Dayton turns to smokers to fill Vikings stadium funding gap

A bailout of the $977 million Minnesota Vikings stadium by smokers and businesses was proposed by Gov. Mark Dayton on Thursday as a hedge against the limited success of electronic gambling games that were supposed to help build the sports palace.

The proposal was part of an overall agreement among Dayton and DFL legislative leaders on the tax bill, which included raising the cigarette tax, raising the income tax on higher-income Minnesotans and expanding the sales tax to a few business services. Total new revenue to be raised by the tax bill is $2 billion, legislative leaders said.

The stadium funding was part of the final tax deal. Revenue Commissioner Myron Frans said the state's $348 million share could be guaranteed by raising the cigarette tax on existing inventories to obtain $24.5 million of revenue in the first year. That would be coupled with a long-term, $20 million-per-year capture of revenue from what Frans described as the closure of a corporate "tax avoidance loophole."

The new plan is needed because electronic pulltab and bingo games selected last year to pay for the state's portion of the downtown Minneapolis stadium have fallen far short of projections. The cigarette revenue would give the project an immediate boost, Frans said, while the corporate tax change would be available in the future, should game revenue continue to underperform.

"We believe it's reliable, it's consistent and we know over time it'll be there," Frans said.

The plan was accepted in principle by those legislators writing the tax bill, a key element in bringing the session to a close by its midnight Monday deadline. But it was immediately attacked by Republicans, who said it violated the principle of building the stadium without taking money from schools, nursing homes and other beneficiaries of the state's general fund. Corporate income taxes and cigarette revenues typically flow to that fund.

"It is money that could otherwise go to schools, to health and human services and the like," said Assistant Senate Minority Leader Dave Thompson, R-Lakeville. "So, once again, because the projections were wrong, because the administration didn't understand the funding mechanism for the stadium, the taxpayer's going to be on the hook."

The stadium announcement is part of the deal making in the final days of the session, which included a late dust-up over Rochester's prized Mayo Clinic expansion project, new offers in a standoff over transportation funding and an agreement on major taxation issues. Meanwhile, the Legislature began passing and sending to Dayton the first major budget bills.

The cigarette revenue for the stadium is based on Dayton's proposal to more than double the tax, from $1.23 per pack to $2.83 per pack by July 1. That revenue would go to the general fund to help pay for a range of state programs, but Frans proposed using the one-time revenue from a tax on existing inventories for the stadium. That money would replenish the stadium's reserve fund and cover any current shortfalls, he said.

The corporate tax revenue would serve as a $20-million-per-year backup source, Frans said. In essence, the change would increase corporate income taxes for many companies with sales inside and outside Minnesota.

Frans said these companies are "avoiding paying their full Minnesota income taxes" by legally reporting some of their Minnesota sales in other states.

He said the new revenue could be used for other budget needs unless it is not needed for the stadium. "It's hopeful we'll never ever need to use this other mechanism," Frans said.

The Minnesota Chamber of Commerce opposes the change, said Beth Kadoun, director of tax and fiscal policy for the business group. "It is certainly not an avoidance," she said of current practice. "It is tax law that's been used in many states and in Minnesota for many years." She said the change "can discourage future investments in Minnesota."

Vikings Vice President Lester Bagley called the new plan "a viable, long-term solution to the electronic-pulltab shortfall." While some legislators argue that the team should increase its $477 million contribution, Bagley said "it looks like the state is honoring our agreement from last spring."

Dayton, House Speaker Paul Thissen and Senate Majority Leader Tom Bakk announced the tax agreement, which in addition to the cigarette tax increase included:

• An income tax hike on the top 2 percent of Minnesota wage earners, with a top rate of 9.85 percent.

• No new tax on liquor, and no surtax to accelerate repayment of the state's debt to public schools.

• No sales tax on clothing, but an expansion of sales taxes to limited business services and goods.

"We're on the cusp of an important course correction in our state's history," said Thissen, DFL-Minneapolis.

Discussions continued on ways to pump more money into state roads and bridges. Dayton, who opposes a gas tax increase, has offered instead to borrow $300 million for highways.

The governor's transportation package still includes at least a half-cent increase in the metro sales tax for transit. The $300 million would come from state trunk highway bonds.

In the one-step-backward department, frustrated legislators threatened to scrap a plan to send millions in state tax dollars to Rochester to support Mayo Clinic's downtown makeover. They were patching the deal up late Thursday.

The "House and the Senate have literally moved … heaven and earth to accommodate the Mayo proposal," House Taxes Committee Chairwoman Ann Lenczewski announced during Thursday morning's tax conference committee. "I will share my frustration. I'm comfortable waiting until next year." Later, however, leaders said they hoped to resolve the dispute and keep the project on track for this year.

Mayo spokesman Karl Oestreich said by e-mail that "discussions continue as part of the conference committee negotiations. We're confident that [Destination Medical Center] will be part of the final legislative package."

The House and Senate have sent the governor their first budget bill, a measure covering jobs and energy programs. It would reduce the unemployment tax on businesses, spend money on economic development and create a solar standard for utilities. The measure also offers St. Paul loan forgiveness for the Xcel Energy Center and gives incentives to Minnesota-made solar equipment. Later Thursday, legislators also passed a less controversial budget plan to fund public safety programs.

Staff writers Jennifer Brooks, Pat Doyle, Baird Helgeson and Rachel E. Stassen-Berger contributed to this report.

Jim Ragsdale • 651-925-5042