Senate DFLers are breaking from the governor's tax plan and pushing for an income-tax increase that would reach down into what many consider middle class.
The comprehensive $1.8 billion tax overhaul plan released Tuesday would tap married filers' taxable income above $140,000 a year. The DFL-controlled Senate also is seeking a dramatic increase in tobacco taxes and the first sales tax on clothing. To offset the sales-tax expansion, the Senate would lower the overall sales-tax rate to 6 percent from 6.875 percent.
The money would go toward wiping out the state's $627 million deficit, lowering property taxes and targeted economic development.
"Our plan is to put the state's fiscal house in order and not bounce from one deficit to the next," said Senate Taxes Committee Chairman Rod Skoe, DFL-Clearbrook.
The proposal sets up a political showdown with fellow party members in charge of the House as well as Gov. Mark Dayton in the closing weeks of the legislative session — not over whether to raise taxes, but rather which ones to raise and how high. Senate DFLers are determined to press hard on Dayton to re-embrace the clothing tax, which was part of a proposal he ditched more than a month ago due to widespread criticism. The Senate remains firmly opposed to a House plan to raise the alcohol tax as much as $4 for a case of beer. Senators also have rejected the House's proposal for a temporary income-tax surcharge on those who earn more than $500,000 a year. The surcharge would result in a giant windfall to repay public schools but slingshot the state's tax rate into one of the nation's highest.
Senate Republicans blasted Tuesday's proposal, saying it guarantees that taxes will rise for all Minnesotans. They said Dayton, who campaigned on taxing the rich, will have misrepresented his intentions if he accepts the Senate plan.
"He said he would not raise taxes on middle-class income earners and he said he would not impose new sales taxes for consumers," said Chanhassen Sen. Julianne Ortman, the ranking minority Republican on the Taxes Committee. "This turns him into a hypocrite, and it goes against everything he said he would do and not do."
Dayton favors his proposal
The Dayton administration says the governor remains committed to his own plan. Dayton spokeswoman Katharine Tinucci said the governor does not want to reject any proposal outright before budget negotiations, but he "certainly is not supportive of taxes that would impact the middle class."
Signaling another point of conflict, House leaders have lined up firmly behind their alcohol tax and surcharge on the highest earners to repay the $808 million the state still owes public schools.
"We are completely committed to that," said Rep. Ann Lenczewski, a Bloomington DFLer who leads the House Taxes Committee. "It's a top priority for us."
Senate DFLers decided Dayton's plan created too high a tax rate for the top 2 percent of earners. They opted for a lesser increase but spread over a wider pool of taxpayers. Their plan would raise the top income tax rate to 9.4 percent from 7.85 percent, touching the top 6 percent of wage earners. For single filers, the new tax rate would kick in at taxable income above $79,730. The higher rate would apply only to dollars over that amount. "We are concerned about having rates that are high and narrow," Skoe said. "So we were looking at including a larger percentage of Minnesotans."
Skoe and other DFLers reject the GOP charge that the plan reaches into the heart of the middle class. They note that the average family income in Minnesota is about $60,000 and that many people who say they are middle-class actually are at the upper end of the income spectrum.
"Most of us perceive ourselves as in the middle, regardless of where we really are," Skoe said.
The Senate's push to retool the sales tax comes as the state taxes fewer items but at a higher rate than many other states.
Lowering the sales tax rate would save consumers more than $1.2 billion a year, but the state would more than make up that lost money by taxing clothing and a long list of previously untaxed services, including car repairs, over-the-counter drugs, tattoos and dating services.
Offering other help
Low-income Minnesotans would get a credit of up to $60 a year to offset the new clothing tax. To come out ahead, a Minnesota family would have to spend less than $1,000 a year on clothing.
The Senate proposal includes millions of dollars in new economic development and aid for schools and local governments, which DFLers hope will drive down property taxes.
The Senate plan carves out tax beaks for dental clinics, airplane equipment and investors in fledgling companies. Also included is help for communities whose home companies are eyeing major expansions, such as 3M in Maplewood and the Mayo Clinic in Rochester.
"Rochester needs to keep up with Mayo's growth," Skoe said. "We think this is a wise use of state resources."
Skoe said the proposal also honors a long-standing DFL goal of lowering property taxes for most Minnesotans.
While the House favors direct property tax rebates, the Senate prefers to have the state take on a larger share of education funding and boost aid to local governments.
The Senate plan also includes a new 13 percent wholesale tax on sports jerseys and other memorabilia, which could then get passed on to taxpayers in the form of higher price tags. Combined with the sales tax, the total tax on sports memorabilia would approach 20 percent.
The memorabilia tax is expected to bring in more than $32 million over two years and help pay the state's share of the new Minnesota Vikings stadium. State leaders are scrambling to find new money to pay for the stadium because the preferred revenue source, electronic pulltabs, has fallen far short of projections.
Skoe said the Senate plan would slice off a small portion of that new memorabilia tax, about 5 percent, for youth sports activities statewide.