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Now that the Dayton administration and House Democrats have both released their tax plans for financing an ambitious $38 billion state budget that includes 6 percent in spending hikes, the last piece of the revenue puzzle comes down to the predilections of the Senate DFL caucus and its first-year Taxes Committee chairman, Sen. Rod Skoe.

Taxes: All eyes now turn to Skoe

Sen. Rod Skoe, chairman of the Taxes Committee, is widely regarded as a fair and thoughtful legislator who is willing to take opposing views into account. He is also considered one of the Legislature’s top experts on the Minnesota tax code. (Staff photo: Peter Bartz-Gallagher)

Senate omnibus bill expected soon

Now that the Dayton administration and House Democrats have both released their tax plans for financing an ambitious $38 billion state budget that includes 6 percent in spending hikes, the last piece of the revenue puzzle comes down to the predilections of the Senate DFL caucus and its first-year Taxes Committee chairman, Sen. Rod Skoe.

The state is facing a $627 million general fund deficit for the 2014-15 budget cycle. In addition to closing that gap, the DFL majorities elected last November are looking to make good on a number of campaign promises, chief among them property tax relief and elevated education funding. The House’s $2.6 billion tax omnibus, written by veteran House Taxes Committee chair Rep. Ann Lenczewski, DFL-Bloomington, passed out of her committee on Wednesday night. The Senate tax plan is expected in the week ahead.
While Skoe is new to his post, he’s been part of tax policy deliberations at the Legislature for several sessions. Over the years he’s been known as a close ally on tax issues of Senate Majority Leader Tom Bakk, DFL-Cook, who preceded Skoe as the chamber’s tax chair.

But this session, Skoe has managed to quietly forge his own identity. A man of few words in public, and sometimes even in private, Skoe is widely regarded as a fair and thoughtful legislator who is willing to take into account opposing points of view. He is also, according to several lobbyists who have worked closely with him this session, one of the Legislature’s top experts on the Minnesota tax code.
“I believe in a more progressive tax system,” Skoe says of his approach. “I believe that the taxes paid should be related to one’s ability to pay the tax.”

From farm to Capitol

Skoe grew up in northern Minnesota and attended college in the Twin Cites at Augsburg. After working in the timber industry for a time, he joined his family’s farm operation near Clearbrook. He now grows cultivated wild rice and potatoes. Before running for the Legislature, Skoe gained extensive local government experience as a Clearwater County commissioner and a member of the local school board.
“When you work on school boards and county boards, you start to see the impacts of the state’s effort to be a partner in providing services,” Skoe said. “You get an understanding of how those things really do play a significant role.”

Skoe, who was elected to the House in 1998 following the retirement of DFL Rep. Edgar Olson, counts former greater Minnesota DFL Reps. Henry Kalis and Bernie Lieder as mentors during his time in that chamber. Kalis counseled Skoe that legislators tend to either focus on the spending side of the budget or the revenue side. Skoe believed that his time in school and county governance gave him the background to work on tax issues.

When former Senate Majority Leader Roger Moe retired to run for governor in 2002, Skoe ran for his open Senate seat, winning the DFL primary and general election by wide margins. He has served on the Senate Taxes Committee since his first term in the upper chamber. When Bakk became Senate Taxes Committee chair in 2007, Skoe was named chairman of the Property Tax Division.

One of the more noteworthy conflicts of Skoe’s tenure in the Senate placed him in the political crosshairs, forced to choose between politically expedient surrender on an issue and what he deemed the soundest tax policy.

In February 2008, the Office of the Legislative Auditor reported that large amounts of non-agricultural land were receiving tax benefits from an agricultural tax policy called Green Acres that was intended to shield actively farmed lands from rising property tax valuations. In his role as property tax chair, Skoe sought to create a new property tax classification that would distinguish active farmland from adjoining sloughs and brushlands. The move angered agricultural interests, particularly in central and southeastern Minnesota.

After that, the once-obscure tax program became a hot-button issue in some legislative swing districts in greater Minnesota. When the backlash came, Skoe impressed a number of longtime lobbyists by standing strong in the face of repeated calls to completely unwind his controversial reforms, choosing instead to apply tweaks to the program.

After DFLers reclaimed the majority in last year’s election, Skoe ran for Taxes chair, which is an elected post in the Senate. Sen. Ann Rest, DFL-New Hope, who had previously served as Taxes chairwoman when she was a member of the House, also expressed interest in chairing taxes. When the post-election closed-door caucus at the St. Paul Hotel concluded, Skoe emerged as Taxes chairman and Rest was named to lead a newly formed Tax Reform Division of the Taxes Committee.
In the view of Ward Einess, a former Department of Revenue commissioner who now lobbies on behalf of a handful of major corporate clients, Skoe was the “logical choice” for the chairmanship.
“I wasn’t surprised,” Einess said. “In many ways, I was relieved. He’s a known entity, a known character.”

Accessible — but guarded

Rod Skoe’s door is open. That much is certain. In a series of interviews, several lobbyists who advocate for a wide range of clients and issues attested to Skoe’s accessibility during the current session. Get to the Capitol early, one lobbyist said, and one is likely to find Skoe seated at his desk, hands clasped behind his head, waiting for his first visitor of the day.

Each of the advocates praised Skoe for his willingness to hear their viewpoints, even when they differ from his own strongly held opinions. Skoe demonstrates familiarity with issues, and asks probing questions. At certain points, they noted, he will simply ask a lobbyist, “How would you approach a solution to this?”

Despite Skoe’s open-door policy, advocates reported varying degrees of openness from the man himself. Notoriously guarded in press interviews and committee hearings, Skoe is more forthcoming in his private meetings with interest groups. If he flatly opposes a proposal, he is usually willing to make his position clear.

“Frankly,” one lobbyist said, “he will tell us when he doesn’t agree with us.”

What frequently remains unclear in those circumstances, sources said, is what Skoe would rather do instead. One Capitol insider who has known Skoe for years said dealing with him can be an exercise in reading between the lines, or digging back to unearth positions Skoe had taken in prior years.

“He still holds his cards pretty close to the vest,” the lobbyist said. “Sometimes there are clues that you can pick up … but I do think you need to be able to pick up clues.”

Gary Carlson, the chief lobbyist with the League of Minnesota Cities, has known Skoe as a friendly partner to the state’s rural communities since he was first elected to the House almost 15 years ago. Despite his stated interest in alleviating local property tax hikes, Skoe warned Carlson that he would not pursue local government aid (LGA) reform unless the various municipal interest groups could agree on a unified position.

“He pretty much told us that, point blank,” Carlson said.

In March, the LMC, Metro Cities, the Coalition of Greater Minnesota Cities, and the cities of Minneapolis and St. Paul came to terms on supporting a new LGA formula, coupled with a call for $80 million in increased LGA funding. With that deal in hand, Carlson revisited the issue with Skoe, who said he would keep to his word and include LGA reform in his omnibus tax bill.

And though Skoe rankled many earlier this year when he amended a tax conformity bill to include a rejiggering of the governance of the Iron Range Resources and Rehabilitation Board, tax committee observers have mostly found Skoe to be an approachable, straightforward figure. Despite his close connections to Bakk, and the Senate majority leader’s presence on both the Taxes Committee and Rest’s reform division, Skoe is still perceived as the gatekeeper on the chamber’s tax moves.

“There’s been a few opportunities where I’ve met with Senator Bakk,” one lobbyist recalled, “and he’s said, ‘I understand your issue, but go talk to Sen. Skoe. He’s the tax chair.’”

Senate bill: property taxes a priority

It’s a foregone conclusion that the tax proposal from the Senate, like the one that has already passed out of Lenczewski’s committee in the House, will include a top-bracket income tax hike. But the contours of the Senate income tax proposal are likely to diverge from the House approach. All session long, sources close to the Senate’s tax deliberations have suggested that the chamber is likely to embrace lower income thresholds for applying its new top rate (which, like the House’s, is expected to come in below Dayton’s suggested 9.85 percent).

The House has proposed a fourth-tier income tax increase on couples making $400,000 a year or more, as well as a temporary surcharge on incomes in excess of $500,000, with the latter designated toward paying off the money lawmakers borrowed from school districts to solve shortfalls during the last two budget cycles.

Skoe said one of the problems lawmakers confront in changing tax policy is that progressive taxes tend to be volatile, since incomes fluctuate widely with changes in the economy. The converse strategy is to tax things that are broad-based and more stable, but tend not to be as income-sensitive.

“There are some contrary things going on in trying to make taxes more progressive,” Skoe said. “The more progressive the tax is, generally, it’s less stable. You want to bring stability, but you also want to bring progressivity, so you’ve got conflicting ideas.” Skoe wouldn’t comment on the shape of the income tax provisions that will appear in his final bill.

Though longtime Capitol watchers are uncertain about the details that will appear in the Senate tax bill, most have expressed confidence that Skoe’s final bill will draw heavily from the package of measures that recently passed out of Rest’s reform division. One key provision in that bill would lower the state sales tax from 6.875 percent to a flat 6 percent, but broaden its application to include several previously exempt consumer services, including auto repair and haircuts.

In essence, the change is a scaled-back version of the sales tax overhaul initially proposed by Gov. Mark Dayton, who later dropped that provision after extensive criticism. Rest’s package, a more incremental approach to shifting the tax from the purchase of goods to services, has so far not inspired the same outcry.

One lobbyist theorized that the reform division bill was “a bit of a trial balloon to see how much blowback he’ll get from within the caucus and the public at large.”

Because he cannot afford to lose the support of his caucus, noted Patty Nauman, a lobbyist with Metro Cities, Skoe faces particular pressure to deliver on issues that his Senate DFL colleagues successfully campaigned on last year. “[Taxes chair] is an elected position,” Nauman said, “so it’s even more tied into where the caucus wants to go.”

One clear priority for the Senate in 2013 is property tax relief, an objective that includes revisiting the way in which property taxes help to pay for K-12 education. Skoe has taken a particular interest in the school funding question, driven in part by the failure of state funding to keep up with inflation during the decade-plus since 2001 tax law changes that eliminated the state’s general education levy.
Skoe has been crafting legislation that would create a new education levy to alleviate the district-to-district funding disparities that have emerged during that time. He’s also looking at equalizing school funding so that similarly valued homes are taxed similarly throughout the state. Through all of the complexity of the school funding proposals, one thing is clear: The move to smooth out property taxes for education that Skoe favors will cost additional state dollars. Initial Senate budget targets indicated that $150 million of the chamber’s K-12 spending would be devoted to lowering property taxes.
“Some of the revenues that are being raised this year are going to be reinvested back into our school funding mechanism,” Skoe said. “Hopefully we will accomplish a number of things by bringing some more equity and stability to school funding.”

As for the sales tax expansion, the Senate Tax Reform Division bill leaves the chamber out of step with Democrats in the House, as well as with Dayton, who has since dropped the issue of broadening the sale tax base altogether. But lobbyists doubt that Rest would have taken such a bold step without Skoe’s support. The two share neighboring offices in the Capitol and, early this year, took joint meetings with key tax lobbyists. As the session has progressed, Rest and Skoe have often been seen huddled together in private conversation.

Said one lobbyist: “I would have to believe that Skoe is agreeing with [Rest] that [sales tax reform] is worthy of the fight — and maybe even worth a fight with the governor.”

Skoe acknowledges that Rest’s Sales Tax Reform Division report includes a number of provisions that have gained little traction on the House side, including the sales tax expansion and a costly sales tax exemption for local units of government. But he sounds undaunted by that fact.

“I know my good friend Ann Lenczewski isn’t including any of that in her bill,” Skoe said. “We’ll have a conversation in conference committee about this.”

Aside from its income tax surcharge, the House tax bill would also institute a large increase in so-called sin taxes, with a higher increase in cigarette taxes than the Senate ($1.60 per pack vs. 98 cents) and a new hike to the alcohol sales tax. In all, the House plan would raise $789 million from new tobacco and alcohol taxes. The alcohol tax in particular is thought to be a sore point with Senate leadership.

All sides anticipate an extensive and complex debate as legislators attempt to reconcile the two bills in a conference committee. Einess points out that Skoe is a veteran of such committees, which frequently found him sitting at the elbow of then-chair Bakk.

Another lobbyist said Skoe’s greatest assets are his willingness to study minute details of the tax code and his creativity in melding seemingly disparate pieces of the tax puzzle. “He’s actually looking at the [tax] code, or the models, or the formulas,” the lobbyist said. “He’s going to take that, and use it, and get wherever he needs to go. I think he’s a person who likes to have a lot of information. He wants to know it for himself.”

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