Get ready for a battle over Minnesota taxes

Gov. Mark Dayton's State of the State address Wednesday at times took the tone of a valedictory. But his budget recommendations Friday made clear that while he's serving his last year as governor, he isn't finished putting his stamp on state policies — and he still cares deeply about the issue that propelled him to office in 2010: tax fairness for low- and middle-income Minnesotans.

Dayton asked the Legislature to create a new state personal and dependent income tax exemption, thereby cutting state income taxes an average of $117 next year for 1.9 million state tax filers. In addition, he proposed expanding a tax credit for low-income Minnesotans, delivering an average $160 cut next year to 329,000 filers.

Those are measures Dayton says are needed to spare low- and middle-income Minnesotans tax increases that otherwise would result from conforming state tax laws to the federal Tax Cut and Jobs Act enacted in December. Dayton wants to partly disentangle the state income tax code from the federal one by starting state tax calculations with adjusted gross income, not federal taxable income as current law provides. That would give Minnesota lawmakers more control over how the state's tax burden is distributed, even as it appears to add complexity to state tax calculations.

In addition, Dayton is seeking to spare Minnesota recipients from the loss of state property tax refunds that the federal changes would have brought to some renters and low-income homeowners.

Dayton argues that fairness justifies making low- and middle-income Minnesotans the focus of state tax relief, since businesses and upper-income earners were big winners in the federal tax overhaul. That notion appeared to have broad support among legislators during Dayton's Wednesday address. When the governor declared that "our number one priority … should be tax fairness for individual Minnesotans and their families," first DFLers, then, more slowly, Republican legislators stood to applaud.

Nevertheless, the Legislature's Republican leaders quickly rejected Dayton's proposals for business taxpayers. His plan would reinstate annual inflation increases in a statewide business property tax and tobacco taxes that were repealed only last year. It would also maintain current state law with regard to taxation of business profits that are "passed through" to owners and taxed as individual income. Conforming that portion of state law to the new federal scheme, which Dayton rejected, would give those taxpayers an estimated $350 million state tax cut this year.

Dayton's budget offers one sizable concession to business. He's asking to make the state tax code match the new federal one regarding single-year depreciation of capital equipment expenses, giving businesses a $100 million tax break.

But the DFL governor made clear that he's keen to keep individuals and families, not businesses, at the heart of any tax bill he'll sign this year. That resolve sets up a contest of wills over tax policy that's expected to dominate the remainder of this year's legislative session, which faces a May 21 constitutional deadline for adjournment. We'll follow that contest and weigh in with our own recommendations in coming weeks.

As Dayton's budget indicates, other matters also deserve attention. The forecast $329 million surplus through mid-2019 allows for needed spending increases to shore up state pension accounts ($27 million), make the new vehicle licensing and registration system known as MNLARS fully functional ($10 million, plus $33 million from a $2-per-transaction fee increase), improve school safety ($21 million), crack down on abuse in senior living facilities ($12 million), step up efforts to combat opioid addiction ($13 million) and improve cybersecurity in state IT operations ($20 million).

Dayton also seeks to shore up the school-based preschool programs launched on his watch. He's asking the Legislature to assure funding through mid-2021 to preschool programs in 59 school districts that have begun with temporary dollars.

The GOP-controlled Legislature is sure to second-guess Dayton's spending allocations. But Republicans ought to find considerable common ground with the governor on the priorities his budget reflects, including his oft-stated desire to leave office with the state in sound fiscal health. His plan shows a $123 million balance at the end of the current budget period and $275 million by mid-2021. That's a prudent course. Legislators should head in the same direction.