One attempt at a Plan C: Brick City Budget

During his State of the State address a couple of weeks ago, Governor Mark Dayton asked for critics of his budget plan to come up with their own “Plan C” (Plan A being the Governor’s budget, and Plan B being a spending-cut only response to the projected $1.095 billion deficit).

So, I’ve taken a shot at it — call it the Brick City Budget.  (The StarTribune did as well.) These are the things I tried to do:

  • Minimize middle-class impacts as it relates to sales tax changes
  • Make a meaningful payment towards the remaining K-12 school funding shifts
  • Minimize negative impacts that come with expansion of sales taxes to B2B services

Revenue

Taxes   Dayton   Brick City 
Income Tax 4th bracket                       1,098.8               1,098.8
Property tax refund                     (1,438.6)                         –
Snowbird tax                             30.0                         –
Business sales tax                       3,200.0                  782.3
Consumer sales tax                       1,060.0               1,116.8
Digital products                             31.2                     31.2
Sales tax rate reduction                     (2,137.5)                (649.6)
Rental car tax                             15.0                     15.0
Sin taxes                           369.9                  369.9
Net corp income tax changes                               4.9                       4.9
Other revenue changes                           (38.8)                  (38.8)
Income tax cut                                  –                (650.0)
TOTAL                       2,194.9               2,080.5
$ in millions; amounts represent change from the November 2012 forecast

There are some significant changes to the Governor’s proposal.  Let’s take them one-by-one.

First, I remove entirely the $500 per homeowner property tax relief the Governor proposed.  While I applaud the Governor’s instincts and recognition of escalating property taxes as an issue, this is not an efficient way to address the problem and it leaves our overly complex property tax system untouched.

Second, I change the new base sales tax rate from 6.85% to 6.25% instead of 5.5%.  This was done to facilitate some of the other changes listed below.

Third, I remove most of the Governor’s proposed business service sales tax expansion.  The remaining categories being taxed (management & other consulting, business support services, office administrative services, specialized deign services, and facilities support among them) are less likely to put Minnesota businesses at a disadvantage compared to competing firms as well as being less likely to disadvantage small businesses versus large businesses.  The new revenue raise by this tax is less than a quarter of the Governor’s proposal, and covers a smaller range of B2B services than similar business sales tax expansion proposals from the Republican governors of Ohio, Nebraska, and Louisiana.

Fourth, I keep clothing exempt from sales tax.

Fifth, I remove the so-called “snowbird” tax that would be levied on gains from stocks and bonds and dividends earned by people who reside in Minnesota for less than half of the year.

Sixth, I would change the composition of Dayton’s increase in “sin taxes”.  Dayton’s increases are solely in cigarettes and tobacco — I would add an increase in Minnesota’s liquor excise tax of $75 million and reduce the increase in cigarettes and tobacco.

Finally, I would offer $650 million in income tax relief to be implemented through cuts in the rates of the lowest two tax brackets.  This would primarily be designed to help offset the impacts of the sales tax expansion for lower- and middle-income tax payers, although all taxpayers would benefit from this change as tax rates on a married couple’s first $135,000 in income would be cut by this proposal.

In total, the Brick City Budget would net about $114 million less than Gov. Dayton’s proposal.

Spending

Spending  Dayton  Brick City
K-12                           344.2                  493.0
Higher Ed                           250.4                  200.0
Property Tax Aid & Credit                           117.1                     60.0
HHS                           128.3                  100.0
Public Safety                             86.1                     65.0
Transportation                           (25.6)                  (25.6)
Economic Development                             70.1                     50.0
Debt Service                             28.5                     28.5
Environment & Energy                             17.6                       7.5
State Government                             13.9                         –
Agriculture                               0.7                       0.7
TOTAL                       1,031.3                  979.1
NET CHANGE                       1,163.6               1,101.4
$ in millions; amounts represent change from the November 2012 forecast

On the spending side of the ledger, the major change is in K-12 education.  Instead of increasing the basic formula rate $52 per pupil at an expense of $119 million for the biennium, I instead pay back $275 million of the outstanding $1.1 billion school shift, while keeping the Governor’s investments in optional all-day kindergarten and increased funding for special education and early childhood programs.  While some school officials rightly point out that the basic formula rate has lagged inflation for the last decade, political realities dictate that the state needs to make some headway on getting the shift behind it in a reasonable timeframe.

Most other categories of the budget see reductions from the Dayton proposal — in fact, excluding K-12, spending in my proposal is $200 million lower than Dayton’s, while still making significant investments in critical areas.  While investments in local government aid are less than half of the governor’s proposed levels, a $60 million increase should help relieve some pressure in local budgets.  Meanwhile, the $50 million reduction in higher education could be expected to come largely out of the University of Minnesota’s budget, pending completion of the review of their administrative staffing and expenses.

Recap

This Brick City “Plan C” is an attempt to rectify some of the weaknesses of the Dayton budget proposal.  Like any budget, it involves significant tradeoffs, and not all of the options available are good ones and all are open to debate.  What do you think?  Leave your comments below.

(The figures above represent my best attempt to calculate what the numbers would be, which is not always straightforward.  Any errors, as such, are inadvertent.)

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9 Responses to “One attempt at a Plan C: Brick City Budget”

  1. Well, you gave it a shot. Although it seems like your increase revenues and increased spending might not quite cover the “projected” shortfall. (Although I’m betting with almost 100% certainty this projected shortfall will drop enough to make the difference for sure, and probably even more than that by quite a bit). I thought figure was 1.1 billion, but maybe someone has read the writing on the wall and seen how much better things are after last sessions smarter, more efficient government measures worked out. (Thank you GOP!)

    The other complaint I think is the most obvious in that the sales tax portion hits the low to middle class even harder under this proposal. You see a bigger rebate once a year doesn’t help pay the monthly bills. I’m made a comfortable living for sometime now, but I still remember the days when a smaller bottom line would mean more Romen noodles for dinner. ( actually, I was more of a mac and cheese guy myself).

    Then of course, my standard issue has to be why raise spending at all. It’s unnecessary. Do we really need to do any of it? Do we even need to raise taxes? can we look for more cuts to the state budbet, by find efficiencies elsewhere? Why not start with a zero budget process, and force agencies to clean up their acts like we in the business world do? We work to be more efficient. Find cheaper supplies. Work out better deals. Make the first priority that you are spending other people’s money. And they expect you not to waste it.

    • The sales tax hits harder under my proposal? How do you figure? I’m collecting $900 million less in total sales taxes than the Dayton budget, and the Dayton plan offered no income tax relief (other than the property tax rebate, which wouldn’t hit a lot of folks). Also, my income tax relief wouldn’t be a one-time rebate as companies would update their withholding.

      • Dayton says (which is BS) that the existing tax reduction and the new sales tax are a basic wash. I you buy into that, then isn’t your reduction in existing sales tax cuts going to unbalance the sales tax for everyone? Or do we expect a large part of his difference to come from the $100 limit on clothing? And then your effort is to make sales tax progressive by alleviating sales tax on low income families? Could you possibly get away from this notion that we need more revenue and stop trying to engineer results through more complex tax code?

        Maybe Ben carlson has it right. It’s time to start a tithing approach to taxes. Makes it simple, and forces everyone to have skin in the game, and folks know that ANY increase effects everyone. Imagine such a place where every increase in government spending came to each and everyone of us. Would government finally strive to be efficient? Would people finally clamour for responsible spending in the country and our state?

        • If you recall my original post on this subject, I don’t agree with Dayton’s assertion that his sales tax plan is a wash for consumers. Which explains the rationale behind many of the changes I propose.

          The intent of the income tax cut is not to make the sales tax progressive, but rather to make it less regressive. My proposal still sees a net increase in sales tax collections, even factoring in the $650 million income tax cut. In total, then, the sales tax proposal — on its own — should factor out to be at best neutral, but more likely slightly regressive.

          If you think we can pay back the school shift — in the budget, not merely by hoping we run surpluses — without more revenue, then I invite you to try this activity yourself and specify the spending cuts you would make.

          • You don’t have to hope for surpluses when you reduce spending. We’ve seen even during this lousy economy, the GOP led reforms are reducing the projected deficit. Last year at this time, did you imagine we’d have paid back MORE of the shift than we borrowed? What if the Feb numbers show continued surplus? How many quarters in row of surplus will show you that there is a better way forward. Keep tightening government spending. Keep squeezing the agencies to find efficiencies. It works in the free market because it increases efficiency. WHy not do this at the government level. Squeeze. Let’s have a cross the board cuts, and make departments and agencies proove they need the money. Force them to clean up waste. We do this all of the time in the private sector. Squeeze. I see no reason to endlessly grow government every year. It’s high time government joined the rest of us and became efficient.

            • So, then, I can mark you down for about $1.375 billion in cuts, since the GOP has said it expects to have a substantial shift payback as part of the budget. That’s about 3.7% applied across the board, OK?

              • I’d go for 5%, so we can payback more of the shift, and as the surplus grows from further budget reform, we can start talking about new programs once the efficiencies are realized in our various departments.

Trackbacks/Pingbacks

  1. Making tradeoffs: Plan C versus Plan D | Brick City Blog - February 19, 2013

    […] I rolled out my “Plan C” budget yesterday, one of the main threads I’ve gotten in terms of comments (from John Brunette in […]

  2. After the Forecast: Adjusting the Brick City Budget | Brick City Blog - February 28, 2013

    […] release his updated budget proposal the week of March 11, I’ve made changes to my original “Plan C“, and I’ve detailed them […]

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