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Minnesota Governor Mark Dayton.

Bruce Bisping, Star Tribune

Dayton's budget is big, but balanced

  • Article by: JAY KIEDROWSKI
  • January 23, 2013 - 7:14 PM

Gov. Mark Dayton is to be commended for presenting a budget this week that is structurally balanced and proposes needed tax reform. Whether the overall size of the budget is acceptable will need to be decided by the Legislature.

For the first time since the early 2000s, a Minnesota governor has proposed a budget that has revenues equal to expenditures in not only the upcoming two-year period but also in the following two years. This by definition is a structurally balanced budget. If it is adopted, and if Minnesota has normal economic times, there will be no budget deficit two years from now. This fulfills the key recommendation of the Minnesota Budget Trends Study Commission.

Embedded in the governor's budget is major tax reform. It starts with the premise that Minnesota citizens should pay roughly equal amounts of income, sales and property taxes. The current tax system is unbalanced, with Minnesotans paying more in property taxes and less in sales taxes.

To rectify this situation, the governor courageously proposes extending the sales tax to clothing costing more than $100, to some personal services and to e-sales, while lowering the sales tax rate to 5.5 percent. Minnesota would go from having the seventh-highest sales tax rate to having the 27th-highest.

Dayton uses some of that new money to extend a $500 property tax rebate to Minnesota homeowners, because property taxes have increased 86 percent since 2002. He also increases local government aid to cities and counties so that, in combination with the property tax rebate, property taxes overall would drop 10 percent.

While Minnesotans are paying about the right amount in income taxes in total to have a balanced tax system, the governor, consistent with his campaign pledge of two years ago, proposes raising the income tax rate two percentage points on the wealthiest Minnesotans (those making more than $150,000 if single or $250,000 if married).

Because of the proposed changes in the sales, property and income taxes, the cost burden of each of the taxes on Minnesotans would be roughly equal. Another positive of the proposal is that Minnesota's total tax revenue would be less volatile in future years.

Business taxes are reformed as well. The governor proposes lowering the corporate tax rate from 9.8 percent to 8.4 percent by eliminating a number of current tax breaks for particular corporations. As with the sales tax proposals, the corporate tax changes follow sound economic policy of expanding the tax base and lowering the rate.

All of these proposals would be a major improvement for Minnesota. There will be many critics, however. Anyone who is losing their tax break (be it clothing retailers, corporations with foreign royalties, or barbers) will vehemently object. It will take fortitude for the Legislature to withstand the criticisms and focus on the common good.

The biggest concern with Dayton's proposal is the overall size of the budget increase. The budget totals nearly $38 billion of spending, an 8 percent increase for the two-year period.

Wisely, the governor found cost savings in the spending base. His administration's work on health care reforms and management efficiencies pay off in reduced spending. But there are spending initiatives that increase expenditures overall.

An increase of 5 to 6 percent over two years seems more reasonable with the economy still recovering.

Dayton does have the spending priorities right. The budget increases go to education -- early education scholarships, all-day kindergarten for more children and a general increase in K-12 funding. All state employees should receive pay increases after years of having none.

There is much to like in this proposed budget. It is rare that a governor has the political courage to propose major changes and truly lead. When critics complain about a particular change, we need to support the governor.

The Legislature should work to improve the governor's proposals. If we want a more stable state government with a fairer tax system, we will need to make our voices heard over the complaints of the critics to ensure that the Legislature does the right thing.

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Jay Kiedrowski is a senior fellow at the Humphrey School of Public Affairs and was finance commissioner under DFL Gov. Rudy Perpich.

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