we all dodged the tax bullet in TPaw years why not go European and levy a billion or two directly from deposit accounts. You could even look back to see if anyone who disproportionate benefited from not paying taxes during the Pawlenty years has moved out the state.

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