No sales tax on clothing or haircuts. No alcohol tax hike. No income tax increase for 98 percent of filers. On Sunday, after four months of launching a flotilla of tax ideas, the Legislature’s DFL majorities and Gov. Mark Dayton unveiled a final 2014-15 state budget outline that, on the revenue side of the ledger, is more notable for its omissions than its contents.
There’s plenty to like on the spending side of their balance sheet. The DFL plan pumps an additional $725 million into public education from preschool through graduate school. That’s enough to reverse the deep higher-education cuts of the past two years; ease the squeeze that has some of the state’s public schools operating only four days a week; pay for all-day kindergarten, and offer preschool scholarships to low-income families.
The plan also includes measures to close a nagging $627 million budget gap, the residue not only of the Great Recession but also of a dozen years of legislative failure to balance the budget in a lasting way.
But the plan’s tax features are a disappointment. They raise revenue in a way that puts Minnesota’s economic competitiveness at risk.
Particularly worrisome is a new marginal tax bracket that will apply to the state’s top 2 percent of incomes. The rate attached to that bracket remains to be set by a House-Senate conference committee, but it is almost certain to be among the nation’s highest, especially after an anticipated temporary surcharge for top earners “blinks on” to get state aid payments to schools back to their normal schedule. After four years of payment delays, ending the “school shift” is an $860 million one-time expense.
Tax ideas that would have allowed for a lower income tax rate, including clothing and alcohol taxes, were rejected because they would have fallen on the middle class. While that decision is true to Dayton’s 2010 campaign promises, it comes at an economic price. Making Minnesota an income tax outlier among the states won’t be helpful in attracting and sustaining private-sector investment.
In addition, like a bad penny, a bad tax policy idea that disappeared two months ago turned up again Sunday. Applying the state sales tax to some currently untaxed business-to-business purchases will be part of the plan, Senate Majority Leader Tom Bakk announced. He was not specific about which items or services would become taxable, nor about how the revenue thus raised would be used, other than for “significant economic development.”
Regardless of how the money would be used, taxing business inputs is not sound policy. It layers hidden taxes into the cost of goods and services and takes a toll on wages and job creation in the affected industries. Those costs will affect low- and middle-class Minnesotans as surely as a clothing sales tax would. But the spurned clothing tax would have had the virtue of transparency, and could have been offset for low-income earners by a refundable tax credit, as the Senate tax bill provided.
To be sure, businesses will benefit from some of the property tax relief measures that total a hefty $400 million over two years in the DFL plan. But low- and middle-income homeowners and renters ought to be favored as the tax conference committee allocates that sizable sum.
Property tax relief is warranted for homeowners and renters whose taxes are disproportionately high relative to their incomes. But homeowner property taxes in Minnesota rank in the middle range among the states, according to the nonpartisan Washington-based Tax Foundation. They aren’t putting Minnesota at a competitive disadvantage. High income taxes are. DFLers would do well to shrink their property tax relief budget for the sake of a somewhat lower top income tax rate.
The DFL plan includes debt service spending in 2014-15 sufficient for an $800 million bonding bill. But the majority’s all-DFL approach to setting the rest of the budget appeared Sunday to dim chances that a bonding bill will be enacted this year. Republican leaders said that since they were excluded from budget-setting, they’re less interested in supplying the eight minority votes in the House and two in the Senate required to achieve the 60 percent supermajority required for general-obligation bonding.
We hope they reconsider. Failing to enact a bonding bill while interest rates remain low and public-works needs are pressing would be a sorry result. It would be particularly disruptive to the multiyear renovation of the State Capitol that was begun last year.
Republicans have offered no alternative budget plan this session, evidently preferring to stand aside and criticize DFL decisions. They should know that if they scuttle a bonding bill, they will deserve to be seen by this session’s critics as part of the problem.
NEW TOP TIER
In January, Gov. Mark Dayton proposed an 9.85 percent tax rate for that portion of annual taxable incomes above $250,000 for married joint filers and $150,000 for single filers. DFL leaders agreed Sunday to those thresholds and left the rate to be decided by tax conferees. The state’s current top tier applies a 7.85 percent rate to the portion of taxable income above $140,961 for married joint filers and $79,730 for single filers.