Editorial: Reform prospects dim after tax veto

Gov. Mark Dayton's veto Monday of the Legislature's business tax cut bill should have come as no surprise to the Republicans who crafted it. The DFL governor had warned all year that he would resist measures that would enlarge a projected budget deficit in 2014-15. He backed that threat with at least two vetoes earlier in the year.

Yet the sharply worded reactions of Republican leaders (see box, right) indicate that they hoped, as did this newspaper, that the final bill's reduced size and positive features would soften Dayton's resistance. The bill would have enlarged a projected $1.1 billion deficit in 2014-15 by $73 million, a modest and seemingly manageable sum compared with earlier versions of the bill.

But Dayton held firm. No deficit-producing "tails" would win his signature. And once again, no compromise was reached on state government's most polarizing issue -- taxes.

That's regrettable. The tax policy impasse at the Capitol that has prevailed for most of the last decade has become a crisis in its own right. Minnesota needs an overhaul of its tax code in order to improve the state's economic competitiveness and the stability and adequacy of its public services.

Minnesota governments rely too heavily on the property tax, a relic of the 19th century, and a volatile income tax that has been shot full of holes with deductions and credits since it was first enacted in 1933. The state would do better with a more broadly applied sales tax, which still applies to roughly the same purchases it did when it was created in 1967.

The Dayton administration says it wants to tackle the tax policy crisis next year. It's working hard to prepare. Revenue Commissioner Myron Frans has visited 18 cities and conducted 42 hearings this year to make the case for change and to collect reactions and ideas. More such meetings are on tap.

But the best preparation for tax reform in 2013 would have been successful compromise on a tax bill in 2012. It could have been the walk-before-you-run start to the marathon dealmaking that major tax reform will require.

Dayton's unwillingness to risk adding to the state's forecasted budget woes partly explains the failure. But the other, bigger contributor to this session's futility is an old story: The Republican majority would not agree to raise taxes. Not even a little. Not even in exchange for tax cuts and policy improvements that would benefit Minnesota-based businesses, such as the proposal to require more online retailers to collect sales taxes. Not even if those tax cuts were larger than any offsetting tax increase.

Lasting tax reform cannot happen unless that changes.

History teaches what one-sided "reform" will yield. Eleven years ago, a Republican House, DFL Senate and Independence Party Gov. Jesse Ventura made the state's last serious stab at tax reform. They reduced property taxes statewide, particularly for overburdened businesses, and promised additional income and sales tax funding for schools to replace lost property tax revenue. But because of GOP resistance, state taxes were not increased to cover that promise.

The result: Reform unraveled. Property taxes today are considerably higher than they were before the 2001 changes. The promise to schools was not kept; today they are owed $2.4 billion in delayed state payments. That debt is not included in the $1.1 billion forecasted deficit in 2014-15. But the schools' first-dollar claim on future state surpluses is another reason Dayton said no to tax cuts this year that were not at least partially offset by higher taxes.

State government is still in a financial hole. Tax reform ought to be part of a smart strategy for climbing out. But no climbing was done this year, and the current cast of politically divided state leaders gave Minnesotans little reason to think that they can do better in 2013.

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