Governor's race is all about taxes

Talk of tax increases can sink a gubernatorial candidate during good times.

These are not good times.

That's why the message that major DFL candidates are offering recession-weary Minnesota voters seems so unlikely: We must raise taxes, because cuts alone can't do it.

GOP candidates say the state must manage without taxes, or risk further economic malaise.

The painful solution may end up somewhere in between. Minnesota faces a $5.4 billion shortfall through 2013, which amounts to a staggering $1,038 for every man, woman and child if nothing else changed.

"Anybody saying you can do it with cuts -- on either side of the aisle -- is a liar or stupid," said state Rep. Tom Rukavina, a DFL candidate for governor.

But no DFLer is proposing anything close to a $5 billion tax increase, so reality dictates that the next governor is going to have to shape a Minnesota that may look vastly different from the state in fatter times.

"Can you do it with cuts? Sure," said John Gunyou, finance commissioner under Republican Gov. Arne Carlson. "I don't think most people would be willing to live with the results."

More taxes?

Outgoing Gov. Tim Pawlenty has never technically bent on his promise to resist statewide tax increases. (Some critics point to fee increases during his tenure as a form of tax increase.)

But in seven years, he also has not proposed the Draconian cuts that would have been needed to bring spending in line with revenues. Instead, he and DFL legislators have tried to patch, shift, trim, and fee their way to fiscal stability.

A tax increase might not significantly change that picture.

Rolling tax rates back to 1998 levels, before tax cuts were approved by both parties, would bring in $806 million.

How about tacking on another $1 for every pack of cigarettes? Add $143 million. Apply the sales tax to clothing? There's another $280 million.

The final tally from all three? Only $1.22 billion a year.

"The honest truth is that you can't raise revenue enough to solve the problem. It can't be done," said Senate Taxes Chairman Tom Bakk, a DFL candidate for governor.

Bakk said he favors something similar to the $2.2 billion, across-the-board income tax increase approved by the Senate last session but never signed into law. "Some called it political suicide," said Bakk, who sponsored the bill. "But even that doesn't solve the problem."

Dayton says the state's wealthiest Minnesotans pay a smaller share of their income in taxes than do those who earn less. Righting that imbalance, he said, would yield $3.8 billion over two years and go a long way toward closing the state's gap.

One caveat: The state's richest 10 percent would have to pay a higher share of the total amount of state and local taxes, which takes in not only state income tax, but sales tax, property tax and other taxes.

Dayton does not say whether he favors raising income taxes enough to ensure the top 10 percent have the same overall burden as the rest of Minnesotans. If not, the potential for new revenue could be dramatically less.

House Speaker Margaret Anderson Kelliher said increasing taxes would likely be part of her solution. The DFL candidate for governor is considering higher income taxes on those who make more than $300,000. She figures that would amount to about $9 a month per person. A failed proposal in the House to create a new tax tier for those who make more than $250,000 would only have brought in $238.6 million this year.

Minneapolis Mayor R.T. Rybak, another DFL gubernatorial candidate, said he would consider extending the sales tax to clothing priced above $200. Minnesota is one of few states that does not tax clothing.

Make cuts, set priorities

Republicans insist there's room to slice spending and re-order state priorities.

State Rep. Marty Seifert, a Republican candidate for governor, said he would reduce entitlement programs, eliminate at least a couple of state agencies and cut aid to local governments instead of raising taxes. All would yield some reductions, although none large enough to balance the budget.

"We have entitlement programs that automatically grow without question," Seifert said. "That's really where a lot of these means-testing, downsizing, right-sizing, economizing ideas are going to have to take place."

Still, Seifert wouldn't put a price tag on his cuts, or say how deep they could go.

Emmer said he would look at "every fund" to find savings, including K-12 and human services. He also would investigate dedicated funds set up for roads, health care and debt payment.

Emmer did not offer specifics. "I am not going to because I can't yet, but you have to look at the whole picture."

The whole picture can be daunting, even to the most ardent budget-cutter. Minnesota spends about 70 percent of its entire general fund budget on just two areas: K-12 schools and health and human services, with about half going to each.

"Governmental efficiency is not the issue here," Gunyou said. "That's not going to get you to a balanced budget."

Right-sizing the state's budget without making big cuts in the two biggest spending areas is nearly impossible, as Pawlenty has found over his seven years in office. He never significantly cut education. He has held down the increase in the rate of spending for health and human services and pushed through some cuts, but not the wholesale slashing needed to avoid tax increases.

Carlson, who vetoed many budget items in his time, said that when the hard decisions come. "The pain around Minnesota will be absolutely stunning," he said.