Dayton's tax reform: Now, the debate

  • Article by: EDITORIAL BOARD , Star Tribune
  • Updated: January 22, 2013 - 7:30 PM

To the governor's credit, he's not just proposing to tax the rich.

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Gov. Mark Dayton

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On Tuesday, Gov. Mark Dayton staked his claim as a tax reform governor. He unveiled a $37.9 billion biennial budget proposal that closes a $1.1 billion budget gap and makes significant new investment in education, funded by more sweeping tax changes than Minnesota has seen since 1971.

Dayton won election in 2010 by hammering one idea: "Tax the rich." His new plan does, though not to the extent he proposed in 2011. It would create a new top income tax bracket with a 9.85 percent rate for married filers with taxable incomes exceeding $250,000, down from a 10.95 percent proposal two years ago but up from today's 7.85 percent top rate.

To his credit, Dayton's thinking about taxes has expanded. His new budget heeds the call of tax study panels through the past three decades for a more robust sales tax, applied to a wider range of purchases but set at a lower, more competitive rate. Dayton proposes to reduce the sales tax rate to 5.5 percent, down from today's 6.875 percent, beginning Jan. 1, 2014.

Most noteworthy on the list of purchases Dayton would tax are ones DFLers have long sought to spare -- clothing sales. There's Nixon-to-China irony in seeing a DFL governor named Dayton propose to apply the sales tax to the purchases of clothing items priced at $100 and up. It "goes against my upbringing," the department store heir said with a smile.

But he evidently agrees with our longstanding view: A clothing tax like the graduated one he proposes would raise needed state revenue without burdening lower-income taxpayers or putting the state at a competitive disadvantage. Minnesota is one of only four states with a sales tax that does not tax clothing purchases.

A clothing tax is one of many interlocking tax proposals that Dayton said would largely spare middle-income families. But he undercuts that claim by relying largely on higher business taxes to raise an additional $2.1 billion in revenue through June 30, 2015. Inevitably, business taxes fall on average Minnesotans through higher consumer prices and lower wages.

While Dayton proposes to reduce corporate income tax rates and freeze the statewide business property tax, businesses would be taxed for the first time on the purchases of legal, accounting, advertising and other business services. The result could be businesses looking to out-of-state providers of such services, to the state's disadvantage.

Minnesotans can count on the business community to explain to legislators the risks attendant to Dayton's plan. Business concern about the state's competitive posture should be taken seriously. Minnesota should avoid adding to business costs in a way that makes it an outlier among the states.

What's also needed in coming weeks is for all Minnesotans to help legislators see the risk that lies in not making the investments Dayton recommends.

Dayton is proposing a biennial budget about $1 billion larger than the one forecast in November. Three-fifths of that increase would go to education at all levels, preschool through graduate school. The state's chronic fiscal woes have left Minnesota ranked 20th among the states in per-student K-12 spending, down from 10th in 2002. Minnesota dealt public higher education one of the biggest percentage cuts in the nation during the same period. As a result, Minnesota's best economic asset -- its well-educated workforce -- is at risk over the long term.

Dayton is right to seek to end that slide. Whether it takes a 7.6 percent biennium-to-biennium increase in state spending to do so, as Dayton proposes, is something the Legislature should question. Dayton's budget includes just $225 million in spending cuts, compared with $2.1 billion in tax increases. The Legislature should look for more cost savings.

Minnesotans should help. DFL legislative leaders said they intend to offer citizens ample chance to participate in budgetmaking. Dayton's ambitious proposal and his party's control of the Legislature assure that this will be a big year in state policy annals. Minnesotans ought to help determine what will be written.

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An editorial of the Star Tribune, Minneapolis.

  • RANKINGS GAME

    Gov. Mark Dayton's proposed tax changes would alter Minnesota's rank among the 50 states in a number of tax categories, including these:

    Sales tax rate: From seventh to 27th.

    Top-bracket income tax rate: From eighth to fourth.

    Corporate income tax rate: From fourth to 12th.

    Cigarette tax, per pack: From 28th to eighth (tied with Wisconsin).

    Sources: Dayton budget presentation, Jan. 22; Campaign for Tobacco-Free Kids.

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