Minnesota Government ‘Shuts Down’ Over Budget Impasse

Debate raged over a tax hike plan proposed by Gov. Mark Dayton (DFL) as the Minnesota state government “shut down” July 1.

As with most government shutdowns, much of the Minnesota state government continued to operate, but a state zoo, horse track, state parks, highway rest stops, and some other “nonessential” services were shuttered.

Failure to adopt a budget by the start of the new fiscal year showed how far apart Dayton’s plan is from what Republicans who control the legislature want. Republicans are in control in Minnesota for the first time in 40 years.

In a press conference shortly before the deadline for reaching a deal passed, Dayton said, “One basic difference remains. They don’t want to raise revenues on anyone and I believe the wealthiest Minnesotans can afford to pay more taxes.”

Higher Taxes on High Earners
Dayton had called for lawmakers to impose a top income tax rate of nearly 11 percent on single persons earning more than $150,000, heads of households earning more than $200,000, and joint filers with incomes of more than $250,000. After negotiations broke down Dayton announced he had offered to apply the top rate only to incomes of $1 million or more – approximately 7,700 of the state’s income tax filers.

Phil Krinkie, president of the Taxpayers League of Minnesota and a former state lawmaker, noted the top 2 percent of Minnesota earners already pay 30 percent of the state’s income tax burden.

Lawmakers had passed a budget that would have raised spending 12 percent over two years – without increasing tax rates – yet they still could not come to terms with the governor.

"We will not saddle our children and grandchildren with mounds of debts, with promises for funding levels that will not be there in the future," said House Speaker Kurt Zellers (R-Maple Grove) in a statement explaining opposition to the governor’s proposals.

Dayton had introduced his initial budget in February, in which he proposed a multitude of new taxes that would take another $4 billion in taxes from businesses and individuals. At the time, Minnesota faced a budget deficit exceeding $6 billion. Subsequent revenue forecasts have lowered the expected deficit to $5 billion. 

$1.8 Billion Increase
With a smaller deficit to balance and under pressure to adopt larger spending cuts, Dayton announced he would pare his tax hike to approximately $1.8 billion.

"No economic data Gov. Dayton has provided shows that this will help Minnesota," said Peter Nelson, a lawyer and policy analyst at the Center for the American Experiment.

Dayton also called for a raise and expansion of the state's sales tax -- including raising taxes on seats purchased at sports stadiums, admissions to car and home shows, and digital video recording and satellite TV purchases. He also called for a change in the way the state calculates corporate taxes. State budget officials estimated that change would have pulled another $270 million annually out of businesses in the state.

“There is this sense at least from Gov. Dayton that raising taxes isn't going to have an impact on our economy; that rich people won't move away or move their money away. Or even a sense that this plan increases the risk of them moving away,” Nelson said.

Impact On All Earners
Though Dayton pitched his tax hikes as an effort to make the highest-income citizens pay more, Nelson stressed the plan would have had the most impact on the lower-income Minnesotans and owners of small businesses.

"Our Department of Revenue has created a tax incidence study of his tax plan, and his tax plan will fall on all income levels anyway,” Nelson said.

Tony Sutton, chairman of the Republican Party of Minnesota, said he was flabbergasted by Dayton’s proposal.
 
"I think the governor is an old-fashioned liberal. He really believes the state government needs more money for spending, and so he believes that raising taxes is the way to accomplish that,” he said. “I think the governor feels this way because he has never had to make a payroll or even had to depend on earning a paycheck to earn a living.” (Dayton is a scion of the family that started what is now the Target Corporation store chain.)

“He is a dilettante lecturing businesspeople in this state on how to live their lives and run their businesses,” Sutton said. “As a small-business owner, I know what it is like to sweat out making a payroll. Sometimes you even hold your own check in order to ensure that people get paid because they depend on it. He has never had to experience these things.”

Nelson says Gov. Dayton appears to believe his tax hike plan will not affect Minnesota's economy.

"There is the idea that this isn't an issue," he said. "This whole idea of taxing the rich is an idea he brought with him from his bid for the governorship. It is deeply ingrained in his belief on where Minnesota should head. You look at 'taxing the rich' and that is part of his message."

Thomas Cheplick (thomascheplick@yahoo.com) writes from Cambridge, Massachusetts.