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DFL tax deal will test economic and political strategies

MinnPost photo by James Nord
Speaker of the House Paul Thissen discussing the budget deal during Thursday night's press conference.

Gov. Mark Dayton and DFL legislative leaders came together Thursday on major elements of a tax compromise — a deal that raises some fascinating economic and political questions.

The package includes Dayton’s plan to raise taxes on Minnesotans in the upper 2 percent of income, establishing a new top tax rate of 9.85 percent on taxable income of more than $150,000 for individual filers and $250,000 for couples. That would give Minnesota the fourth-highest tax rate in the nation.

The latest version of the tax bill also includes a $1.60-a-pack increase in the state cigarette tax but no increase in liquor taxes. It also includes provisions intended to hold down local property taxes.

Business groups vigorously oppose the income tax increase, saying it will harm 20,000 small business owners who pay individual income taxes on their business income. They also worry about its impact on Minnesota’s ability to attract and retain business, and on the ability of corporations to recruit higher-wage managers and professionals. But the governor and DFL legislative leaders remain unconvinced.

If the two houses go along, Minnesota will test competing theories about how business executives make locational decisions – about whether they care more about taxes or the quality of education, workforce training and other services the state provides.  The answer most likely varies depending on the type of enterprise, but the bottom line is that both factors are important.

Interestingly, House DFLers on Thursday abandoned their proposal to levy a surcharge on the state’s wealthiest residents – on top of the new top tax rate – and pay back the remaining $860 million from the school aid shift used to help balance previous state budgets. Instead, they’ll go along with the governor’s plan to repay the shift in four years rather than two.

Repaying the shift had been a major issue used by DFLers in the last campaign. But the fact is that it is largely an accounting fix. It won’t give school districts one additional dollar to pay teachers, fund all-day kindergarten and or meet other needs. For schools – and for DFLers – it’s far more important to put more money into the school aid formula, as they plan to do.

As legislators race toward Monday’s midnight deadline for adjournment, there still is a game of high-stakes poker — with potentially big political consequences — being played on other issues. They include:

Minimum wage

House DFLers want to increase the state minimum wage from $6.15 an hour to $9.50, while Senate DFLers say they’d rather go home without an increase than go beyond $7.75.  An increase in the minimum wage is a top priority of organized labor, and my bet is that a deal still will get done.

Stadium funding

Every day, there seems to be a new proposal to plug the hole in the $977 million stadium funding plan that was caused by a major shortfall in revenues from electronic pull tabs. Dayton pushed hard for the stadium last session and has the most to lose if the funding plan falters. So he’s likely to win some kind of fix – even if it means diverting revenues that would otherwise go into the state’s general fund and help meet other state needs.

Transportation funding

Transit advocates still are pushing for a half-cent increase in the existing quarter-cent metro sales tax for transit, which they argue is critical to going forward with the Southwest Corridor light-rail transit (LRT) project and continuing to expand the regional transit system. The Senate has coupled the transit tax increase with a nickel-a-gallon increase in the gasoline tax, which is dedicated for highways. But the governor and House members – both up for re-election next year – won’t go along. This still looks like a long shot.

Work to be done

So, as always, legislative leaders have left an enormous amount of work to be completed in the final several days of the session. This will mean some long nights during which members get tired, cranky and prone to missteps. It also means that members of the Republican minority will have opportunities to erect obstacles and slow things down.

Whether Minnesota state government is controlled by Republicans, DFLers or a combination of the two, the concluding days of any legislative session inevitably are messy.

The House, Senate and governor have institutional differences that influence their agendas and decision-making.  The governor and members of the Senate have four-year terms that permit longer-term thinking, while House members always are looking to the next election.

The governor has a statewide constituency, while the Legislature represents a collection of smaller constituencies – urban and rural, fully-developed and fast-growing suburbs, regional centers and small towns with one traffic light.

There’s also the influence of testosterone levels in this still male-dominated system of government. These folks all are very competitive and they all want to win. I remember talking to a succession of House DFLers who served on the school aid conference committee in the 1970s and ‘80s, and all of them vowed never again to sit across the table from their Senate DFL counterparts.

Suffice it to say, if the closing days of the legislative session were an Olympic ice-skating event, the judges would not be awarding a lot of “style” points.

Comments (24)

  1. Submitted by Eric Andersen on 05/17/2013 - 11:01 am.

    Minnesota the fourth-highest (state) tax rate in the nation

    The lionshare of the state budget is education.

    Minnesota % of 2011-2012 K-12 school funding from:

    Local 13.2% ranked 49th
    State 80.6% ranked 3rd
    Federal 6.1% ranked 47th

    It is pretty obvious why so many other states have a lower state tax rate. Most other states leave it up to local taxes to fund education.

    • Submitted by Greg Kapphahn on 05/17/2013 - 04:57 pm.

      Most Other States Leave it Up to Local Taxes

      Which, of course, means that if you live in a wealthy suburb with high property taxes and a wealthy population, your schools will be absolutely excellent,…

      whereas if you live in a less wealthy inner ring suburb or rural area with far lower property values and a far less wealthy population, your schools will be deeply underfunded.

      THAT’s why we moved away from doing school funding this way. We wanted Minnesota’s “above average” students to receive an excellent education, no matter whether they were born in Wayzata, Kennedy, Rochester, Grand Marais, Mahnomen, Pipestone, or Caledonia.

      This CAN’T be that hard to understand!

      • Submitted by Tom Anderson on 05/17/2013 - 11:08 pm.

        Out here in Anoka-Hennepin

        We get squat for education funding, no LGA in my city, our property taxes are going down, and I’ll put my district’s test scores against yours and the rest of the state. What is hard to understand is why the school districts that get the most money (Mpls.-St. Paul) aren’t as excellent as you say they should be.

        • Submitted by Matt Haas on 05/18/2013 - 09:33 am.

          Hmm

          What do you suppose might contribute to that? Let me guess.. Andover? Maple Grove? What might distinguish your city school system from the core city schools? But then I suppose you just pretend that poverty plays no role in school performance and just pretend its because you’ve discovered some magic elixir that makes your children smarter and your educators more capable.

  2. Submitted by Gail O'Hare on 05/17/2013 - 11:05 am.

    Dayton is an addict, too.

    Minnesota pioneered the disease model of alcohol addiction, but the carefully tailored marketing campaign against tobacco addicts makes them ripe for ripping off. Tobacco companies are not hurt at all; smokers bear the entire burden of this legal, profoundly addicting substance. It’s ludicrous that holier-than-thou pols claim they want smoking to end, but nevertheless balance the budget with over $400 million in taxes on tobacco. How many addicts could be supported with in-patient treatment with all that money? But wait, if everyone stopped, how would we pay all our bills? We’ve worked hard convincing folks that smokers are responsible for those bills, but that sham will be exposed if we actually have to get along without all that lovely tobacco money.

    If they really wanted to end smoking, they’d ban it. Use the Settlement money to pay for treatment and leave behind the whole ugly chapter to be recounted in history books. Dayton, himself recovering from alcohol addiction, should be deeply ashamed.

    • Submitted by Greg Kapphahn on 05/17/2013 - 05:00 pm.

      Prohibition?

      Gee, we have NO idea where THAT will lead do we?

      (cigarettes will still be available but at prices that make the new price with the added tax seem like a pittance by comparison),…

      not to mention an entirely NEW area around which crime syndicates can organize!

      I suppose it WOULD give a massive boost to the “war on drugs,” though, wouldn’t it?

      • Submitted by Gail O'Hare on 05/17/2013 - 07:15 pm.

        No, satire

        My intention was to emphasize that no serious expenditures are made to treat tobacco addicts. We have Mayo and Hazelden to turn to if we really want help with addiction. The purpose of the Tobacco Settlement of the late ’90s was prevention and treatment, but the money has been filched by state governments almost from the beginning. I considered a Modest Proposal that would eliminate all taxes in favor of a simple tax-by-the-pound formula. Many of our legislators are clearly overweight and some are downright obese. Taxing their beer, pizza and triple-fudge brownies would save healthcare costs and road deterioration as well.

        Oh, did I say tax beer? After all, we haven’t raised alcohol taxes in decades. It should be a no-brainer, given the facts. As Lori Sturdevant reported on 4/27:
        “Alcohol consumption costs taxpayers plenty. A March 2011 assessment by the state Department of Health pegged the economic costs caused by alcohol’s toll on health and public safety at $5.06 billion per year. That’s 17 times more than state alcohol tax revenues that year, the department noted.”

        But most Minnesotans drink and far fewer smoke, so it’s politically expedient to demonize smokers and tax them to the hilt – while hypocritically profiting from Evil Tobacco.

        • Submitted by Matt Haas on 05/17/2013 - 09:35 pm.

          And?

          Hmm, let’s think this through. If I was a legislator, what would I do, tick off the majority of the state’s electorate, thereby ensuring my, and most likely my party’s defeat? Or alternately, tick off a small, and shrinking minority of the electorate, whom a lot of folks outside of said group don’t particularly care for, due to their excessive complaining over the fact the government has the gall to make it harder for them to kill themselves. Yeah tough call there.

  3. Submitted by David Broden on 05/17/2013 - 11:26 am.

    Minnesota Future or Political Games–The Legislative Challenge

    The 2013 legislative session presented an opportunity to Redesign State Government with a vision reflecting the demograhics, jobs, economic development, and quality of life in Minnesota. Cleary there has been no leadership toward these challenges. Minnesota has a long demonstrated and valued legacy of social progeressivism, fiscal rigor/integrity and attention to factors that promote econonmic growth–enabling jobs– addressing competitiveness. This is a balance of concern across economic,social, and demographic communities. As the session winds down for 2013 consideration of a balanced agenda and legislation has not been or will not be addressed. With a balanced approach to ensure opportunityt for those stressed due to no jobs or low income while also providing for incentives or conditions that promote new businesses to start and grow and for existing business to grow jobs and opportunity can thrive and quality of life will remain a MInnesota trademark.Only by addressing both the social issues–including health care, education etc. and by enabling business strength can we all gain and continue to share the Minnesota quality experience. With a week to go — perhaps a miracle will happen to see that by placing trust in the role of business as a partner with government and the overall pubic can we collaborate to strengthen the lives of all Minnesotans for today and the future.

    Dave Broden

  4. Submitted by jody rooney on 05/17/2013 - 12:12 pm.

    Show me the data

    I don’t mean to be skeptical but show me the data that shows taxes are a major consideration for businesses. There is data that say it isn’t.

    When you don’t get data to support your theory it is not a good theory.

    I pretty much guarantee that no small business that is on the margin can’t get under the threshold. Although they may be whining that taxes are too high because of the self employment tax returning to normal levels. I know that got my attention this year at tax time.

  5. Submitted by Tim Milner on 05/17/2013 - 01:27 pm.

    I agree

    that most businesses are unlikely to pick up and move because of all these new taxes and fees. A few may (one of mine moved to South Dakota – a machining shop with 12 or so employees). A few may not expand in MN. But it’s unlikely that any major firm just ups and moves\ because of a tax increase.

    Yet the reality is that this tax money has to come from someplace. After all, money is a finite resource for all businesses. Everyone only has so much to use to pay expenses with and/or to invest in plant and equipment with.

    There seems to be a sense that everyone is greedy and the taxes are only going to reduce those greedy people’s “excess” wealth. That may be true in a few cases, but most of the people I know that are going to face the consequences of these taxes are small business owners, accountants, doctors, service providers, etc. They are making their wages the old fashion way by creating / adding value to something. Not by trade stocks and other financing mechanism to create capital gain (which, by the way, are taxed at a far lower rate and will not be effected by any of these tax changes).

    If I left everything the same as in 2012 in my small business (60 employees), paying all the new taxes, fees and health insurance related costs, I would have little profit to reinvest in my business. That’s simply a fact. Manufacturing businesses like mine that service the industrial segment (we provide industrial coating services) simply don’t operate under huge profit margins. If we can make 10-12% before taxes, we are feeling pretty good.

    But business in 2013 is not going to be the same. I’m being asked by every customer to reduce my prices in face of both foreign and domestic competition. I have absorbed raw material price increases for nearly everything we use. There is going to be less profit – unless we can be more productive and efficient. Trust me – we work really hard at that. But to meet that challenge and pay more in taxes. It’s going to be tough. Something has to give.

    And it will be expense cutting. Am I going to be able to offer raises this summer? Probably not – or if I am – they will be miniscule. I really hope to keep the employees healthcare contribution the same (they pay 30%) but I not sure as my agent has warned me to expect an increase around 12% again this year. Then I have the new taxes. And the increase in property taxes from a local referendum.

    I guess the bottom line is that it seems more and more people believe that if the government takes more in taxes that there are no consequences. I am sorry, but that is simply not true. Is it better that the government have that extra dollar? Or is it better if I spend that extra dollar on raises? Or on equipment purchases? Or on building upgrades? Where is that dollar going to make the bigger difference in our economy? Where is it going to be used most effectively?

    That is the question that needs to be asked and thought about. But it’s far easier to say “tax the rich” or “the rich don’t pay their fair share” than to engage in meaningful discussion on the trade offs society must make.

    • Submitted by Greg Kapphahn on 05/17/2013 - 05:09 pm.

      Perhaps If You’re Making Enough Money

      For the tax increase to make it impossible for you to reinvest in your business because of your personal taxes, you might want to incorporate your business, rather than running it all through your personal accounts.

      Perhaps you could even give your employees a bit of a pay increase by foregoing your OWN increase or even reducing the money you take out of your business for your own salary and benefits.

      The loyalty and respect you’d win from your workers and their productivity increase in response to your generosity and self-sacrifice would likely MORE than make up the difference.

      • Submitted by Tim Milner on 05/17/2013 - 08:52 pm.

        Greg just proved my point

        in that every business owner is bad, greedy, etc. A sterotype painted with a very broad brush.

        A few facts .

        We are a sub-chapter S corp. My last salary increase was in 2006. I have never declared a dividend larger than what was needed to pay the sub S corporate taxes.

        I did not take pay for a chunk of 2009 to make sure I did not have to lay off any employees. We used the MN Work Share Program to help my employees make ends meet while we only had work for 32 hours. (Work Share pays for 40 hours when the employees work 32 hours or less – so long as I did not cut benefits (I did not) and avoided any general layoffs. (But that program charges back to the company State unemployment insurance rates – so I am now paying in back (quite happily)).

        I have been in business nearly 20 years. 25% of my staff has been with us for 15 years, 60% better than 10 years. There is a reason for that – they have always been well paid and well treated – they don’t have a reason to find other work. Most of our new employees are referrals of friends and relatives of current employees.

        Finally, not counting the dividend declared to pay the taxes owed, I, the owner, was the 4th highest paid employee in 2012.

        If you Google my name, you will find me and my company. I encourage you to call me. Come down to the shop, meet my employees, see the investment I’ve made, let me prove to you the statements I’ve made above.

        JFK once said “The ignorance of one voter in a democracy impairs the security of all.” It’s time to start enlightening the populous about real situations – not just campaign slogans. I am willing to take the time. Are you?

        • Submitted by Matt Haas on 05/18/2013 - 09:41 am.

          Its a two way street Mr. Milner

          If what you claim is correct, congratulations, you’ve managed to remain a human being in spite of having to run a business in an ever less human business world. That being said, what you’ve stated applies to you and you alone. Please don’t be so naive as to think that we should instead generalize all business situations based on your isolated experience. There are good business owners and bad, economic policy, like business itself, can not be based on the experience of a few isolated actors, good or bad. Believe what you will about tax policy, but understand its not put in place to punish, or promote, anyone. Its put into place to best serve the overall interests of the state, as put forth by those who are elected, and therefore ultimately by us.

  6. Submitted by David Broden on 05/17/2013 - 02:51 pm.

    Where do Jobs come from?

    The situation in Mn can be defined very simply. We talk of establishing jobs for the full spectrum of job skill levels from service workers, touch labor, skilled labor,to professionals in engineering, management etc. if we do not create a tax and related reguation as well as infrastructure enviroment and then include strong education base the companies will not exist to have the jobs for any level, The Minnesota economy must grow to provide jobs for the grrowth in population and we must train and education the workers for all skill–including eliminating skills gap. Just keeping the current companies and even assuming reasonable growth of these companies is not enough– there must be both organic growth from within and new starts or moving to Mn to grow the economy appropriately. Jobs come from company investment and growth not only from attrition but if our state government does not want growth then we will remain a a non-competitive static state. We will al gain if we can become an aggresssive pro buinsess and pro worker state benefiting everyone and ensuring quality of life.

    Dave Broden

    • Submitted by Greg Kapphahn on 05/17/2013 - 04:50 pm.

      Sorry, But As the GOP Currently Defines It

      “pro business” is precisely, absolutely, completely,…

      ANTI-worker, ANTI-education, ANTI-infrastructure maintenance and growth, ANTI-environment, and ANTI-quality of life for any and all classes of people except the top 1%.

      Sadly, the Democrats lack the level of courage necessary to tell the truth of that,…

      and are still running a bit scared that, if they return Minnesota to what has worked so massively well in the past,…

      indeed, what you describe in your post,…

      the Republicans will tear them apart in the next election,…

      primarily because it will require spending a good deal of money to do so.

  7. Submitted by Ross Willits on 05/17/2013 - 04:12 pm.

    Business taxes

    Business are taxed on profits. That is what is left over after business expenses. So you don’t pay taxes out of the same pot that you pay your staff (or yourself!) Businesses pay taxes on what is left AFTER expenses.

    The question about “should I spend the extra dollar on raises or give it to the government” is a false question. I you have legitimate expenses whether operational or capital investments, the business is NOT taxed on those dollars.

  8. Submitted by Mark Kulda on 05/17/2013 - 05:50 pm.

    Also No $5 insurance surcharge for police/fire pension bailout

    It was also announced this afternoon that the Omnibus Tax Conference Committee had decided to pay for additional funds into the police and fire pension funds with General Fund money and not with the proceeds of a proposed $5 surcharge on auto and home insurance policies in Minnesota. The General Fund expenditure is a far smarter way to address the situation than a surcharge on insurance policies.

  9. Submitted by Robert Gauthier on 05/17/2013 - 09:19 pm.

    Too late

    Tobacco settlement money was used by Republicans to balance budget with those bonds, remember?

  10. Submitted by Tom Anderson on 05/17/2013 - 11:02 pm.

    So $860 million would go back to the schools

    And none of it would go to teachers, all day kindergarten, or other needs. So it would go–where? How would $860 million dollars just disappear without being spent somewhere? If it is just an accounting shift that isn’t real money, why don’t we finance the new Vikings stadium with that money?

    • Submitted by Rachel Kahler on 05/20/2013 - 08:21 am.

      Debt service

      It would probably go to paying back loans that schools took out to cover their budgets during the shift. It may also go to paying for capital improvements and supplies that were delayed during the shift. In other words, it goes to the teachers, all day kindergarten, and other needs. A stadium is not a need, let alone a school-related one.

      • Submitted by Tom Anderson on 05/20/2013 - 09:17 pm.

        Never mind

        The “no shifts, no gimmicks” folks won’t be paying this back after all. But it will be paid off in four years so that’s good.

  11. Submitted by Leonard Foonimin on 05/18/2013 - 06:43 am.

    All of you quit whining

    after all none of this matters, Zygi has his new stadium and that’s the most important outcome according to the Legislators and the Governor … how its paid for doesn’t matter

  12. Submitted by Deborah Dillaway on 05/19/2013 - 02:25 am.

    Alcohol vs nicotine addiction – O’Hara

    VERY cheap shot at Governor Dayton. People brave and honest enough to work through the recovery process should not be maligned and trivialized. Get thee to an Alanon meeting, commentator, or atleast into a cynic’s recovery program!

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