Taxes, spending and bonding differences linger as lawmakers, Dayton start final week of session

Minnesota's political leaders could overhaul the state tax code, make a big investment in roads and buildings, give money to schools for safety programs and to help offset budget cuts, and approve new spending on elder care and opioid addiction treatment — all in the next week.

Or they could do none of that.

As they head into the last week of the legislative session, state lawmakers are racing to reach agreements on a handful of major initiatives under discussion the past three months at the State Capitol. For DFL Gov. Mark Dayton, now in his final months in office, it's one last chance to notch major accomplishments — but he must work with a GOP-led Legislature whose leaders have frequently been at odds with him, resulting in partisan breakdowns at the end of recent legislative sessions.

Last year, Dayton and lawmakers set a two-year state budget that covers the state through the first half of 2019. That means there's not much they absolutely must do this year. But state lawmakers, many of whom will face voters in November, say a gridlocked session would have devastating consequences.

"This could be a great, great success — but we need leadership from the governor to make that happen — or it could be a bust," House Taxes Committee Chairman Greg Davids, R-Preston, said of the tax bill, which he called the "centerpoint" of the 2018 session.

GOP legislators reached an agreement on a tax plan Friday but now need to negotiate with Dayton. If they fail, many Minnesotans could end up with tax increases and a complicated filing process. Inaction on other measures would mean the continued deterioration of water systems, roads and state buildings. Efforts to stem opioid addiction would be stunted. Schools would lack money to add counselors or building security.

Dayton has made schools his top priority in his final round of end-of-session negotiations. At the beginning of May, he called for an additional $138 million in one-time "emergency" funding for schools, and he urged lawmakers to pass gun legislation and school safety spending.

Lawmakers spent much of the session deliberating over unexpected issues, including the federal tax change, the failed rollout of the state's vehicle licensing and registration system and calls for increased school safety and gun control after the mass shooting in Florida. Senate Majority Leader Paul Gazelka, R-Nisswa, said that is part of why an unusually small number of bills have made it to Dayton's desk so far this year.

Nonetheless, Senate Minority Leader Tom Bakk said he expects a flurry of bills will head to the governor for a signature before the end of the session on May 21.

"Monday through Sunday next week — that's seven days," said Bakk, DFL-Cook. "Things come together pretty fast."

Despite Republican control of the House and Senate, lawmakers have been trying to hash out their own differences on key proposals before entering negotiations with Dayton's administration. The two chambers reached an agreement on adapting the state's tax system to federal changes. But they still need to agree on a spending package that distributes some of the state's projected surplus and on a public works bonding bill.

"Those three things should happen," said House Minority Leader Melissa Hortman, DFL-Brooklyn Park. "But I'm afraid that it's starting to look like we might not get all of them. Or any of them."

Spending bills are laden with differences in policy as well as the amounts of money spent on various programs. A House public safety budget bill changes the standard for sexual harassment under state law, making it easier for victims to bring legal cases against harassers. The Senate bill does not. The Senate spending bill dedicates $16 million to continue repairs to the Minnesota Licensing and Registration System (MNLARS), while the House version requires the governor to cut nearly $10 million from his budget to pay for the system.

"Frankly, I don't want to keep throwing money down that rat hole," House Speaker Kurt Daudt, R-Crown, said of MNLARS. He said he would rather seek an outside vendor to take over the system.

The bonding proposals appear easier to combine. They are the same size, $825 million, and dedicate similar amounts of money to water infrastructure and roads and bridges. Dayton's borrowing package, however, is nearly twice as large as what Republicans want to spend.

Lawmakers started meeting last Wednesday on the most complex merger: The tax bills. The House, Senate and Dayton had all crafted plans intended to align the state tax code with the federal overhaul and prevent widespread tax increases on Minnesotans. The combined version of the House and Senate bills drops the tax rates for the two lowest income brackets, costing the state $137 million in revenue in 2019 and more in following years.

The proposal doesn't include some changes Dayton would like to see, Department of Revenue Commissioner Cynthia Bauerly told legislators Friday. And she said they must figure out how the tax bill costs would fit with spending proposals.

Recent legislative sessions ended in acrimony between GOP lawmakers and the DFL governor, who is not running for re-election and will leave office at the beginning of 2019.

Last year's session culminated in a protracted legal battle after Dayton vetoed the Legislature's budget. The 2016 session ended without a bonding package, and Dayton refused to sign the tax bill over a wording error. In 2015, a special session was needed to pass key bills. All sides say they are determined to avoid a special session this year.

The governor said he and Republican leaders have worked hard to smooth over lingering tensions from last year, but they still have deep divisions over policy priorities.

"The end of session is when all of those divisions are heightened and become very much forces in deciding the outcomes, and especially in an election year," Dayton said.

The governor has spent the last weeks of the session drafting open letters to lawmakers and holding a flurry of news conferences to draw attention to his priorities, including the expansion of a state-run health insurance program and the $138 million to help school districts. Stable funding for public schools has been a signature issue for Dayton, and he fears impending layoffs of teachers and program cuts at schools will undo some of that work.

"That money has been designated for safe schools, elder abuse, opioid abuse, MNLARS," Gazelka said. "We don't have the time, or the resources, to switch midstream."

Star Tribune staff writer Erin Golden contributed to this report.