Details were scarce in the broad-brush biennial budget outline that Gov. Mark Dayton and DFL legislative leaders painted Sunday afternoon. But when Senate majority leader Tom Bakk said the plan involves "significant sales tax reform" and Dayton added that consumers would not see the sales taxes applied to clothing or personal services such as haircuts, business lobbyists took notice.
Sales tax reform that doesn't involve consumers must involve businesses. Bakk acknowledged that ideas for taxing some currently exempt purchases made by businesses are again under discussion.
That's the category of tax changes that Dayton proposed in January, then withdrew in March after taking heavy fire from affected businesses.
But then, Dayton was out to raise more than $2 billion from business services sales taxes, and wanted to reduce the overall state sales tax from 6.875 percent to 5.5 percent. The leaders' charge to the House-Senate tax conference committee is much more modest. The thought of reducing the sales tax rate apparently has been dropped.
Instead, the aim is to raise enough additional sales tax revenue to allow some now-taxable purchases to be exempted.
"Some powerful economic incentives" could be provided in that fashion, Bakk said. While he did not spell out what incentives he has in mind, a sales tax exemption for construction materials has been part of the Legislature's discussion about how to support a major expansion by the Mayo Clinic and a new research lab at 3M.
In addition, new sales tax revenue might be used to allow the state to relieve local governments from paying sales taxes. That would in turn result in property tax relief in which businesses and homeowners would share.
But if Dayton and the DFL-controlled Legislature is again targeting business services for taxation, I'd bet that the thought of somewhat lower property taxes won't mollify the affected businesses.
Gov. Mark Dayton has been bad-mouthing a proposed sales tax on clothing ever since he dropped his larger scheme for sales tax reform in March. Even at the lower 6 percent tax rate that the idea's proponents in the state Senate say it would allow, it's too hard on the middle class, Dayton says.
But one of the long-standing claims about a clothing sales tax has been that it would make the overall sales tax less regressive -- that is, less disproportionately burdensome for lower-income Minnesotans.
That's still accurate, said Revenue Department tax research director Paul Wilson. The latest analyses draw from 2008 data, and use those data to derive a score called the Suits Index. The more negative the Suits number, the more regressive the tax. The score for a clothing tax was -0.215, compared with -2.45 for the sales tax as a whole.
Refund part of the clothing tax via an income tax credit, as the Senate bill does, and the tax would become even less regressive, Wilson said.
It turns out that the wealthy spend more of their incomes on clothing than poorer folks do. That's one of the reasons that adding the sales tax to clothing has been a recurring option in state tax discussions for at least 30 years.
A clothing tax would also stabilize the state's notoriously volatile revenue stream. (People still buy clothes during recessions.) It would not cause undue concerns about interstate competitiveness. (Minnesota is one of four states with a sales tax that exempts clothing.)
It may not be popular with the governor. But its policy merits make it well worth a serious discussion by House and Senate tax conferees this week.
The income tax rate that House DFLers chose for their proposed new top income tax bracket isn't exactly a nice round number. It's 8.49 percent, Speaker Paul Thissen announced Monday, and would fall on that portion of taxable incomes exceeding $400,000 for married joint filers and $226,000 for singles.
That rate is awfully close to 8.5 percent. But a measly 0.01 percent difference evidently matters to the politicians who picked it -- for two reasons, I'd guess.
One is that with a 8.49 percent rate, they can claim with a straight face that the state's top rate is below its level in the 1990s. Minnesota cut its 8.5 percent top rate to 8.0 percent in 1999 and 7.85 percent in 2000, as the state's economy perched precariously atop the dot.com bubble.
More significant may have been Thissen's comment that at 8.49 percent, Minnesota's top rate would be "out of the top 10 in the country." He could have added "just barely." According to the House Research Department, 10 states and the District of Columbia have combined top state and local income tax plus surtax rates higher than 8.49 percent. If Minnesota follows the House DFL lead, its top rate would be No. 11, just below the dreaded top 10.
But not right away. The House's proposal also includes a temporary surtax, and it's a big one -- 4 percent, for that portion of taxable incomes exceeding $500,000 for married joint filers. The proposed surtax would automatically expire after two years -- but while in force, it would give Minnesota a steep top rate of 12.49 percent, behind only California and New York.
My guess is that in the 2014 election, it's the number three -- as in third-highest in the nation -- that voters will hear about from GOP candidates and their business allies. Three is easier to remember than 8.49 or 11.
A temporary surcharge on high-income taxpayers made an unexpected debut at the Capitol Tuesday as leaders of the House DFL majority unveiled their broad-brush plan for balancing the 2014-15 state budget. They propose to employ that tool, last seen in Minnesota in 1982, to erase the remaining $854 million owed to the state's schools from the budget-balancing "shifts" of 2009-11.
The surcharge House DFLers envision would fall only on "the very wealthiest Minnesotans" and would be designed to automatically end, or "blink off," when the school debt is fully repaid. That could occur as soon as eight months from now if the next state budget forecast shows a sufficient surplus. Current law commits mid-biennium surpluses to school debt repayment.
Partisan skepticism greeted the notion of a blinking tax. "Nothing is more permanent than a temporary tax," said House GOP minority leader Kurt Daudt.
But history says otherwise. The 1982 surcharge, which started at 5 percent and grew to 10 percent as the state faced recurring deficits, blinked off in early 1984 as the economy rebounded and the state's finances stabilized. Unlike the new idea, that surcharge applied to all income tax payers at the same percentage level.
The surcharge hasn't blinked back on since. But the Republican governor who initially allowed it to become law without his signature was already recommending another blinking surcharge in September 2008 as a way to cope with the rapidly unfolding Great Recession. His words at the Humphrey Institute that day weren't heeded. In retrospect, they seem prescient and wise:
"Don't wait until we're completely out of recession to increase taxes. People start thinking you can get along without that money. That's not good. The state has a responsibility to carry out the work society has given it. The longer you delay, the more damage you do to that work."
Gov. Mark Dayton wasted no time on pleasantries as he addressed several hundred Minnesota Chamber of Commerce members Wednesday, the day before his expected release of a revised state budget plan.
The DFL governor's business critics won Round One of this year's Great State Tax Debate last week, when they got him to concede defeat on a proposal to apply the state sales tax to business services. With that proposal gone, also axed are Dayton's plans to reduce the state sales tax rate, send homeowners $500 apiece in property tax rebates and extend the sales tax to clothing. A lower corporate income tax rate, something for which businesses gave him no credit during Round One, evidently has also been withdrawn.
That leaves an income tax increase for the state's top earners and a cigarette tax increase, Dayton said at the Chamber's Day at the Capitol luncheon in St. Paul. He conceded defeat on one thing more -- a plan to tax "snowbirds" who spend at least six months and one day in another state each year and thereby avoid income tax liability in Minnesota. (Update: I spoke too soon about the snowbird tax. He kept it in his revised budget, released Thursday, but acknowledged that it poses difficulty for Minnesota's summer tourism industry and faces an uphill fight at the Legislature.)
It also kicks off Round Two -- and Dayton's at times stern Chamber address suggests that he intends to play a more aggressive game. He's ready to fight for higher taxes for the sake of improving investment in education, particularly early and higher education, he indicated. He challenged his plan's critics to employ facts, not anecdotes and impressions, as they make their case.
He distributed a six-page handout of charts and graphs containing facts he deems relevant. Among them: Per $1,000 of personal income, Minnesota's total state and local tax burden ranks a respectable 15th, down from 8th in 1996. State and local government revenues as a percentage of total state personal income are projected to decline under his budget to 15 percent in 2015 from a 1994 high of 17.9 percent. Minnesota job growth in 2012 outstripped that of all but 11 other states, including the nation's four lowest tax states (the lowest of which is South Dakota).
Maybe more pertinent in coming weeks: In response to a questioner's complaint that higher income taxes hammer small businesses, Dayton said only 6 percent of the state's businesses that pay taxes via the personal income tax earn enough to qualify for the higher rate he favors. His proposal will mean higher taxes for only 54,000 Minnesotans. Their average taxable incomes are $645,000 a year, he said.
If Dayton stays as feisty as he was Wednesday, those are numbers that Minnesotans will hear often in the two months that remain of the 2013 legislative session.
The answer to the question Dave from Owatonna asked about whether Gov. Mark Dayton proposes to tax memberships at service clubs and nonprofit organizations is "it depends."
YMCA, YWCA and Jewish Community Center memberships are on the list of items that would be newly taxed under Dayton's plan, which would also reduce the sales tax rate from 6.875 percent to 5.5 percent.
But memberships in veterans' organizations are expressly excluded on the list that was shared with the Capitol press corps Friday. Revenue commissioner Myron Frans explained that Ys and JCCs are treated as athletic clubs, while veterans' organizations serve communities in ways that the administration prefers not to burden with taxation.
When I was schooled in Capitol coverage years ago, I was taught that Minnesota politicians have great difficulty saying no to this state's military veterans. I'd say that pattern holds.