Gov. Mark Dayton opened his press conference with a warning: “This is complicated.”

That caution came as he introduced his supplemental budget plan for the 2018 session on Friday, which included how he wants to spend the $329 million state budget surplus. His spending wish list included everything from new money for school safety, tackling the opioid crisis and shoring up the state’s pensions to combating abuses in elder care facilities.

But that’s not the complicated part.

What usually would have been a simple proposal on how to spend a small fraction of the state’s $45 billion two-year budget became a much bigger task as Dayton and lawmakers grapple this session with the massive federal tax overhaul, which has major implications on how complicated and expensive Minnesota’s tax season will be next year.

Dayton’s budget and taxes proposal — which he says will lower family and individual taxes while not mirroring some of the federal bill’s business tax cuts — is the opening pitch of the session, shaping the terms of the debate between the DFL administration and the Republican controlled Legislature.

“This is very complex,” Dayton said. “[We are] factoring all of these federal changes, which, we didn’t wish for, but are dealing with and trying to protect and successfully protecting Minnesota individuals and families income tax.”

A complicated tax debate

Normally, in non-budgeting years like this one, the governor and lawmakers come in for a short session, pass a bill to deal with any new deficit or extra surplus, and do something called tax conformity, a typically simple task that aligns small changes in state and federal tax code.

But the federal bill passed in December brought the biggest changes to tax policy since the 1980s, and it affects just about everyone. The bill cut corporate tax rates and lowered estate taxes while also lowering the tax rates for each income level and nearly doubling the standard deduction. The new federal bill also eliminates the personal and dependent exemptions, which is a standard sum people got for themselves and their children taken off of their taxable income.

Minnesota has its own tax provisions, but it relies on the federal tax system as its starting point. Minnesota is one of six states that starts with the “federal taxable income” figure and calculates each resident’s taxable income from there by adding Minnesota-specific deductions, exemptions and rates. The elimination of personal and dependent exemptions in the new federal law has complicated that process, and for some Minnesota families who claim dependents, simply conforming to federal tax code means their taxable income number could go up.

In Dayton’s plan, Minnesota would move away from using the federal taxable income figure, instead separating state and federal income tax provisions for individuals and families, allowing the state to set its own deductions and rates. From there, Dayton’s Department of Revenue Commissioner Cynthia Bauerly said they want to offer a $60 per-person tax credit. With all the changes considered, 1.9 million Minnesotans would see an average of $117 tax cut next year, his office said, and 329,000 people will get an average cut of $160.

But that system would have its own costs, which Dayton is proposing to pay for in part by not fully conforming with all of the tax cuts businesses received under the federal bill. He would also put a cap on estate tax cuts. 

“Individual Minnesotans did not receive much of any benefit from the federal tax bill, from lower to middle income citizens, so this is a way of balancing it out,” he added. “We’re not raising taxes, per se, on corporations, we are just conforming and not conforming to some of the different provisions.”

He’s also renewing a push from last session to undo tobacco tax cuts and reinstate an inflator on property tax calculations for businesses. Dayton signed a $650 million tax bill passed by the Republican-controlled Legislature last year that included those tax cuts because Republicans quietly tucked a provision into a separate budget bill last year that required his signature on the tax bill to fund the Department of Revenue. He then vetoed the budget for the House and Senate to try and compel them back to the negotiating table on those tax cuts and other provisions in the budget bills. That never happened, with a lengthy legal battle ensuing instead.

Republicans are already pushing back on the idea of renegotiating those tax cuts, as well as the notion that Dayton’s plan benefits families and individuals.

Republican House Taxes Chairman Greg Davids said is also interested in moving away from using federal taxable income, but he said House Republicans do not plan on “revisiting tax proposals he personally signed into law. It would be irresponsible to raise billions in taxes when we have a healthy budget surplus.”

MNLARS controversy, and more spending

Even the less complicated part of Dayton’s pitch Friday — how to spend the extra money on the state’s budget — proved controversial.

In particular, Dayton didn’t include new funding in his budget to fix ongoing technical problems with the Minnesota Licence and Registration System — known as MNLARS — but instead said he would use existing dollars and continue a $2 fee on some registration, driver’s license apps and other transactions.

Continuing the $2 fee to pay for the fixes, which would have automatically gone away this year, is an idea that’s “dead-on-arrival” with House Republicans, Rep. Paul Torkelson, Chair of the House Transportation Finance Committee, said Friday.

“Governor Dayton has repeatedly claimed he is taking responsibility for the MNLARS mess his administration created,” he said. “Raising DMV fees on hardworking Minnesotans shows he is apparently not serious about backing up those words with action.”

Dayton has asked the Legislature for $10 million immediately to go toward fixing technical problems with the system and $43 million total this session. But Republicans have asked him to find that money in existing agency budgets and have called for more oversight on spending for the system. Dayton said he will not sign bills that “cannibalize” agencies to pay for the fix.

“We can’t leave it the way it is. That’s not a viable alternative,” Dayton said. “I apologize to the Minnesota taxpayers for the additional cost.”

Dayton wants to spend $12 million on increased investigations and remedies to deal with the problem of abuses in elder care facilities. Dayton would raise some money for those proposals by adding a new $7,750 fee on starting up assisted living facilities, which don’t currently have a licensing fee.

He also wants to spend $30 million on the University of Minnesota and Minnesota State systems, which would mostly go toward freezing tuition increases for the next school year. Among his other budget recommendations: $27 million toward shoring up the state’s liability on its public pensions; $47 million on a handful of school safety proposals, which includes increasing counselors and mental health grants for schools; $6 million to create a central office to handle sexual harassment complaints in state agencies.

Dayton and lawmakers will spend the next several weeks crafting their own proposals on how to spend the budget surplus. Dayton and leaders must find an agreement by the May 21 constitutional deadline to adjourn. If they don’t, they risk going into an overtime special session.