Gov. Dayton -- a man with a plan

Give Gov. Mark Dayton this much: He's found a way to raise taxes that the business community appears to hate more than an income tax hike for the rich.

Dayton's proposal to impose the state's sales tax on the services businesses buy -- legal, advertising, accounting, computing and the like -- had by week's end become Competitiveness Enemy No. 1. In volume and vitriol, business condemnation of that proposal was outstripping the reaction two years ago to Dayton's unsuccessful bid for a new income tax bracket for top incomes.

"It's the most damaging thing we could do for competitiveness," Minnesota Business Partnership exec Charlie Weaver said of taxing sales of business-to-business services. Minnesota would join just five other states -- including South Dakota -- in tacking the sales tax on so wide a range of business inputs.

For 46 years, apparently, there's been a Minnesota tax policy that this state's businesses liked better than South Dakota's version. Before Dayton flushed that out, who knew?

What keeping up with the competition requires of a state, it seems, is a changeable, eye-of-the-corporate-beholder sort of thing.

Dayton seemed to be responding to some of the business lobby's old anticompetitiveness complaints. He offered to reduce the state's corporate tax rate from 9.8 percent to 8.4 percent, taking it from fourth in the nation to 12th. He said he'd freeze the statewide business property tax for two years and reduce its rate of increase after that.

He threw in the so-called "Amazon tax" on Internet sales -- a fairness measure long sought by Minnesota-based retailers. A long-sought point-of-purchase sales tax exemption for capital equipment is in. So is a $346 million rollback in unemployment insurance premiums.

There's irony to note here. The DFL governor turned to the sales tax in large part because the competitiveness watchdogs in 2011 were so riled about his income tax "fourth tier."

Dayton's new plan still raises the income tax by about $1 billion on the top-earning 2 percent of filers. But the marginal rate he proposes now, 9.85 percent, is down from 10.95 percent two years ago. Instead of tied for highest in the country, it would be fourth-highest, up from eighth-highest today.

The governor has come around to the realization that compared with other states, Minnesota underutilizes its sales tax. He endorsed extending it to services when he saw that doing so would permit a drop in the overall sales tax rate from 6.875 percent to 5.5 percent. That would move the rate from seventh-highest to 27th among the states, to the benefit of businesses and consumers who buy already-taxed goods.

But Dayton wouldn't consider asking households to pay a tax when they hire a lawyer or tax accountant unless he asked businesses to do the same. Fairness demands as much, he argues.

"This is going to be a tough decade," Dayton told the Star Tribune Editorial Board last week. "If people understand that we've got a fair system, they're going to be a lot more accepting of what we'll have to do" to meet a rising demand for government services while federal help shrinks.

"Yes, but that needs to be measured in terms of value, not just taxes," advised economist Art Rolnick, late of the Minneapolis Federal Reserve, when I caught up with him last week.

Providing high-quality public services at a reasonable price belongs at the heart of Minnesota's competitive strategy, he said.

The complainers about business-to-business sales taxes have a point, Rolnick said. Business taxes are inevitably passed along to consumers and employees in the form of higher prices and lower wages. That's hidden, regressive and "pretty inefficient," he said.

But the 50-year Minnesota success formula has been to invest in high-return "public goods" like a well-educated workforce, transportation and public safety. "We offer a great public environment," Rolnick said. "That's our edge."

The 21st century may have ramped up the competitive intensity for Minnesota businesses. But it has not diminished the competitive value of those public goods. To the contrary -- they are more important than ever.

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