Bigger Deficit? Tax Impact? Questions Abound About Minnesota Proposal

By Don Davis and Danielle Killey

Federal tax law changes could lead to a deeper Minnesota budget deficit, the state Senate leader says, one of several uncertainties about the state budget.

The possibility of a growing state deficit and ambiguity about what is happening in Washington raise questions about whether Gov. Mark Dayton’s $38 billion two-year budget proposal will need major alterations. Even many of Dayton’s fellow Democrats wonder about the tax portion of the plan a month after it was introduced.

In November, financial officials reported the state faced a $1.1 billion deficit, a figure Dayton used in building his budget. A financial report earlier this month appeared better, with the state collecting $140 million more than expected in January.

However, Senate Majority Leader Tom Bakk, DFL-Cook, said that tax bump actually may be bad news.

The former Senate Taxes Committee chairman said the increase was “driven by the federal tax policy changes. I believe there are a lot of people deciding to cash in some investments and dividends at the lower tax rate than the tax rate you see now.”

To deal with the so-called “fiscal cliff,” Congress and the president allowed some taxes to rise, which prompted what Bakk said were attempts to sell before taxes went up.

“I am more concerned now about the deficit growing than I was a few weeks ago,” Bakk added.

On top of the deficit and congressional questions, Bakk and House Speaker Paul Thissen, DFL-Minneapolis, Friday said they need to know more about Dayton’s plan to put the sales tax on more items to see if it could be “problematic.”

Senate Minority Leader David Hann, R-Eden Prairie, was blunt about the Dayton plan, calling it “dead on arrival” because, to him, it appears no legislator from either party supports it.

Dayton expects to submit a revised budget request next month after an updated state budget forecast is released on Feb. 28. Included in the forecast will be information about how ongoing federal budget talks could affect the state.

Bakk said he submitted a request to the state Revenue Department about specifically what would be taxed under the Dayton plan. He has not heard back.

Lawmakers, business leaders and others have wondered about Dayton budget specifics, especially changes to the sales tax. Dayton’s proposal would lower the sales tax rate to 5.5 percent from 6.875 percent, but would tax more items, including services and pieces of clothing that cost $100 or more.

“What we’re trying to do by lowering the rate and broadening the base is trying to inject some stability in our revenue stream,” Revenue Commissioner Myron Frans told reporters Friday.

Overall, people spend more money on services than goods, he said.

The bulk of about $2.1 billion in new net revenue would come from a tax on services businesses provide to other businesses, such as legal, advertising and accounting fees.

“These are industries and services that have never been taxed before,” Frans said.

Those expenses probably would get passed on to consumers, business leaders have said.

Some details have been slow to come out since the plan’s initial release. Dayton spokesman Bob Hume said writing the legislation for “such complicated tax reform” is complex and takes time.

“As the Legislature goes forward, we’ll have more questions,” Frans said.

On the budget’s spending side, Bakk said that he has received a lot of requests to increase funding in specific areas over what Dayton recommended in his two-year, $38 billion proposal.

“I have spent a lot of time managing expectations,” the senator said.

Bakk said he tells groups wanting more money for their specific programs that they cannot get more spending but not pay higher taxes. “You have to be willing to pay for these things.”