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Continued: Top earners cool to paying more

They are members of an exclusive club who reluctantly stand at the center of Minnesota's budget debate.

Gov. Mark Dayton wants these 7,700 people making more than $1 million a year to pay higher income taxes, either permanently or as a two-year surcharge. The resulting revenue could generate $500 million to $700 million over the next two years, enough to help close the state's $5 billion budget gap, end the government shutdown and get state employees back to work.

Republican legislative leaders have said no, and some of the state's top earners said in interviews this week that the "tax the rich" plan rings hollow to them. Few would comment about the potential hit to their own paychecks and lifestyles. Most insisted that their chief concern is the broader impact on the state economy.

"I don't agree that raising taxes the way [Gov. Dayton] has proposed is a smart way to raise revenues for the state," said Doug Baker, CEO of Ecolab. "I told the governor this."

Minnesotans who make more than $1 million a year already are projected to pay $1.081 billion in state income tax for the 2011 tax year. While Baker and others say they can afford the extra levy Dayton wants, they insist it's bad economic policy that could hurt job growth, kill expansion and cripple efforts to attract top talent.

Others in the state's economic elite feel differently, calling Dayton's proposal unattractive but probably necessary.

Still others feared the tax increase would stifle philanthropy, curtail profit sharing and ultimately brand Minnesota as a difficult state in which to do business.

Baker, who earned $8.5 million last year, said Dayton's approach to solving the state's budget deficit is bad policy because the plan would lift Minnesota's tax rate to twice that of Illinois. Instead of taxing the rich, Baker said he would tax clothing, consumer services and other items. "We know this stuff is pretty progressive and it hits the people [harder] with more income," he said.

Currently, only seven states have a higher top income tax bracket than Minnesota, according to the Tax Policy Center.

Adding the governor's proposed 2 percent increase on the 7.85 percent top rate would rank Minnesota third, behind Hawaii and Oregon, both at 11 percent.

Minneapolis publisher and prominent Democratic fundraiser Vance Opperman called it "obnoxious" to single out a group of high earners in Minnesota to balance the budget.

But he added that he supports funding education "no matter how you raise the money. ... That's what sets us apart from other states."

He suggested the state look at revenue-raising options such as expanding the sales tax and instituting structural tax reforms to reduce annual revenue volatility.

More conservative executives had other worries. Polaris Industries CEO Scott Wine said a tax hike on the wealthy will discourage hiring and expansions here.

"It will have an impact on where we continue to invest," said Wine, who made $2.7 million last year. "In sports, you play to win and I think the states that are reducing taxes and reducing spending are playing to win the economic growth game."

'Sounds good politically'

Polaris, the Medina-based maker of all-terrain vehicles and snowmobiles, is in the process of closing a manufacturing plant in Wisconsin and opening one in Mexico.

Recent job candidates are eyeing Dayton's proposal and evaluating how much of a salary they need "to offset the higher taxes here compared to elsewhere. [That's] what people have played back to me," Wine said.

Wine said if a tax increase goes through, he would consider moving to a lower-tax state when he retires. "I want to be in as low a tax state as possible," he said.

Russ Huffer, CEO of the glass-making firm Apogee Enterprises, blames the shutdown on politicians who have "not learned to play together in the sandbox."

"The worst part about saying 'tax the rich,' you can raise it all you want. ... It doesn't balance the budget. It doesn't make things better. It just sounds good politically. That's all,'' Huffer said.

Unlike many of the top executives, Rebecca Thiess, a budget analyst for the liberal Economic Policy Institute in Washington, D.C., thinks Dayton's proposal is probably better for the state economy than trying to rely solely on budget cuts to solve the deficit.

"From an economic standpoint, we think tax increases on the wealthy would be preferable to spending cuts because they wouldn't have as much of a negative effect," Thiess said. "For instance, a [higher-taxed] rich person may not invest as much in stocks. But that is much more preferable than spending cuts that are going to hurt on the local level."

Paul Walser co-owns 12 auto dealerships and three used-car lots in Minnesota. If his taxes rise, he's all right with that -- sort of.

"I certainly feel like I have been very blessed and that I have all that I need and then some, so I don't have a problem philosophically with paying more tax," Walser said.

But there is a wider cost to the state, Walser believes.

"Minnesota is already burdened with very high property taxes," income taxes, utility costs and labor unions, Walser said. "When you throw them all into the pot, it means it's more challenging to operate a business in this part of the country than in many other places."

ddepass@startribune.com • 612-673-7725 dphelps@startribune.com • 612-673-7269

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