Budget Notebook: Tax Reform Discussed, Tax Increases Not So Much

By Danielle Killey and Don Davis

Democrats and Republicans said tax reform should be part of a plan to tackle the state’s deficit and create a budget, although on Wednesday they were light on specifics.

Senate Majority Leader-elect Tom Bakk, DFL-Cook, said in discussions with people across the state it has become evident that “a growing reliance on property taxes is a problem.” But he was reluctant to say that tax changes would mean higher payments.

“I think tax reforms and raising taxes are different things,” Bakk said.

House Speaker-designate Paul Thissen, DFL-Minneapolis, said taxes cannot solve everything.

“Taxes are only one component” of a state budget, he said.

Bakk said he has talked with Sen. Rod Skoe, DFL-Clearbrook, who will chair the Tax Committee, about tax goals for the coming year. He said when it comes to tax reforms, the idea is to “not make us an outlier.”

Gov. Mark Dayton said the Legislature likely can expect his budget proposal to include higher taxes on the wealthiest 2 percent of Minnesotans.

Senate Minority Leader-elect David Hann, R-Eden Prairie, said when Democrats bring up the idea of tax reform, they likely instead mean tax increases. Republicans are open to “genuine reforms,” he said.

“We think the talk about tax increases is grossly premature,” House Minority Leader-elect Rep. Kurt Daudt, R-Crown, said.

Union and liberal groups called for higher taxes, while conservative organizations mostly were quiet after a state budget deficit was announced.

“Raising revenue responsibly by asking corporations and the wealthiest Minnesotans to pay their fair share is as essential to budget stability as reforming the tax code and championing government efficiency,” said Executive Director Jim Monroe of the Minnesota Association of State Employees.

School payment a plus

State leaders said one positive of the budget forecast is the opportunity to begin paying back money owed to Minnesota schools.

“The good news is we are able to repay the schools,” Dayton said.

Bakk said Democrats made that a key priority while campaigning this year.

Thissen pointed out the issue is not done.

“We still owe our schools over $1 billion,” he said.

Legislators and governors in recent years have delayed payments to schools to help solve state budget problems.

Under current law, surplus money in the two-year budget that ends June 30 must be used to repay schools. On Wednesday, Dayton and lawmakers learned that $1.3 billion will be spent to lower the state’s debt to schools.

Half of the $1.3 billion is to be sent to schools on Dec. 15, with the rest following in the coming months.

Housing an economic key

The Minnesota housing market could help bring back the state economy.

If officials in Washington fix federal fiscal woes, State Economist Tom Stinson said, the housing market and its related forestry and lumber industries would benefit.

“That’s the area that was hurt the worst,” he said.

Stinson said Congress and President Barack Obama need to take meaningful action or the economy probably will drop into a recession.

“If they kick the can down the road or allow us to go down the fiscal cliff, that probably costs us money,” Stinson said.

Such inaction would cost individuals who are caught in a recession, which would cost the state in terms of lower revenues.

Stinson’s staff produced a report about what would happen with no fiscal cliff solution, including Minnesotans holding 45,000 fewer jobs than expected by the end of 2013 and 70,000 fewer a year later.

Personal income would drop 4 percent, the report shows, and the state unemployment rate would jump to 7.1 percent from the current 5.8 percent.

Even with the Minnesota problems, however, the state would do better than other states. Stinson said, because defense spending would take the biggest hit and Minnesota has few military bases or suppliers.

Pull tabs lagging

Revenues from electronic pull tabs are lower than anticipated, but Dayton said that is due to a lag in getting the program off the ground.

“It is taking longer than expected to ramp up,” he said.

Money from the new program is earmarked to pay for a new Vikings football stadium.

Once the program is fully implemented, there is no expected fund shortage, Dayton said.

“The lower revenue collection is a result of the pace at which this new technology can be implemented, not an underlying problem with electronic gaming as a source of revenue,” a Dayton spokesman said.

Dayton said many vendors are waiting to see if it is worth entering the field of electronic gaming. Establishments that are using electronic pull tabs seem to be happy with the results so far, Dayton said.

No more ‘gimmicks’

Democrats said the next state budget needs to focus not just on filling the immediate deficit, but preventing more in the future.

“Each time we’ve faced a deficit we have failed to take the long view,” Thissen said. “We need to have a budget that doesn’t rely on the gimmicks of the past.”

Dayton said he is committed to producing a balanced budget.

“We’re done with the gimmicks, we’re done with the games,” he said.