Avoid budget that makes Minnesota uncompetitive

Minnesota legislators are on spring break this week. Many will be positioned to collect constituent reactions to the 2014-15 budget outlines that DFL majorities released last week before the annual midsession recess.

About one aspect, they ought to get an earful. The House DFL proposal to double down on an upper-income tax increase — albeit temporarily — risks launching the state's top tax rate into an anticompetitive stratosphere. It's an idea that ought to disappear faster than March snow.

House DFLers insist that Minnesota should get its recession-incurred obligation to school districts off its books ASAP, and no later than June 30, 2015. They're willing to impose a temporary income tax surcharge exclusively on the state's top earners to raise the $854 million that task requires. Their surcharge would "blink off" as soon as schools were paid, either via surcharge revenues or any forecasted surplus dollars, to which schools have a claim under existing law.

But that's not all. House leaders are also intent on a permanent income tax increase for top earners. In that, Senate DFLers and DFL Gov. Mark Dayton concur.

Nobody but Dayton is yet willing to attach a rate to his proposed new top tax bracket. Dayton's bid is a 9.85 percent rate for that portion of taxable incomes that exceed $150,000 for single filers and $250,000 for joint married filers. That rate raises an estimated $1.1 billion over the next two years — and would be an uncompetitively high fourth-highest in the nation.

The House evidently aims to see Dayton's precariously high bid and raise it for the next two years. The highest marginal rate in the country is California's 13.3 percent for earners of $1 million or more; Hawaii is in second place with 11 percent. The House majority appears willing to put Minnesota in the California-Hawaii tax league.

That's not good company for a state that wants to continue to be home to more Fortune 500 companies per capita than any other. Those big businesses aim to attract top talent from around the country. A supersized state income tax for top earners would make their recruitment more difficult, and could cause some companies to ask whether they ought to do their hiring elsewhere.

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The Senate budget contains no risky upper-income surcharge or accelerated shift payback. But it has a school funding wrinkle of its own: It would put $150 million in 2014-15, and $150 million per year after that, into the state's share of a new property tax that could be imposed at school boards' discretion, and could be used to replace existing voter-approved school levies.

Senate Majority Leader Tom Bakk describes this proposal as the revival of a key component of the acclaimed 1971 Minnesota Miracle that has been missing, and missed, since 2001. That year, the state "took over" the share of school finances that was previously provided by a mixture of property taxes and state aid, in which the state's share was more generous for property-poor districts than for wealthier ones.

The 2001 changes were well intentioned. But their goal of reduced school reliance on the property tax was foiled by the recurring revenue shortfalls that the state has endured since. Schools have turned repeatedly to voters for more property tax revenue to make up for inadequate state support. Not all voters have been receptive to school appeals.

The result has been the reemergence of educational disparities that the Minnesota Miracle was created to reduce. The quality of K-12 education offered in more affluent places is again pulling ahead of that available in poorer quarters, while property taxes in some districts have risen faster and higher than low-income homeowners can bear.

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Major decisions lie ahead for the 2013 Legislature in the next seven weeks, and the budget outlines reveal only a little about what form those decisions might take. Some of what we see looks laudable. Higher education, the fiscal whipping child of the last decade, looks to be headed for a good year. Sufficient education money is on the table to both pay for quality preschool and provide all-day kindergarten for at-risk children, provided legislators make those children's needs a priority.

Both chambers' majorities plan to shave $150 million from the $11.3 billion base funding projected for human services. That budget is dominated by health care expenses. Keeping fiscal pressure on that fast-growing portion of the budget is crucial to the state's being able to step up investment in education.

More spending constraint is in order. A key place to look is at both the existing and the scheduled "spending" in the tax bill. Legislators plan richer doses of property tax relief and aid to local governments than seem justified in a budget that still needs to erase a $627 million deficit.

The budget outlines underscore something that's been clear since Minnesota's votes were counted last Nov. 6: A major state tax increase is coming. As this page argued in its own budget outline last month, it's crucial that any new tax be crafted in a way that minimizes its competitive drag on Minnesota's economy. Particularly in the Senate, hints were heard last week that a base-broadening, rate-reducing reform of sales and corporate taxes remains a possibility this year.

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