Dayton's budget plan includes higher taxes, spending

Calling for an end to "gimmicks and fiscal games," Gov. Mark Dayton Tuesday proposed an overhaul of Minnesota's tax and budget system that would raise hundreds of millions more from high-income taxpayers and high-dollar clothing sales, and pump much of the new money into education and property tax relief.

The governor's plan also includes a lower rate on an expanded sales tax.

The plan calls for about $38 billion in spending over the two-year budget period -- roughly $1 billion more than the state was expected to spend.

With fellow Democrats winning back the Legislature in November, Dayton's proposal carries tremendous weight. Still, hours after Dayton rolled out his plan, some DFLers were reluctant to endorse it completely, with some calling it a starting point.

House Speaker Paul Thissen of Minneapolis said he thinks Gov. Dayton delivered what he said he would. Thissen said Minnesotans will let lawmakers know in the coming weeks whether it's too much.

"What the governor is doing is laying out choices for the people of Minnesota, and I think that hasn't been done in a long time," Thissen said. "It's long past due that we talk about, if we are to be in this position in the future, where we have a top-notch education system that's going to allow us to compete in a global economy, we need to figure out a way to do that."

State Republicans felt no hesitation, blasting Dayton's proposal as a job killer dressed as fairness. House Minority Leader Kurt Daudt derided it as a plan to create a better Wisconsin, tweaking Dayton's budget theme of creating a better Minnesota. Others noted Dayton refused to back new taxes on clothing and cigarettes when he ran for governor.

MORE BUDGET COVERAGE

• Story: Pushback to Dayton's sales tax plan
• Details: Sales tax changes
• Highlights: Dayton's budget proposal
• Link: Read the entire budget
• Live Blog: Revisit live coverage

Republican Senate Minority Leader David Hann of Eden Prairie said he believes everyone will end up paying more taxes under Dayton's plan, not just the wealthy.

"If you're a Minnesotan and you're going to get a haircut, there's going to be a tax," said Hann. "If you're going to get your oil changed, there's going to be a tax. Just go down the list. There's a host of things that are going to be taxed in Minnesota that weren't taxed before."

Dayton said he's ready for the criticism, and challenged critics to come up with something better.

"Everybody who's not paying taxes or is not paying their fair share of taxes and is being asked to pay more or start paying taxes -- 'it's devastating, it's ruinous, everybody's going to leave the state,'" Dayton said. "I've heard this for 30 years. You've got to tax somebody. So are we going to tax just the few, the middle-income taxpayer and families, or are we going to ask everybody -- businesses and high-income earners as well as everyone else -- to pay a fair share?"

The plan calls for higher income taxes on top earners and an expansion of the sales tax to clothing purchases more than $100 and some services, including legal and accounting services. Cigarette taxes would also increase 94 cents per pack under his proposal.

Dayton would reduce the sales tax rate from 6.875 percent to 5.5 percent. He also proposed providing property tax relief to homeowners and business, cutting the corporate income tax and increasing state aid to cities and counties.

EDUCATION FUNDING SEES A BUMP

Dayton would channel much of the new tax revenue generated from his plan to education -- from early childhood to colleges and universities. The plan spends $240 million more for higher education, another $260 million for K-12 schools, $44 million for early childhood education and another $40 million for all-day kindergarten.

"We need to put our money where our beliefs are, and where we know we can get results," Dayton said.

Education Minnesota, the statewide teachers union, praised the proposed school spending increases.

"This is the first time in many years that the Legislature has started with an investment mentality toward public education, from preschool to college," Tom Dooher, the union's president, said. "That's good for our students and for our economy."

Dayton's proposal gives the state's two higher-education systems more than 80 percent of the money they've requested. The Minnesota State Colleges and Universities system and the University of Minnesota would each get an additional $80 million over the biennium.

MnSCU would get full funding to buy training equipment and expand its internship program. The University of Minnesota would get its funding for research, and enough money for a two-year tuition freeze.

But Office of Higher Education Director Larry Pogemiller says the University of Minnesota would first have to satisfy lawmakers' concerns over how much it spends on administration.

"I'm guessing the governor believes they will be able to make the case, but we will see," Pogemiller said.

University of Minnesota President Eric Kaler called the budget proposal "good news." He said he's working to submit an interim spending report to the Legislature by March 15.

The budget also includes an increase to the state's largest financial aid program, which would grow by more than a quarter.

The state Office of Higher Education says the $80 million increase in the State Grant for the biennium would be the highest in 25 years. Pogemiller said the average grant would increase by about $300 a year, though some students could see increases of more than $1,000.

"This will help on the debt issue for lower- and lower-middle-income people for sure," Pogemiller said. And we think, depending on the institution you pick, it should definitely help for middle-income people."

State grants supplement federal financial aid. The average grant is almost $1,500 a year.

The proposed budget increase would enable the program to add another 5,000 students. That would boost the total number of students served to more than 100,000.

ENVIRONMENTALISTS CHEERED BY SMALL INCREASE

Each of the three major environmental agencies — the DNR, the Pollution Control Agency, and the Board of Water and Soil Resources — would get single-digit bumps in their general fund budgets.

Steve Morse with the Minnesota Environmental Partnership said it's a welcome change from the last couple of years, when the Legislature cut those agency budgets. And he said he expects the current Legislature to approve the governor's plan.

"It's just a breath of fresh air," Morse said. "We think this Legislature will embrace this and deliver this, and perhaps more."

The governor also wants to direct increased income from hunting and fishing fees to the game and fish fund and to raise the price of critical habitat license plates to $40. The added money would help pay for conservation land and the non-game wildlife program.

Parks and trails money includes $9 million over the next four years to improve state parks and trails, along with $407,000 to coordinate park and trail planning among metro, state, and Greater Minnesota agencies.

Forest management money includes investments in forest inventory, timber harvest, reforestation, and road maintenance. Aquatic invasive species work would receive almost $4 million in each of the next four years.

The governor also proposed new money for the Environmental Quality Board, an oversight agency whose budget has eroded dramatically in recent years.

A report commissioned by the governor recently recommended that the EQB be revitalized.

TRANSPORTATION BUDGET GROWS, TOO

Dayton's budget proposal also includes more money to maintain and expand the state's transportation infrastructure.

The governor proposes allocating $20 million to the existing Transportation Economic Development Program. If the Legislature approves the funding, half of that would go towards local infrastructure projects.

MnDOT Commissioner Charlie Zelle said transportation infrastructure is critical to economic development and jobs.

"Not only do we work on projects that otherwise aren't going to be funded but because it increases economic development and jobs it also increases the tax base," Zelle said.

The governor is also proposing a new transit-dedicated quarter-cent sales tax for the seven-county metro area. If passed by the Legislature, the new tax would go toward expanding the region's transit system. It would come on top of an existing transit-dedicated tax in five metro counties.

Metropolitan Council Chair Sue Haigh said if lawmakers agree to the governor's proposal, the state would not need to borrow for as many as 21 new transit projects over the next two decades.

"That is how most of our competitor regions fund their transit systems, so this is very common — Dallas, Denver, Seattle," she said. "This puts us in a competitive place."

DAYTON DEFENDS TAX RESTRUCTURE

Dayton argued that his plan would make the state income tax system fairer and that most Minnesotans wouldn't see a dramatic change in their taxes.

"Married couples with taxable incomes below $250,000 would pay the same in income taxes, also pay about the same in sales taxes, and receive a property tax rebate from the state of up to $500," Dayton said in prepared remarks. "That is a $500 per year tax cut for most middle-income Minnesota families."

Dayton also says that changing the state's tax code will help boost job creation in Minnesota. He proposed lowering the state's corporate income tax from 9.8 percent to 8.4 percent. Dayton's plan also eliminates tax breaks for corporations that operate overseas.

Republicans have warned that any type of tax increase will hurt the state's economic recovery.

The biggest problem with the plan was Dayton's extending the sales tax to business services, such as accounting and legal work, said Charlie Weaver, executive director of the Minnesota Business Partnership.

"It really hurts the smaller companies," said Weaver, "because what a Target or a General Mills or an Ecolab will do then is simply buy those services elsewhere."

Dayton's plan is the starting point in a debate likely to reach into May. At a minimum, lawmakers must plug a $1.1 billion projected deficit.

Overview hearings on Dayton's budget will begin Wednesday. But lawmakers are expected to wait until March or later to begin votes on the recommendations or their substitute. In late February they will get an updated economic forecast, which will determine whether the estimated deficit they must erase is larger or smaller.

"We have the luxury of getting to see the reaction across Minnesota'' before acting, said House Tax Committee Chairwoman Ann Lenczewski, DFL-Bloomington.

(MPR reporters Stephanie Hemphill, Jessica Mador and Alex Freidrich and the Associated Press contributed to this report)

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