Minnesota’s top lawmakers from both sides of the aisle praised Gov. Mark Dayton’s announcement on Friday that he plans to drop a heavily criticized tax on business services from his revised budget proposal set to be released next week.
With that significant chunk of revenue out of the picture – Dayton’s initial plan for the next budget cycle included more than $3.5 billion in new revenues and roughly $1.4 billion in property tax rebates – the governor either will have to significantly pare down his budget or rely heavily on other yet-to-be-defined tax hikes to fund it.
“I think that [Dayton] heard the same concerns that our representatives have been hearing about the impact [the business-to-business tax] could have on Minnesota’s economy and businesses here,” House Speaker Paul Thissen told reporters on Friday. “I imagine that’s the reason he did it, and I think it probably is the right direction.”
The governor told reporters on Friday, the Pioneer Press reported, that he would also drop his proposed tax hikes on consumer services and clothing. The concession marks the end of Dayton’s ambitious attempt to realign the state sales tax with Minnesota’s service-oriented economy.
Lawmakers had been lukewarm
DFL legislative leaders had offered a lukewarm reception to the governor’s sales tax plan since it was released. Thissen said on Friday that the business-to-business services tax expansion “was never going to be part of ‘Plan C’ in the House” as legislators worked to craft their own biennial budget.
“As we were putting together our ‘Plan C,’ that was never — was likely not going to be part of our proposal,” he added.
The governor warned legislators from the beginning that if they attempted to pick apart his complicated tax and spending package by exempting certain industries or services from the sales tax plan, it would start to unravel at the seams.
But Dayton swept the whole ball of yarn off the table on Friday, leaving a serious funding gap for the ambitious investments he’s called for in education and property tax relief.
Taxing business-to-business services formed much of the new revenue to fund priorities like all-day kindergarten and increased state support for college students, as well as allowing the state to drop the overall sales tax rate from 6.875 percent to 5.5 percent.
A bit of breathing room
Last week’s positive economic forecast, which cut the state’s projected budget shortfall from $1.1 billion to $627 million, gave Dayton some breathing room to revise his budget and come back to the table with an alternative proposal. At the time, reporters asked Dayton if he would cut back on any of the tax increases in his 2014-2015 budget.
But rather than distance himself from the vilified business-to-business tax proposal then, the governor said he was considering doubling down on other tax relief priorities that weren’t included in his original budget package. Those so-called “tax expenditures” included an upfront exemption for capital purchases and an increase in the renters tax credit.
Still, at least one forward-thinking reporter predicted that the improved economic picture might have spelled the end for the governor’s business-to-business sales tax expansion.
Dayton’s reversal stems from extreme opposition to the plan from Minnesota’s business community.
“I thought it was going to be very divisive and extremely difficult to get through the Legislature,” Dayton told reporters, according to the Pioneer Press. “But if we did, the consequences would be a real rupture in our relationship with the business community.”
With the announcement Friday, it’s unclear what else from the governor’s budget will have to exit the picture with the tax on business-to-business services – or which new revenue sources might come into play.
The business-to business services were forecasted to raise $3.2 billion in new revenue, part of which was to be offset by a sales tax rate reduction, when the governor outlined his budget in January. Dayton administration spokeswoman Katharine Tinucci said in an email that updated estimates from the February economic forecast weren’t yet available on Friday.
A few clues about potential changes
Lawmakers offered a few clues about what’s on the chopping block.
Thissen said the governor’s proposed up to $500 per-homeowner property tax rebate plan, which would have cost the state about $1.4 billion, would now likely be “difficult to afford.”
The House Speaker instead focused on income tax hikes on the wealthiest Minnesotans, which he said lawmakers would likely include in the legislative budget proposals set to be introduced next month.
Dayton’s initial budget from January includes a $1.1 billion income tax hike on couples earning more than $250,000 a year and individuals making more than $150,000 annually.
Thissen said he didn’t know if a liquor tax increase, already under consideration by some lawmakers, would be on the table.
“We’re working on a number of alternatives,” he said without offering much explanation.
DFL legislative leaders hope to outline their budget targets within the next two weeks and to spend the first three weeks in April passing budget bills.
Dayton’s updated plan next week marks the beginning of serious discussions over the state budget for the next two years, and the governor spent part of the last week reaffirming that his initial proposal was the first volley in a long string of negotiations.
Secured some support for other investments
By dropping the business services tax, Thissen said the governor also secured some support from the business community for income tax hikes to fund investments in areas like education.
“I fully expect the business leaders who want these additional investments, know that they take resources, are going to get on board with the proposal,” Thissen said, “which is a balanced approach to solving our budget deficit and making additional investments to Minnesota’s future.”
But Republicans, who said they were “encouraged” that Dayton dropped the divisive services tax, remained skeptical that businesses would tolerate income tax increases.
“That’s not what I’m hearing out there,” GOP Sen. Julie Rosen said. “It’s like, ‘How much can you throw at them?’ And the business-to-business was the biggest elephant in this room, so of course they focused their attention [on it].”
“The businesses are concerned about these taxes — not just the business-to-business, but the fourth tier [income tax increase],” Senate Minority Leader David Hann added. “I think these things are additional burdens on an economy that is already struggling.”