Dayton’s budget proposal cuts tax rate; includes first-ever sales tax on clothing, services in Minnesota

By T.W. Budig

ECM Capitol Reporter

Democratic Gov. Mark Dayton’s 2014-15 state budget proposal is the boldest seen since the days of Gov. Rudy Perpich, Democrats say.

“This is bold,” said Senate Majority Leader Tom Bakk, DFL-Cook.

Dayton, in a budget initiative heavy with tax reform, proposes to broaden the state sales tax to services — auto repair, haircuts — and extend the sales tax to clothing items costing $100 or more.

While businesses lose sales-tax exemptions for legal, accounting and other services, the broadening allows for a state sales-tax rate cut by more than a percent to 5.5 percent — the cut would drop the state’s sales tax from seventh highest in the nation to 27th, Dayton said.

The total amount of sales tax paid by the typical Minnesota consumer under the broadening proposal would remain about the same, according to a Revenue Department estimate,

Food, prescription drugs, medical services and other some items would remain exempt under the proposal.

But Revenue Commissioner Mryon Frans said unless a given service is specifically exempted, the sales tax, as proposed, would likely apply to it.

The sales-tax reform is slated for Jan. 1, 2014.

Republicans blasted the sales-tax proposal.

“It’s the biggest tax increase I can remember,” said Sen. Paul Gazelka, R-Cass County. “It’s huge — they’re taxing everything from haircuts to oil changes and when they project raising $2 billion; it’s impacting everyone.”

“Every business transaction is going to have a tax,” he said.

Rep. Ron Kresha, R-Little Falls, said, “I have already heard concerns about the budget proposal and the impact on middle class families and businesses in my district. As one of my constituents pointed out, ‘Now my work boots and haircuts will be taxed. How does that help me?’”

Both Gazelka and Kresha were concerned that the governor’ budget delays payback of the remaining school shift dollars owed to school districts until 2017.

In addressing the “most unfair of all state and local taxes” or the property tax, Dayton proposes a $500 property-tax rebate to homestead filers that overall would provide $1.4 billion in tax relief over the biennium.

The rebate would be applied to the first $500 of property taxes paid in 2013 and every year going forward, Dayton said. His budget would fully fund the renters’ property-tax credit.

Dayton’s property tax initiative includes a $120 million increase to local government aid and county aid.

In easing the property tax burden on businesses by $120 million, Dayton proposes a temporary two-year freeze on rate inflation in the state business property-tax levy.

He also proposes cutting the state corporate income tax from 9.8 percent to 8.4 percent, dropping Minnesota’s rate from fourth to the 12th highest in the country, said the administration.

Dayton proposes cutting unemployment insurance taxes by $346 million over two years.

“There’s a lot in here for the business community to like,” Bakk said.

Dayton, who ran for office with a tax-the-rich campaign slogan, cites a tax incident study by the Minnesota Department of Revenue showing the Minnesota middle class paying about 12.3 percent of its income on state and local taxes while the wealthiest 2 percent paid 9.7 percent.

The governor proposes crafting a fourth-tier income-tax bracket with an additional 2 percent on the wealthiest 2 percent of high-end earners.

The fourth tier bracket would be at 9.85 percent and would apply only to married couples earning more than $250,000 in taxable income, single people earning more than $150,000.

The tax would capture an additional $1.1 billion over the upcoming two-year budget cycle.

The fourth-tier proposal would place the state’s upper tax rate in the top five nationally, the administration said.

If the $500 property-tax rebate is considered, taxes for many Minnesotans will go down, the governor said.

Dayton is also proposing a 94-cent-per-pack state tax increase on cigarettes that would bring in about $370 million over two year, to be spent on health care.

All told, the income-tax increase on top earners, sales-tax expansion, cigarette tax increase and a minor change to the corporate income tax will bring in an additional $2.1 billion over the upcoming two-year spending cycle.

This is after $1.4 billion in property-tax rebate is paid for.

“I expect that significant tax reform will be very difficult to achieve in this legislative session,” Dayton said.

Powerful individuals and business interests oppose it,  plus the additional burden of needing to make good a $1 billion budget deficit.

The Minnesota State Bar Association voiced its strong opposition to extending the sales tax to citizens and businesses needing legal services.

Another hurdle for Dayton’s proposed budget is the Minnesota Legislature.

Democratic legislative leaders, while praising Dayton for perceived boldness and a proper focus on the middle class, indicated the governor’s tax reform proposal will face scrutiny and change.

No one should have any illusions otherwise, House Speaker Paul Thissen, DFL-Minneapolis, said.

Bakk indicated the governor’s proposed sales-tax extension to clothing could be facing long odds.

“(It’s) a pretty steep hill to climb,” said Bakk of passing such a provision.

Dayton’s proposed two-year state budget calls for $38 billion in spending.

There are no gimmicks in it, said Finance Commissioner Jim Schowalter.

He points to tighter contracts with HMOs and long-term care reform as saving more than $1 billion.

State government departments must absorb some $890 million in inflationary costs as the cost of inflation is not included in the budget, administration officials said.

In other areas, the governor proposes spending about $86 million on economic development that will leverage some $1.4 billion in additional private investment, according to the administration.

He proposes slating $80 million in additional spending apiece for the University of Minnesota and Minnesota State Colleges and Universities (MnSCU).

In a change affecting Greater Minnesota, Dayton proposes replacing Republican Gov. Tim Pawlenty’s signature rural development program Job Opportunity Building Zones (JOBZ) with the Minnesota Job Creation Fund, which the administration said provides more accountability.

Legislative committees are holding hearings on Dayton’s proposed state budget.