This morning, Governor Mark Dayton released his long-awaited 2014-15 budget proposal. And, true to his word, there’s a lot to chew on here. Dayton’s proposal contains fundamental tax reform and some new spending initiatives that are sure to raise some eyebrows. In this post, we’ll summarize the proposal. In the coming days, we’ll get into more detail on the merits and problems with specific elements of the plan.
The November economic forecast from Minnesota Management and Budget projected $35.8 billion in revenue and $36.9 billion in expenses under current law for the 2014-15 biennium. Dayton’s proposal wipes out that $1.1 billion deficit by increasing revenue by a new $2.1 billion and increasing spending by a smaller amount: $1 billion. Total spending for the biennium totals $37.9 billion, much lower than what some GOP sources were floating prior to the proposal being announced.
Revenue: Net increase $2.1 billion
Dayton has put together a comprehensive tax reform plan in his proposal, with a lot of moving pieces. Let’s break it down by the type of tax.
Individual income taxes: Dayton would add a new top bracket to Minnesota’s individual income tax code, a marginal rate of 9.85% on taxable income over $250,000 (couples) or $150,000 (individuals). This proposal would raise $1.1 billion in 2014-15. Dayton also proposes a new property tax rebate, which would give back up to $500 on each property. This proposal would cost $1.4 billion for the biennium. Net impact: -$300 million.
Sales taxes: This is the largest component of the tax reform plan. Dayton’s proposal would remove many of the exceptions from the state’s sales tax code. Consumer and business services (except for a very limited set) would now be taxed. This includes legal services, accounting services, haircuts, auto repair, etc. Most goods would also now be taxed. Remaining goods exceptions would be food, prescription drugs, and clothing (items that cost under $100). In return for broadening the base of the sales tax, the rate would be reduced from 6.875 percent to 5.5 percent. Dayton Administration estimates show that this change would work out to be essentially neutral for most families. Opponents of the provision have already called out that the sales tax charged on business services will be baked into consumer prices, leading to a net increase in what consumers pay. Also included is a 0.25% sales tax increase for the seven-county metro area designed to fund transit projects. Net impact: $2.1 billion.
Corporate income taxes: Dayton proposes cutting the corporate income tax rate from 9.8% to 8.4%. Such a change would drop Minnesota to the 12th highest corporate income tax rate. To pay for the rate change, Dayton’s proposal would eliminate tax breaks for foreign operating companies and foreign royalty payments, making the reform essentially revenue neutral. Net impact: $5 million.
Cigarette taxes: Cigarette taxes would be raised by 94 cents per pack under the Dayton proposal, reaching $2.54 per pack. Net impact: $370 million.
Spending: Net increase $1 billion.
Most of Governor Dayton’s proposed new spending goes to education. Let’s see how it breaks down:
E-12 Education: The two largest components here are a significant increase to special education funding ($125 million) and a 2% increase in the basic education formula ($118 million, or $52 per student). Additionally, Dayton proposes additional funding for all-day kindergarten ($40 million). Finally, early education programs get a major boost ($93 million in total, with the largest single element being $44 million in Early Learning Scholarships which fund pre-school for low income families). Dayton does not propose paying off any of the remaining K-12 shift in the next biennium, waiting to pay it off until the 2016-17 budget. Net impact: $344 million.
Higher Education: Dayton proposes an $80 million expansion of the State Grants program, which will allow 5,000 additional students to enter the program, and increase the payout to 90,000 students already on it. Additionally, Dayton proposes $80 million in expanded funding for MnSCU to expand internship and apprentice programs, improve facilities and equipment, and retain faculty (assuming required administrative cuts are made). Dayton also was going to propose an additional $80 million in funding for the University of Minnesota, but is withholding support for that increase pending the Legislature’s requested review of administrative costs. Net impact: $170 million ($250 million if the U of M makes it back in).
Health and Human Services: Programs receiving increased funding in this part of the budget include child permanency and mental health programs ($44 million), the Statewide Health Improvement Plan ($40 million), and funding for the health care exchange ($29 million). Net impact: $128 million.
Local Aids and Credits: Dayton’s proposal would increase aid to cities and counties by $120 million.
Where are the spending cuts, you may ask? Dayton points to last session’s budget, where $4 billion in spending reductions were achieved ($2 billion in cuts, $1 billion in additional reductions since the budget was passed, and $1 billion in inflation not added to department budgets). In his 2014-15 proposal, Dayton cites an additional $225 million in reductions, much of which comes in the Health and Human Services budget, such as $74 million in savings from restructuring in the long term services program and $65 million in negotiated savings with service providers and drug companies. Additionally, inflation totaling $890 million was not included in the budget for the various departments.
Additional details on the proposal can be found at the Minnesota Management and Budget website.