Minnesota Capitol standoff fuels worries about chaotic tax season next year

The stalemate over taxes between Gov. Mark Dayton and the GOP-controlled Legislature is fueling worries of a turbulent tax season for Minnesota taxpayers and businesses early next year.

As the Legislature's midnight Sunday deadline for votes nears, the DFL governor on Thursday vetoed a bill that includes income tax rate cuts and brings the state into alignment with the federal tax code, which was revised by Congress in December.

Dayton vetoed the bill, he said, because Republican lawmakers have refused to get on board with what he said is his top priority: a $138 million package of emergency aid for school districts struggling with budget problems. But he also said the GOP-crafted tax bill offers too little relief to taxpayers while requiring too little in taxes from corporations.

Dayton axed the bill during a visit to Bruce Vento Elementary School in St. Paul. Surrounded by young students, he counted to three and used the veto stamp as the kids shouted, "Veto!"

"This veto is for these children and their futures," Dayton said. Dayton and Republican legislative leaders met privately for less than an hour Thursday, with little progress toward a resolution reported. They were scheduled to meet again Friday.

If state lawmakers go home without pairing the federal and state tax rules, said St. Paul tax attorney Eric Johnson, "the complexity involved for Minnesotans in computing their state income taxes going forward will be mind-boggling."

While Dayton warns of teacher layoffs and larger class sizes, the consequences of inaction on the state tax code would be convoluted and would be felt widely, said David Bahls, principal at the Minneapolis law firm Gray Plant Mooty.

Because the starting point for calculating state taxes is federal taxable income, he explained, Minnesota taxpayers would have to compute their federal taxes, then figure out what their taxable income would have been under now-outdated 2017 federal tax laws. They would file state taxes based on that number.

"Obviously it will be very complex," Bahls said. Some Republicans at the Capitol have suggested in recent days that tax changes could be made when the next Legislature convenes in January 2019; Dayton will have left office by then. But, Bahls said, if the dispute isn't ironed out until early next year, "there won't be time to get tax forms updated."

That prospect worries Tracy Fischman, executive director of Prepare + Prosper, which provides free tax services to low- and middle-income metro-area residents.

The organization is still analyzing the federal tax code changes, she said. Without federal-state conformity, "there would have to be a dual tax preparation process. It would take longer and it would be confusing," she said.

"It sounds like everybody's going to be extending their taxes," said Minneapolis CPA Karen Palm. She added a plea: "Please legislators, do your job and give us something so we can do our job."

Mike Hickey, Minnesota director for the National Federation of Independent Business, is hoping for "some kind of conformity triage" — a compromise that would help small businesses. "We're used to these breakdowns" in the legislative process, he said. "It usually leads to an overexciting final weekend."

Bahls said his firm isn't preparing for the worst yet. "We're kind of starting with the proposition that something is going to be done," he said. Johnson's take: "The two sides are just playing chicken with what needs to be done."

The money that Dayton wants for schools would be spread among all 553 school districts across the state, including at least 59 districts that are anticipating budget shortfalls.

"Teacher layoffs are going to be draconian around the state if this funding doesn't go through," Dayton said.

Without the cash infusion, the governor's office said, hundreds of teachers could be laid off, extracurricular activities eliminated and larger class sizes instituted this fall.

Rochester Public Schools, for example, face a budget deficit of $1.6 million for the 2018-2019 school year. Metro-area school districts have said they plan to lay off more than 240 teachers and other staff to save money. In the metro area, 26 school districts face a total shortfall of more than $108 million in 2018-2019.

Dayton's plan would increase school resources by 2 percent in the coming year, amounting to an additional $126 for every student.

Senate Majority Leader Paul Gazelka, R-Nisswa, said Republicans in the Legislature share the governor's interest in supporting schools but believe the state is already spending enough.

Dayton and lawmakers also need to work through differences over a broad spending and policy bill. A conference committee that has been merging House and Senate measures has agreements on the bulk of it, but Dayton is concerned with many pieces of the plan.

Dayton has found at least 63 policy provisions in the supplemental budget bill that he is opposed to, spokesman Matt Swenson said.

The conference committee's proposal does not include money for the creation of an office to investigate and prevent sexual harassment in state government, which Dayton has supported.

And their proposed agreement leaves out a policy provision that would have changed the standard for sexual harassment by eliminating the requirement that the behavior be "severe or pervasive."

The measure increases penalties on some protesters, including those who block freeways or airport roads. The bill would also make it a felony for someone to trespass on property with a utility, gas or oil pipeline with the intention of damaging or stopping its operation.

In other action at the Capitol Thursday, the House voted 75-54 to place a constitutional amendment on November's ballot so voters can decide whether to dedicate sales tax revenue collected on vehicle parts and repairs to fund state roads and bridges.

Gazelka has said that some Senate Republicans oppose the proposed constitutional amendment, and said there aren't enough DFL votes to pass the measure in that chamber.

Staff writers Jessie Van Berkel and J. Patrick Coolican contributed to this report. Judy Keen • 612-673-4234