Minnesota House Democrats are asking the state’s highest earners to dig even deeper to bail out the state from its financial woes, proposing a temporary income tax surcharge that would catapult Minnesota to one of the nation’s highest taxed states.
House DFLers want the top 1 percent of earners — those netting more than $500,000 — to come up with about $854 million over the next two years to repay public schools. The move would smooth out the state’s finances and allow DFLers to make good on a signature campaign pledge. The surcharge could blink off sooner if the debt was repaid earlier.
“The bill we owe toward schools is past due,” said House Speaker Paul Thissen, DFL-Minneapolis. “And the right thing to do is to pay them back.”
Thissen unveiled the tax surcharge on Tuesday as part of a new budget outline that maps out more than $2.4 billion in new revenues, largely for increased spending on education and property tax relief. The financial sketch did not outline where the rest of the money would come from, but Thissen said DFL Gov. Mark Dayton’s permanent tax hike on high earners would likely become a piece of the final proposal.
The House plan opens up a new frontier in the budget battle gripping the Capitol, where DFLers control the governor’s office and both chambers of the Legislature. The surcharge could shape up as another test of DFL unity. The Senate and Dayton have not been as anxious to repay schools quickly and are leery of nation-leading income tax rates.
If Dayton’s income tax hike and the surcharge become law, the tax rate for Minnesota’s highest earners — at least temporarily — could crest at 11 percent. That would place the state firmly among income tax outliers like Hawaii and Oregon. The proposal would also set Minnesota on a much different course than a growing number of other states, where Republican leaders are looking at scrapping the income tax in favor of more sales and use taxes.
“Democrats want Minnesota to be number one in higher taxes,” said House Minority Leader Kurt Daudt, R-Crown. “Republicans want Minnesotans to be number one for job opportunities.”
Some cuts proposed
Legislators are crafting a two-year budget proposal to wipe out a $627 million projected deficit. Along with the tax hike on high earners, legislators are considering an array of proposed tax hikes on everything from tobacco and alcohol to clothing as a way to find more money for education and property tax relief.
As part of their plan, House leaders proposed about $200 million in reductions, mostly from health and human services.
House Majority Leader Erin Murphy didn’t identify specific health and human services reductions, but she said legislators should continue to press for reductions in a massive and growing area of the budget.
“We must find a way through efficiencies, reforms and cuts to bend the cost curve in health care while doing everything we can to to protect our seniors and Minnesotans with disabilities,” said Murphy, DFL-St. Paul.
House DFLers also pledged money for expanded all-day kindergarten, for higher education and for an $800 million bonding bill that would fund a raft of building and road projects. Their plan also sets aside extra money for public safety, the courts and economic development.
House Democrats, who won power in the last election and face a feisty GOP eager to reclaim control, have displayed a keen focus on paying back the remaining $854 million owed to public schools.
Over the past several years, the state borrowed more than $2.4 billion from public schools to balance the budget. Criticism over the borrowing has resonated with the public, but school officials have not pressed the state hard for repayment. The improving economy has refilled state coffers and already allowed the state to repay a giant share of the money owed.
The income tax surcharge could have a tougher time in the state Senate, where leaders have been open to the governor’s proposed income tax hike on high earners.
“The House just took it up a notch, and to their credit they found a way to make it temporary,” said Senate Majority Leader Tom Bakk, DFL-Cook. “But my position has been that when it comes to tax policy, it is helpful to be not in the top five in any category.”
Avoiding a showdown
Senate Democrats are scheduled to release their own budget outline on Wednesday, laying out their priorities for the rest of the legislative session.
Thissen said that if state leaders had not cut income taxes for high earners years ago, the state probably would not have needed to borrow from schools in the first place. So targeting that group to repay schools is fair, Thissen said.
Sidestepping a confrontation over the tax surcharge proposal, the Dayton administration opted to focus on where House Democrats would like to spend the money.
“It is clear the House DFL shares our priorities of investing in education and job creating measures; the governor looks forward to looking at their proposal in detail,” said Katharine Tinucci, a Dayton spokeswoman.
The governor heads to Duluth on Wednesday to stump for his own budget proposal.
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highest state income tax rates
California 12.3 percent
Hawaii 11 percent
Oregon 9.9 percent
Iowa 8.98 percent
New Jersey 8.97 percent
Source: Federation of Tax Examiners