Dayton's budget plan: Widen sales tax, increase top income rate

High-wage earners would pay $1 billion more in income taxes, all Minnesotans would pay sales tax on pricier clothing and homeowners would see $500 yearly rebates under Gov. Mark Dayton's budget proposal, released Tuesday.

The sweeping changes would remake the state's tax system, taking some burden off property taxes and broadening the sales tax to more goods and services. High earners would pay more, the DFL governor said, to bring fairness to a system that favors the wealthy.

Dayton said his goals are twofold: to generate needed revenue, but also to make the tax system more fair and better suited to an increasingly service-based economy. The sales tax would broaden its reach, but the statewide rate also would drop to 5.5 percent from the current 6.875 percent. He would also increase the cigarette tax by 94 cents a pack, primarily as a way to discourage smoking.

"These are just common-sense changes that are going to benefit the vast majority of people," Dayton said as he laid out his proposal.

K-12 schools and higher education would get the biggest boost they've seen in years, with more money for all-day kindergarten, special education and classrooms. Colleges would get a 9.6 percent funding bump, with money to pay out awards to thousands of students and create 10,000 paid internships and apprenticeships.

A longtime believer in early education, Dayton would set aside more than $90 million over the two-year budget period to fund scholarships for low-income families to access quality early learning programs and child care.

The court system, which has long complained that it lacks the funds to deliver justice swiftly, would get more than $70 million to maintain core services, tighten safety measures, reduce backlogs for public defenders and improve the state's crime reporting system.

Dayton repeatedly said his plan was a starting point for discussions to come, and legislative leaders -- on both sides -- and others appeared to take him at his word.

On Tuesday, DFL leaders praised his plan for its boldness but said they, and Minnesota, will have to dig into the details before they adopt the budget's specifics.

Business leaders objected to higher taxes on wealthier Minnesotans and on the services that businesses sell each other but some praised the increased funding for education and transit. And Republican lawmakers upbraided the governor for his heavy reliance on new taxes in a budget that cuts only $225 million in spending from a $38 billion budget.

Dayton, who campaigned in 2010 calling for the state to "tax the rich," would create a new tax rate of 9.85 percent, to be paid on taxable income above $250,000 for joint filers and above $150,000 for single filers. That would net about $1 billion from 53,000 returns and give the state one of the top five top rates in the country.

For the first time, Minnesotans would pay sales tax on clothing -- items above $100 -- and on services like haircuts, auto repairs and legal fees.

"This is a budget for a better Wisconsin," said House Minority Leader Kurt Daudt, R-Crown, implying that Minnesotans would run to Republican-led Wisconsin if the budget were passed as proposed. Dayton's campaign and governing mantra has stressed the creation of "a better Minnesota."

Evening out the tax split

Dayton's plan would dramatically alter the state's revenue streams. Over time, the state's system has tilted toward the property tax, which supplies 40 percent of the state's revenue. Income taxes provide 33 percent and 27 percent come from sales taxes. The overhaul would ensure that each of the three sources provided roughly a third of state revenue.

That overhaul and Dayton's proposed new spending offered business leaders things to love and hate in his budget.

Corporate taxes would fall to 8.4 percent from 9.8 percent. Dayton also would freeze business property taxes for two years.

The seven-county metro area would pay an extra 0.25 percent sales tax for improved transit -- a measure local business groups have supported. He also would increase spending on economic development by $86 million.

Minnesota Business Partnership Executive Director Charlie Weaver said the governor had prepared the business community well for the shape of his budget. "We don't need to over-react to this," Weaver said.

But he did join with Minnesota Chamber of Commerce Vice President Laura Bordelon in decrying Dayton's plan to tax business-to-business services, which have long been tax exempt, and the proposal to increase taxes on high earners.

"[This] could have a serious impact on job providers as a whole," Bordelon said. She said the positives, which include the new tax on online purchases and the business property tax freeze, are "pretty small in the overall scheme of things."

The Mall of America has already been to the Capitol to trash a DFL Senate proposal on taxing clothing, and Internet retailers have sued states that tried to tax their sales. Dayton would tax both.

Robert Enger, the president of the Minnesota State Bar Association, gave Dayton kudos for trying to create a fairer tax system but described the proposed tax on legal services as a "tax on justice."

For some, Dayton's budget is a welcome relief from the lean years.

The Department of Human Services, which handles health care and economic assistance for low income Minnesotans, would be kept largely stable after years of reductions.

Dayton would pump $500 million in new spending into education, including income-based scholarships for high-quality preschools and an $80 million boost to the State Grant Program that helps students pay college tuition.

But, disappointing some allies, Dayton proposed delaying repayment of a $1.1 billion school payment shift to 2017, when revenues have stabilized.

Homeowner rebate

Some of the biggest new spending in the governor's proposal would be property tax rebates for homeowners. They would get $500 per year, although the rebate could not exceed taxes paid. Of 1.5 million homesteads in the state, an estimated 95 percent would receive the maximum rebate. The first rebate, based on 2013 property taxes paid, would be paid on the 2014 income tax return.

Businesses would not be eligible for the rebate but all homeowners -- from dwellers in million-dollar mansions to those under threat of foreclosure -- would get money back. Senate Majority Leader Tom Bakk, a DFLer from Cook, thanked the governor for putting the cash in his budget to lift the property tax burden.

"That is historic property tax relief," Bakk said. But he made clear he was not ready to adopt the rebate idea as his own. He called it an "interesting" proposal, faint praise from a former tax committee chair. "Certainly," he said, "There's a lot of different ways the tax committee could take it."

Staff writers Jennifer Brooks and Jim Ragsdale contributed to this report. Rachel E. Stassen-Berger Twitter: @rachelsb