Dayton's new plan: 'Tax the rich,' leave sales taxes alone

Gov. Mark Dayton bowed to political reality Thursday, unveiling a revised budget that he hopes will be an easier sell to tax-averse Minnesotans than the massive sales tax overhaul he had championed just two months ago.

Although the $37.9 billion state budget proposal is Dayton's second, it is far from the last Minnesotans will see. In the coming weeks, lawmakers will add their own plans to the mix, and their leaders already have indicated they would sketch out some differences with Dayton.

Dayton's new plan relies heavily on a $1.1 billion income tax increase on the wealthy and allows him to revert to the "Tax the Rich" mantra that got him elected.

"Just saying no to tax increases is not a budget plan and it's not responsible," Dayton said.

But the new Dayton budget puts lawmakers and the governor on more comfortable footing as they negotiate details. His allies in the DFL Legislature had become increasingly vocal in their opposition to his plan to extend and overhaul sales taxes, particularly his proposal to tax business services. A Star Tribune Minnesota Poll last month found that a majority of Minnesotans opposed Dayton's proposed sales tax on business-to-business services but supported the idea of increasing the income tax on top earners.

Lawmakers from both parties — and even some in the business community — have acknowledged that, by the time the final gavel bangs, wealthier Minnesotans will face higher income tax bills.

Dayton campaigned in part on that issue, proposing it two years ago when he faced a Republican Legislature, put it to his January plan and is sticking with it in this latest iteration.

"I think that was done on Election Day," said Senate Majority Leader Tom Bakk, DFL-Cook, referring to voters' November swap of a Republican-led Legislature for a Democratic one. "The governor has been very out-front about how he feels about the high wage earners. So I think when Minnesota voters gave him a Democratic Legislature, that die was cast."

Republicans say Dayton's new proposal will still hit hard.

"I'm a little dismayed to see that the governor hasn't realized that taxes are going to be bad for Minnesota's economy," said House Minority Leader Kurt Daudt, R-Crown.

Rep. Kurt Zellers, a Republican from Maple Grove who faced the governor as House speaker last year, said Dayton's "insatiable desire to tax 'the wealthy' is only going to hurt small business women and men the hardest."

Dayton's new plan, like his January proposal, would mean higher income taxes on couples earning more than $250,000 in taxable income and singles earning more than $150,000.

According to state calculations, about 54,400 Minnesotans would pay more income tax under the plan. The extremely wealthy would feel the biggest bite. The state estimated that a married couple with $1 million in taxable income would pay $15,000 more per year if Dayton gets his way and a couple earning $5 million would pay an additional $95,000.

The new proposal would increase cigarette taxes, which has shaky support in the DFL-controlled Legislature; close corporate tax "loopholes," and impose a new 'snowbird' tax, which would force people who live in Minnesota slightly fewer than six months out of the year to pay Minnesota taxes. Dayton said he is unsure that the "snowbird" tax, which opponents call the "grandparent tax," will pass this year.

"Even he knows that won't get legislative support," said Sen. Julianne Ortman, R-Chanhassen.

The governor said he no longer supports a sales tax overhaul, noting both that former Governors Jesse Ventura and Rudy Perpich tried similar approaches and failed as well. But that does not mean some sales tax rewrite is not in the offing.

"There are some pretty easy places to go after some additional sales tax money ... digital goods, body piercing, tattoos cosmetic surgeries. All kind of luxury items, I think," said Bakk.

But for the governor, the sales tax is dead, which means Dayton is proposing less spending on new programs.

Dayton is dropping his plan to give every Minnesota homeowner up to a $500 annual property tax credit. That would have cost the state $1.5 billion over the next two years.

"I still think property tax relief is very important, [but] this doesn't allow us to do as many things as we would with a broader reform," he said. "That's the way it is."

The new plan from the governor also lacks the funds to speed up repayment of the so-called school shift, a key priority among House members, particularly. Adopted during bad budget years, the shift changed the dates the state gave aid to public K-12 schools. Shifting the payment dates makes the state's budget calculations a little rosier.

The governor's previous budget had fully repaid that shift, now worth $808 million, by 2017. Now, under his plan, schools will have to wait until better economic times to see payments revert to their regular pattern.

Democrats in the House say that's not good enough. "We would like to pay back the school shift this year," said House Speaker Paul Thissen, DFL-Minneapolis.

Despite losing $2 billion in revenue compared to his first budget proposal, Dayton found some new programs worth funding in the latest version of his budget. He added $18 million to his spending plans to offer renters tax relief and would give the state's Office of Administrative Hearing a one-time $60,000 boost to cover the cost of dealing with increased campaign-related complaints.

The governor even made changes to his spending plans on Wednesday night. Katharine Tinucci, the governor's spokeswoman, said he was so moved by his visit Wednesday with United Way officials that he added in millions more in spending to domestic-violence and homeless-youth programs.

"We are very excited," said Kenza Hadj-Moussa, communications director for the Minnesota Coalition for the Homeless, of the $5 million the governor added for homeless youth. "That program has been underfunded for years [but] it is still shy of the need."

Rachel E. Stassen-Berger Twitter: @rachelsb