Minnesota tax reform: A three-act play

A large section of the legislative graveyard is reserved for tax reform plans.

Governor after governor over the past three decades has ginned up proposals for changing Minnesota's tax system, only to see them meet the same dismal fate for the same simple reason — such reforms impose pain on the well-organized, who mobilize skilled armies of lobbyists and publicists.

Despite governors enduring this unblemished losing streak, policy wonks have delighted at their success in persuading governors to carry their banners. The wonks' favorite proposal — to broaden Minnesota's sales tax to clothing and services — was embraced by Gov. Rudy Perpich's Tax Commission in the 1970s, by Gov. Arne Carlson's "Model Revenue System" in the 1990s and by the "21st Century Tax Reform" report at the end of Gov. Tim Pawlenty's term.

True to form, Gov. Jesse Ventura struck a muscular pose in taking up the same cause. His 2001 "Big Plan" paired the darling of tax reform geeks — applying taxes to the purchase a broader range of services — with reductions in the sales tax rate and property taxes, all in addition to his earlier cuts to income taxes. But in the end, Ventura's ballyhooing produced an outcome arguably worse than not passing new legislation. Revenues were reduced by rebates and rate cuts, and the shift of school funding from a statewide general education levy onto general revenues made the budget vulnerable to economic downturns, ushering in a decade of shortfalls and budgetary gimmicks.

Bottom line: Ventura handed out the sugar of smaller tax bills in flush times, but failed to deliver the pain of broadening the base of sales taxes. The organized complainers and special-interest lobbyists that he lampooned for their "sob stories" turned out to be Lilliputians besting Gov. Gulliver.

Into this grisly history rushes Gov. Mark Dayton, with an audacious flying clothesline across a broad swath of Minnesota taxes. Jesse's "Big Plan" looks scrawny by comparison.

Dayton's two-year plan would raise $3.6 billion of new revenue by — deep breath — returning with a vengeance to the golden oldie of broadening sales taxes.

That's not all. Taxes on tobacco would be hiked by 94 cents a pack, and the sales tax for the seven-county metro area would rise for transit.

That's a lot of pain, creating a gold rush for lobbyists racking up billable hours trolling the Capitol on behalf of organized professions and businesses.

The classic Greek tragedy of Minnesota tax reform proposals would foretell a traditional grim ending for Dayton's ideas. Yet, my recent road trip to the Capitol, featuring visits with GOP and DFL smarties, revealed that the governor may well defy the usual morbid fate — but succeed in ways different from what he initially proposed in January.

Sit back and grab some Joe, folks. We are in for a grueling three-act drama.

Act 1 set the scene as the governor unveiled his proposal. His team initially hoped (as had Ventura's) that the organized interests and their allies would focus not on the plan's parts but on the overall package, which promised reductions in the rates for sales and corporate taxes, $500 property tax rebates, and nearly $700 million in new spending on education and local governments.

News flash: The interests have scored their first victory over the proposed new taxes on business-to-business services. Although the governor continues to hold out hope, the chorus I heard in the catacombs of the Capitol hit one note: These taxes on businesses are all but dead. And that was among the governor's most loyal DFL supporters.

But Dayton has scored a more potent achievement. He has defined the battleground by entering the debate from the left. His opening proposal to raise $3.6 billion when the budget deficit is only $1.1 billion recruits a powerful constituency for new spending that will mobilize to fight for tax hikes as the forces of resistance form.

Act 2 began with last week's February economic forecast. It sets the projected budget numbers for the Legislature as it gets to work in earnest sizing up support and opposition to the governor's ideas.

Arithmetic is on the minds of DFL legislators as they try to stitch together majorities. No Republican will vote with them. Their majorities are small and riven by rural/urban splits, philosophical divisions between progressives and probusiness moderates, and policy wonk spats.

Legislative leaders are listening carefully as their colleagues fret about constituent howls over the governor's push to expand sales tax to clothing and services. They also vent about what they see as Dayton's expensive, unnecessary, and poorly constructed proposal to send out $500 property tax rebates.

An aside about quality theater — what happens in Act 1 often returns later. Dayton's big (and perhaps deliberately high) revenue target will mobilize well-organized interests desperate for funding (think of the education lobby) to ask legislators where the new revenue will come from if and when they attempt to revise the governor's tax proposals.

Seasoned lawmakers are starting to mull over approaches to raising revenue to fill part of the crater likely to be left by eliminating the B2B tax, which accounted for more than half of the $3.6 billion Dayton proposed to raise for new investments. The lack of intense organized opposition to Dayton's push for a tax hike on the most affluent has enticed DFLers to count it as a foregone conclusion — and to explore privately the possibility of increasing individual income taxes more broadly.

Both parties have criticized the governor for pumping revenue without proposing adequate tax reform. The Legislature's rewrites — along with the governor's sales tax broadening and transportation proposals — may end up producing more reform than was initially apparent.

Act 3 will be the decisive end game. The month of May seems distant, but it is very much on the minds of legislative leaders. Working out inevitable differences between the House and Senate is an obvious challenge. But I was stunned by the main hurdle worrying DFL HQ at the Capitol — the governor.

Will Dayton dig in his heels and possibly use his veto? He began his political career working for Gov. Rudy Perpich, who clobbered DFL legislators who were blind to his demands. As one veteran legislator put it, "the governor talks about flexibility but digs in on issues he cares about." Warning: When Dayton talks about welcoming a "good Plan C," bank on him insisting that the alternatives meet his standards.

Beyond shared political interests, DFLers share Dayton's values of investing in education and escaping the curse on government activism created by endemic structural deficits.

Democratic lawmakers are also mostly united in appreciating their fleeting historic opportunity to control both branches. Pointing to the uncertain fate of DFL majorities in the 2014 and 2016 elections, one senior DFL legislator spelled out the stakes in changing tax policy:

"We do it this year or it won't happen for a long time."

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Lawrence R. Jacobs is the Walter F. and Joan Mondale Chair for Political Studies and is the director of the Center for the Study of Politics and Governance at the Humphrey School and the Department of Political Science at the University of Minnesota.