Minnesotans have begun taking a hard look at Gov. Mark Dayton’s budget proposal, which would raise some taxes, broaden or reduce others, increase education spending and result in spending for the 2014-15 budget period that is about $4 billion more than the projected $33.9 billion of the current biennium.
As they scrutinize his budget proposal, residents and their lawmakers should make sure every recommendation that advances is measured for its potential for contributing to the growth of Minnesota’s economy.
It’s private-sector growth, not growth in the government’s share of the economy, that will keep Minnesota prosperous and make more good things possible. The long-term problem is this: Minnesota’s economy could be expected to grow at about 3 percent a year, but state spending is growing at about 5 percent; health and human services spending accounts for most of that structural gap.
Dayton’s proposals include a reduction in the state’s sales tax rate — from 6.875 percent to 5.5 percent — along with a broader base of taxable items. Dayton called the proposal a “modern tax code for the 21st century,” updated for today’s service economy.
When the state’s sales tax was implemented a half-century ago, more than 60 percent of consumer purchases were for goods, most of which were taxable, with the rest going for services that were largely exempt from taxes, the Pioneer Press’ Salisbury has reported. Now, the situation is reversed, with two-thirds of consumer spending paying for services.
Dayton’s proposal would tax such consumer services as auto repairs and hair stylists. Of particular concern, however, is the proposed tax on legal, accounting, specialized design and other business-support services.
We join many in the state’s business community worried that taxing such service will drive jobs and economic activity away. Business firms will go elsewhere to purchase the services, which will leave the state, and “they won’t move back,” Ecolab CEO Doug Baker told us. The tax would “make people less competitive” for their choice to do business in Minnesota.
Dayton’s proposal would for the first time extend the sales tax to clothing, taxing items of more than $100, and also include an “e- fairness” measure intended to help support “Main Street” businesses by taxing transactions with out-of-state online sellers. Uncollected taxes on Internet sales last year amounted to $400 million, Revenue Commissioner Myron Frans told us.
Dayton also recommended a cut in the corporate tax rate, from 9.8 percent to 8.4 percent, and freezing property taxes on businesses.
He proposes $1.4 billion in direct property tax relief to Minnesota homeowners, with a $500 rebate, but would raise income taxes by 2 percentage points on taxable income of more than $250,000 a year for those filing jointly and $150,000 for single filers.
The governor’s plan, which would increase spending from about $33.9 billion in the current biennium (plus repayment of $1.3 billion owed to schools) to $37.8 billion during 2014-15, also includes productivity measures aimed at delivering to Minnesotans “better public services for a better price.” His proposal includes $5.1 billion in cost savings and reductions over four years through “reform and responsible fiscal management.”
On a realistic note: The proposal, Dayton said, is “the first word, but not the final word, on the budget.” Between now and the final word, there’s a lot of editing to come.
This editorial originally appeared in the January 23, 2013 edition of the St. Paul Pioneer Press.