Dayton's budget frays alliance with Minnesota business

Gov. Mark Dayton has spent two years painstakingly working to build an unlikely alliance between his union-backed DFL administration and the state's powerful business community.

Now much of that is fraying as he plows ahead with a plan to extract billions of dollars in new taxes from the state's businesses.

"If you do this, you are gambling with the golden egg," said Douglas Baker Jr., CEO and board chairman of Ecolab, a Twin Cities-based Fortune 500 company. "It's not a good place to play."

Dayton's administration has spent more than a year meeting face to face with business leaders, attempting to cultivate relationships with those still wary of the governor's commitment to business. Those conversations led some to praise Dayton for his willingness to listen, to even come to their offices to hear their concerns.

Then he unveiled a budget that, for the first time, would tax legal fees, accounting work and other business-to-business services, shocking business leaders and energizing them in a way no other political issue has in years.

Now this scion of business, whose family earned its fortune in retail, is locked in a showdown with some of Minnesota's largest and most powerful companies over how best to improve the state's economy. The result could leave a mammoth footprint on the final budget deal and potentially reshuffle political alliances between DFLers and business.

Dayton insists the state's revenue system no longer works. Consumers and companies spend far more on nontaxable services than on taxable goods, leaving the state vulnerable to an endless cycle of deficits and unstable budgets.

"We are not just putting out our proposal and going to hide," said Myron Frans, commissioner of the Minnesota Department of Revenue. "We are going out there saying, here's our plan, this is our solution. If you don't want us generating revenue from the business to business, what's your solution?"

In early February, Dayton, his chief of staff Tina Smith and Frans met with Baker and other leaders with the Minnesota Business Partnership, a group of top Minnesota companies that spent millions to defeat Dayton's gubernatorial bid.

In the meeting the business leaders did not mince words: Dayton's plan, they said, would make Minnesota companies less competitive and force the largest companies to consider moving their headquarters to lower-tax states. Such a move would not require a massive uprooting. For tax purposes, relocating a dozen top executives to an office building in a low-tax state would suffice.

The leaders warned Dayton that those companies that stayed behind might scale back charitable giving to make up for the higher tax bill. Dayton reminded them the proposal was a starting point, likely to undergo significant changes at the hands of the Legislature.

That's unnerving political gamesmanship for the head of multibillion-dollar companies with investors relentlessly focused on the bottom line. Every major company in town is working on contingency plans in case it is enacted, Baker said, with most including workforce reductions.

But this tussle is one Dayton began itching for last summer, even before voters handed DFLers control of the Legislature and profoundly strengthened his hand in negotiations.

One warm day last June, Frans and Smith were sitting with the governor in his Capitol office.

Usually buzzing with staffers and activity, the office suddenly fell silent.

Dayton told Frans and Smith he was tired of incremental, patched-together budgets. He wanted a proposal balanced for the long haul. He wanted a profound rethinking of the tax system and one that was fairer. Pieces he had been critical of before, like the tax on clothing, were all in play.

"This was his vision from the very beginning, to do something bold," Frans said. "He said it might not be politically popular, but Minnesotans are entitled to a plan that puts us on the right path."

Last Tuesday, Smith and Frans returned to meet with members of the Minnesota Business Partnership in another closed-door meeting and again faced a near-unanimous chorus of opposition.

"Part of the reaction is, 'We can't pay tax. We've never had to pay tax. Why should we have to pay tax now?' " Frans said. "I get that, but we have a problem here and we all need to pay some tax. So, what's the fairest way to do that?"

Frans discredited the notion that businesses would flee to lower-tax states. More states are considering taxing business services, he said, and taxes are never the sole consideration for a move.

"Do you want your business to be in a low-tax, low-service state where there is no thriving economy, or do you want it in Minnesota, where there's a great workforce and great quality of life?" Frans asked.

As a liberal DFLer with strong union support, Dayton knew he would have to work hard to convince business that he was sensitive to their concerns.

Smith started her career at General Mills and has close contacts with many Twin Cities business leaders. Frans was a longtime tax attorney with decades of corporate experience. Kathy Tunheim, a public affairs guru, volunteers as Dayton's senior adviser on jobs.

Minnesota Business Partnership executive director Charlie Weaver acknowledged that Dayton "has reached out to us since his first day, more than past governors, even Republican governors." A former lawmaker and commissioner, Weaver was chief of staff to Republican Gov. Tim Pawlenty.

Tunheim said Dayton wants a strong private sector economy and is intent on building ties with business. "It doesn't mean we are going to do everything they want all of the time," she said.

Business leaders credit Dayton for being open and accessible, and they are still prepared to work with him.

"Dayton has been vocal about the need to think differently. That's important," Ken Powell, chief executive officer for General Mills, said in a recent interview. "He's engaged with business, which we think is impressive." But, Powell said, subjecting business services to the sales tax "would be devastating to our competitiveness."

"We do believe that spending can come down, and the personal income tax hike is not a deal breaker but deserves much more conversation," said Richard Davis, president and CEO of U.S. Bancorp, a Fortune 500 company. "We will find an answer. This is a good moment to encourage dialogue and idea-sharing."

But Davis and others are hedging their bets. Business leaders will meet soon with two men who could become key allies in restructuring parts of Dayton's plan: Senate Majority Leader Tom Bakk, DFL-Cook, and House Speaker Paul Thissen, DFL-Minneapolis. Both have signaled that the business-to-business proposal is likely to be "modified" as it moves through the Legislature.

"The governor is important," Davis said, "but so is the Legislature, and business leaders will make their case to both."