Gov. Mark Dayton says he will draw the line at any spending plan that raises overall taxes on the middle class.

Heading into the crucial, final weeks of the legislative session, the governor says he can compromise on other issues with his fellow DFLers who control the Capitol, but he won’t agree to a clothing tax that would hit families or an income tax increase that reaches beyond the wealthiest Minnesotans.

“That position is about as foundational as anything, as I go into negotiations,” Dayton said in an interview with the Star Tribune.

DFL leaders in both the House and Senate are pushing their own plans for tax increases on a range of sources including income, alcohol, cigarettes and clothing, setting the stage for a three-way clash in a one-party government.

Dayton’s stance against taxes that touch the middle-class is not absolute. He has hinted strongly that he is open to the possibility of some increase in the so-called sin taxes on cigarettes and alcohol.

But he has already publicly dismissed the Senate clothing tax plan and a House effort to impose an income tax surcharge on the wealthy that would catapult Minnesota’s tax rate to among the nation’s highest.

The House wants to make good on DFL campaign promises to restore education funding and lower property taxes, while Dayton is intent on his original goal of taxing the top 2 percent as a way of bringing in new revenue without hitting everyday Minnesotans.

Senators, who are not up for re-election next year, are looking for stable sources of new revenue that could lay the foundation for years of innovation and reform.

Even if some of the House and Senate proposals fall away, others that are more likely to pass, such as cigarette and alcohol taxes, could bring a new wave of revenue to the state’s depleted treasury. Advocates of adopting those measure say the money could spur advances in education and economic development all while driving down property taxes.

Waiting in the background at the Capitol are Republicans who were jettisoned into the minority by voters last year. GOP leaders say they believe that DFLers are falling into the classic trap of overreach and that the more DFLers bulk up on new taxes, the wider the Republican path back to power becomes.

“We are seeing the results of one-party power and I don’t think the result is going to be good for Minnesota,” said Sen. Dave Senjem, R-Rochester.

Even DFLers are predicting that the final few weeks of the session could be rocky.

“I think there will be a blowup,” said Rep. Ann Len­czewski, DFL-Bloomington, chairwoman of the House Taxes Committee. “But I think what will be more important is that there will be a more conscious awareness that all three need to feel good and need to save face and that they are balanced.”

Senate Majority Leader Tom Bakk, a DFLer from Cook and former union negotiator, is pushing Dayton and House leaders to broaden the sales tax to clothing and consumer services like auto repair, while lowering the overall sales tax rate to 6 percent from 6.875.

That would put Minnesota’s sales tax system more in line with other states. But recent polling and a log of calls to the governor’s office show Minnesotans are staunchly against a tax on clothing.

Dayton originally proposed a broadened, lower sales tax that would affect consumers and businesses alike, but few rallied to his cause. Now, he said, he will not accept a sales tax proposal that nicks consumers alone.

That “becomes a regressive tax on the middle-income people and families,” Dayton said. “My fundamental position is that I oppose that.”

Dayton also dismissed the House’s proposed temporary income tax surcharge on those who make more than $500,000 a year. That plan would bring in a giant sum — about $1.2 billion over two years — but would put Minnesota firmly among the highest taxing states in the country.

House Speaker Paul Thissen, DFL-Minneapolis, said he remains committed to using the surcharge money to repay the final $854 million owed to public schools after an accounting shift that helped balance the budget.

Dayton maintains that extra money from a steadily improving economy is already paying back schools and that the debt could be wiped out in little more than a year if gains continue. He says he’s loathe to push Minnesota into top-tax tiers just to fix something that is righting itself naturally.

“If there’s another way to handle it, then I think that’s a better way,” he said.

Dayton’s stance also could leave DFLers without the money needed to make good on many of their spending promises. Plans to raise income taxes on the wealthiest Minnesotans, as Dayton has proposed, and a widely embraced tobacco tax hike won’t be enough.

Another potential pot of money that could smooth over differences has sparked its own controversy.

A House plan to raise wholesale taxes on wine, beer and hard liquor could yield $355 million — enough to provide property tax relief, expand rehab programs and more.

But the tax that the House maintains would add a mere 7 cents to a can of beer has brought a sharp pushback from brewers, who say the resulting tax bite will be far higher — as much as $4 per case of beer.

Dayton, initially cool to an alcohol tax increase, now says, “I don’t favor it, but I’d most likely sign a bill if I agree with everything else in the bill, and it had that in it.”

The Senate still actively opposes the hike and refused to include it in its tax plan, saying it leans too heavily on middle-income Minnesotans.

The three leaders also have parted ways on a gas tax. House and Senate leaders had pushed an increase they said would fund needed road and transit projects, but Dayton stopped them short.

The proposed increase, he said, would prompt a huge outcry from motorists at a time when prices at the pump already top $3.50 per gallon and the increase would bring in just a fraction of the money needed.

“I said from the very beginning of the session that I was against the gas tax, so I was surprised that they were surprised,” Dayton said.

“I don’t think people want to pay more tax money to watch things become maybe not quite as worse as they would be otherwise,” Dayton said. “They want to see improvements, and they deserve to be shown that.”

His ambitions for a comprehensive rethinking of the state’s transit system are likely to emerge as a central theme in his re-election campaign.

Legislators who still hope Dayton can be persuaded on some of the larger tax pieces know they are edging toward a delicate moment in negotiations, seeing how far they can push without causing a full-scale and embarrassing political meltdown.

Republicans, meanwhile, are waiting to capitalize on any hints of dysfunction.

“It’s sort of like a tax policy hokey pokey,” said Sen. Dave Osmek, R-Mound. “You put something in. You take it back out, you put it back in and you shake it all about. It’s not the way we should be governing as legislators.”

 

baird.helgeson@startribune.com 651-925-5044 rachel.stassen-berger@startribune.com 651-925-5046 Twitter: @rachelsb