Dayton not alone in raising taxes to fix state budget gap

Republican legislative leaders have criticized the proposed income tax portion of Gov. Dayton's budget plan as being out of step with the rest of the country, but other states have been raising taxes to fix their budget problems as well.

Republicans have said Dayton's plan to raise income taxes on Minnesota's top earners was "pathetic", "feeble" and "detached from reality." They also said raising taxes is out of line with what other states are doing.

"This is an economic argument. This is a numbers argument," said Republican Senate Majority Leader Amy Koch earlier this week. "When you look at what governors in 49 other states are doing to make their states competitive, that's lowering taxes. That's improving the business climate."

But those statements aren't exactly true. The governor of Illinois recently signed an income tax hike on all residents; the governor of Connecticut proposed sweeping sales and income tax increases; and Rhode Island's governor also says he'll propose a tax hike.

"We're talking about the fourth or fifth year that states are having to deal with these significant budget gaps, so it's common for every state to look at every option.

And while the governor of California hasn't proposed a tax hike in his budget, he wants voters to approve an income tax hike and sales tax increase.

And that's just this year.

"The refrain that we hear consistently is that anything and everything is on the table," said Todd Haggerty with the National Conference of State Legislatures. Haggerty said the recession has forced states across the country to deal with significant budget shortfalls.

Numbers compiled by Haggerty's group showed that 12 states raised taxes by 1 percent or more last year. And in 2009, 15 states raised income taxes, 17 states raised sales taxes, 18 raised tobacco taxes, five raised alcohol taxes and 20 states raised corporate taxes.

He said in general states are planning to both raise taxes and cut spending to balance their budgets.

"We're talking about the fourth or fifth year that states are having to deal with these significant budget gaps, so it's common for every state to look at every option," he said.

Minnesota last raised taxes in 2005, for general fund expenditures like K-12 schools and health care. That year, Gov. Pawlenty signed legislation that put a 75 cent fee on each pack of cigarettes.

But many of today's college students weren't even born the last time Minnesota raise income taxes. That was in 1991, and Minnesota cut income taxes twice at the end of the economic boom in 1999 and 2000.

Jon Shure is deputy director of the State Fiscal Project with the Center for Budget and Policy Priorities, a group that advocates for tax increases to balance government budgets. He said compared to the rest of the country, Minnesota has lagged in raising taxes.

"Most states that have income taxes, it's pretty safe to say, have raised them since the last time Minnesota did," Shure said.

Nine states don't have broad based income taxes, and Minnesota's top income tax rate is already higher than many other states and would be even higher under Dayton's plan.

Minnesota's top rate of 7.85 percent is currently the ninth highest in the nation. It would be second highest if Dayton's plan to increase it to 10.95 percent becomes law and the highest if Dayton's 3 percent temporary surtax on people with incomes over $500,000 were enacted.

Kail Padgitt, an economist with the conservative Tax Foundation, said Dayton's plan could scare off potential businesses that are looking to relocate or expand.

"Is it going to make people want to locate to your state? That's really going to be the question that is going to be important," Padgitt said. "As the economy begins to pick up, individuals and businesses are going to be looking at expanding their business and picking new locations. And I think states want to maintain a competitive nature and advantage in this area."

Dayton has said his budget would hold down property taxes. He said some business owners pay more in property taxes than income taxes, and you can't talk about the effects of one form of taxation without considering the other.