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Revised Dayton budget keeps investment priorities, drops controversial tax changes

New revenue would come from a fourth-tier income tax on the wealthy and a tobacco tax hike.

“I believe this proposal is the responsible, balanced budget the people of Minnesota deserve,” said Gov. Mark Dayton.
MinnPost photo by James Nord

Gov. Mark Dayton dropped sweeping sales tax changes from his updated budget proposal released Thursday, but said he protected his goals of making Minnesota’s tax system less regressive and investing in education and economic development.

As expected, Dayton killed both the ambitious $2 billion sales tax overhaul he initially proposed — and his plan for $1.4 billion in property tax rebates.

The governor’s updated $37.9 billion budget contains much of the same spending as his original proposal.

It also includes a fourth-tier income tax on the wealthy, an end to certain corporate tax loopholes and a tobacco tax hike.

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“I believe this proposal is the responsible, balanced budget the people of Minnesota deserve,” Dayton told reporters at a Thursday press conference. “There are no shifts, borrowing or other gimmicks to balance it. Just honest, straightforward accounting.”

The governor’s revenue hikes total roughly $1.8 billion — down from more than $3.5 billion in his previous proposal — which allowed Dayton to keep his spending priorities and fill in the state’s projected $627 million deficit for the next two years.

This session’s serious budget negotiations are nearly set to begin. It’s now up to the DFL majorities in the Legislature to shape their own budget proposal, and the Democratic leadership said they would roll out lawmakers’ spending targets next week.

Democrats didn’t have a press event after the governor outlined his new budget plan but did offer their views in writing.

“Today the Governor reinforced our shared commitment to work together on passing a fair and honest budget that puts the last decade of deficits and borrowing behind us, and moves Minnesota forward on the path to a growing middle class and long-term economic prosperity,” Senate Majority Leader Tom Bakk said in a statement Thursday afternoon.

Lawmakers hope to begin passing budget bills in April.

This is the second shakeup to Dayton’s budget proposal. He proposed more modest revisions in response to the February economic forecast two weeks ago, before dropping the unpopular tax on business-to-business services.

“During that time, it has also become clear to me that the broad tax reform which I had proposed lacks the broad public and legislative support to be enacted,” Dayton said.

While the governor admitted the new plan isn’t as grand as his initial recommendation — Democrats billed it as a bold vision for the future of the state — the governor said he bowed to public opinion on expanding the state sales tax to consumer services, business-to business-services and certain clothing.

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“It’s not as bold as it was before,” Dayton said jokingly. “We talked about plan A, B and C. This is plan B+, but it’s one that has legislative support, public support.”

DFL leaders were lukewarm in their support of Dayton’s ambitious sales tax overhaul, which would have expanded its base while significantly lowering the rate. It’s unclear if parts of the plan will surface again, and the governor declined to say if he would veto such a package.

Despite the blow to his proposal, Dayton said his opponents — including Republicans and business groups — support many of the investments he’s proposed, even if they don’t like the taxes necessary to fund them.

“Just saying no to tax increases is not a budget plan. It’s not responsible,” he said. “Those who don’t want to pay a single dollar more in taxes need to own up to the responsibility to tell us what are the consequences of that.”

Dayton’s proposed investments include pumping $640 million into early, K-12 and higher education, $120 million in city and county aid for property tax relief, $86 million for economic development and middle-class tax credits that the governor tentatively outlined after the February forecast.

Even with those significant spending boosts, the revenue drop forced Dayton to leave out some of the key tax provisions in his January budget. He removed plans to freeze Minnesota’s statewide business property tax, lower the corporate income tax and give homeowners up to a $500 property tax rebate.

The $1.8 billion in tax increases the governor outlined on Thursday — which were included in his original proposal — include a $1.1 billion income tax hike on the top 2 percent of Minnesota’s earners, a $370 million tobacco tax increase (94 cents per pack) and $323 million in closed corporate tax loopholes.

Dayton also kept his controversial “snowbird” tax on part-year Minnesota residents in the plan out of a sense of fairness, although he said it’s unlikely to remain in the final version.

Republicans blasted Dayton’s updated budget as “Government gone wild” and “Taxapalooza.”

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They urged Minnesotans to beat back the governor’s proposed income tax hike in the same way that the public opposed his business-to-business services tax. House Minority Leader Kurt Daudt said Republicans haven’t decided if they’ll offer a specific counter to Dayton’s plan.

daudt portrait
MinnPost photo by James Nord
“The governor’s original budget fell flat,” said House Minority Leader Kurt Daudt.

“I’m happy to see the governor has reeled back some of the tax proposals that he’s put forward,” Daudt said, encouraging Dayton to remove the rest of the tax hikes. “The governor’s original budget fell flat. The people didn’t like it. He’s retracted that. We’re glad to see that.”