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In his administration's first budget proposal, Gov. Mark Dayton delivered on a campaign promise to make tax hikes on Minnesota's wealthiest earners the chief weapon in solving Minnesota's $6.2 billion budget deficit.

Dayton budget pitches $4B in taxes

In his administration's first budget proposal, Gov. Mark Dayton delivered on a campaign promise to make tax hikes on Minnesota's wealthiest earners the chief weapon in solving Minnesota's $6.2 billion budget deficit.

Gov. Mark Dayton’s first budget proposal contained $4.1 billion in revenue, $950 million in cuts, and $465 million in new spending. (Staff photo: Peter Bartz-Gallagher)

New revenues outpace net cuts by 8-1 margin

In his administration’s first budget proposal, Gov. Mark Dayton delivered on a campaign promise to make tax hikes on Minnesota’s wealthiest earners the chief weapon in solving Minnesota’s $6.2 billion budget deficit.

“I’m not willing to make barbaric cuts in the essential services that affect Minnesotan’s lives,” Dayton said in presenting the plan. His budget calls on lawmakers to increase state revenue of various sorts by $4.13 billion, a figure that includes around $2.8 billion in top-bracket income tax increases. The budget makes $950 million in permanent cuts but adds $465 million in new spending, for a total of $485 million in net budget reductions. That leaves the ratio of new taxes to net cuts in the proposal at roughly 8-1.

Although it’s technically not a cut, Dayton makes up about one-quarter of the deficit – $1.4 billion – by deferring repayment of the school aid payment shift that was part of the fiscal year 2010-11 budget agreement.

The DFL governor said that the state’s wealthiest citizens need to help the state survive its fiscal crisis. He also laid out a case that lawmakers need to correct the failings of a tax code that isn’t keeping pace with the rising incomes of the richest Minnesotans.

“This is about restoring tax fairness in Minnesota,” Dayton said.

Taxes: Dayton’s signature fourth-bracket income tax increase would generate an estimated $1.89 billion from a new 10.95 percent rate on taxable incomes exceeding $150,000 for joint filers. In addition, he wants to raise $918 million from a two-year surcharge of 3 percent on incomes that exceed $500,000. Dayton further visits his deficit solution on the country-club set by generating $84 million from a state property tax surcharge on homes worth more than $1 million.

A couple of long-controversial corporate and individual tax breaks are targeted for elimination as well. Dayton provided a moment of levity during his press conference at the Stassen building when he said he wants to close the so-called “snowbird” loophole. Dayton, who grew up among Minnesota’s business elite as the scion of the Dayton department store fortune, said $15 million a year is a conservative estimate of the amount that could be raised by collecting taxes from people who live out of the state for a portion of the year and pay taxes elsewhere.

“I could name a few,” Dayton said. Specifically, those who have an abode in Minnesota for six months out of the year and are in the state for more than 60 days but less than 183 days would have to pay taxes on their Minnesota-sourced income.

The budget contains a total of $430 million in revenues garnered from the elimination of current tax breaks. Dayton is reprising proposals from the past several sessions to do away with foreign operating corporations (FOC) and the foreign royalty subtraction. The FOC tax break, which dates back to Gov. Rudy Perpich’s administration, provides businesses with income derived overseas an 80 percent tax break on that income. Eliminating FOCs and foreign royalty subtraction would raise about $272 million in the upcoming biennium. When other corporate tax changes are included, Dayton would collect $355 million more from the corporate franchise tax than under current law.

Dayton’s plan also proposes tax policy changes that would make it more difficult for companies to deny that their income is tied – or in the parlance of tax law, has “nexus” – to Minnesota.

One bit of minutiae in Dayton’s budget proposal: a repeal of the sales and use tax on cell phone ring tones. The move would cost the state $410,000 for the biennium.

K-12 Education: Dayton is proposing $14.2 billion for K-12, a sum that represents 38.4 percent of the general fund budget and reflects a down payment on his promise to increase funding for education during every year of his tenure.

Dayton’s budget buttresses education spending in large part by continuing the $1.4 billion shift to school districts that former Gov. Tim Pawlenty and legislators enacted to fix the 2010-11 budget deficit. Dayton proposes to start paying back the shift over a 10-year period in the out years, starting in fiscal year 2014.

The K-12 proposal calls for $52 million in new spending on four education programs, the largest being optional all-day kindergarten for low-income students ($33 million). It also pitches a rating system to help parents choose an early childhood education provider, and initiates an award for school districts that share best-practice methods with others.

Dayton meanwhile found $15 million in savings from expenditure reductions. The savings were achieved by turning off a variety of small spending items, such as a provision to prevent any new school districts from entering the Pawlenty-era Q-Comp teacher compensation program. That will generate $3.3 million in savings in 2013.

As with other agencies, Dayton cuts the operating budget of the Department of Education by 5 percent. That amounts to a $991,000 reduction.

HHS: Dayton’s proposed budget cuts are concentrated in the Department of Health and Human Services. His proposal would trim $680 million from HHS programs while adding another $331 million in new spending, producing a net figure of around $350 million in reductions.

The biggest savings would come from reducing provider reimbursement rates and grants, a step that would produce $144 million in state savings. Home and community-based service rates would be cut by 4.5 percent, and nursing facility rates would decrease by 2 percent. But those cuts, and others, are designed to be offset by two other HHS proposals: the state’s early enrollment in federal Medicaid expansion, and the dynamics of a proposed tax increase on service providers.

First, the MA expansion means that hospitals accustomed to receiving a lower payment for services provided to adults under less generous state programs (mainly GAMC) will now be allowed to cover a wider range of services and receive higher reimbursement rates for providing them. Half of that funding will come from the federal government under the Medicaid expansion that’s part of the federal health reform law.

The second aspect of the plan, the Medicaid surcharge and payment rates, is essentially a tax increase on providers conceived to help leverage federal dollars and provide a net benefit to the general fund. Providers who see Medicaid patients or hold managed care contracts would pay the tax. Under Dayton’s plan, the MA surcharge would see a net increase of $627 million.

Much of that money, however, would flow back to the hospitals – accompanied, of course, by the federal matching dollars. The result is that the providers are largely made whole, albeit with a caveat: While providers pay the tax based on their total book value, they are repaid based on the number of Medicaid patients they treat. A hospital with few Medicaid patients would thus expect to receive less in return, while a hospital with a high Medicaid patient load would get more.

Dayton’s plan also calls for $90.5 million in savings from managed care, some of which would come via administrative cost reductions and performance-based pay benchmarks. Current law stipulates that the state withholds 5 percent of the cost of managed care contracts. Dayton’s proposal would hold back more if certain benchmarks weren’t met. If they were met, however, overall costs to the state would be expected to decrease as a result.

Current managed care law allows the contract holders to keep 6.6 percent for administrative costs; Dayton’s plan would reduce that to 5.3 percent, an action that could result in as much as $40 million in savings for the state.

Dayton’s proposal would also eliminate coverage for some 7,200 adults currently eligible for MinnesotaCare (specifically, those making more than 200 percent of federal poverty guidelines). That change, however, would be contingent on getting Washington to approve a waiver.

LGA: For all the changes Dayton laid out in his proposed budget plan Tuesday, there was one conspicuous constant: local government aid and tax credits. Dayton’s budget proposes no deviation from projected fiscal year 2012-13 spending levels when it comes to city and county aid programs, property tax refunds, homestead credits and disparity reduction aid.

Notably, this was the sole proposal that leaked out of the Dayton administration and into the press before the budget unveiling, and it placed the governor squarely between Republic budget cutters and the homeowners and local governments that would bear the brunt of any cuts-spawned property tax increases.

The proposal appears to be part of a continuing political stratagem by the Dayton administration. Like the governor’s call for a major off-year bonding package in 2011, the LGA funding reprieve seems calculated to exploit rural/suburban tension in both GOP legislative majorities. (Rural members are more enthusiastic about bonding and about preserving LGA funding than their suburban counterparts.)

Higher education: The budget hammer falls on the Minnesota State Colleges and Universities system and the University of Minnesota to the tune of $152 million. The Dayton proposal also contains another $18.2 million in cuts, bringing total higher ed reductions to $171 million.

Sheila Wright, the director of the Minnesota Office of Higher Education, said the Minnesota State Grant Program – a need-based financial aid program that’s unique to Minnesota – is not included in the cuts.

Public safety: Given the modest spending increases it proposes in corrections, public safety and the courts system, Dayton’s budget in some ways aligns the administration with relevant Republican committee chairs, many of whom have already said it will take increases, not cuts, in their sectors this year to prevent substantial further damage.

Trial courts, for instance, would see a $6 million increase over projected spending, and corrections would see a $22.8 million increase. Public Defense Board spending would increase by $6.4 million. Some overall savings would be drawn from administrative cost reductions at the Department of Corrections.

State government: The most significant cut is the 6 percent reduction in the state work force. How much of this could be achieved via attrition and early retirement as opposed to layoffs is an open question, but Dayton and MMB Commissioner Jim Schowalter estimated that the proposal could result in as many as 800 layoffs.

Eliot Seide, who heads AFSCME Council 5, said that while none of his members want to lose their jobs, the union largely supported Dayton’s overall budget proposal. Seide said he hopes to work with the governor’s office to take aim at some of the layers of management in state government if the Legislature acts on the proposal. But Seide added that he’s worried the proposal will snowball in the hands of the Legislature. State work force reductions as high as 15 percent have already been proposed by some Republicans.

In all, Dayton’s budget cuts around $5 million from the funding of state government operations.

About Charley Shaw and Jake Grovum

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