Democrats in the state Senate released a plan today that increases income taxes on wealthiest 6 percent of Minnesotans, raises the sales tax on clothing and services, and increases the cigarette tax.
Republicans don't like it and even some Democrats in competitive districts are uneasy about the taxes and spending. But DFL leaders say the $1.8 billion dollar tax increase is needed to erase the state's budget deficit and increase spending for schools and property tax relief.
The plan reveals the last piece of the Senate Democrats' tax puzzle. The public now knows the tax and spending priorities of Gov. Mark Dayton, Senate Democrats and House Democrats.
The three sides agree on raising the cigarette tax and income taxes on top earners. But they differ on the rates and who is taxed. Senate Tax Chair Rod Skoe, DFL-Clearbrook, says he prefers to tax more Minnesotans at a lower rate than Dayton and House Democrats.
"We're concerned about having rates that are high and narrow and we want to have a broader, lower rate, so we were looking at including a larger percentage of Minnesotans than just 2 percent," Skoe said.
Skoe's proposal increases income taxes for couples with an annual taxable income of at least $140,000. Dayton wants a new income tax bracket to target the top 2 percent of filers: joint filers making $250,000 or more. The House DFL plan raises taxes on the top 1.1. percent, or joint filers couples making $400,000 or more.
When it comes to sales tax, Senate Democrats are taking a different approach than the governor and House Democrats. They want to expand the sales tax to clothing and consumer services and lower the overall rate.
Broadening the sales tax base is good tax policy, Sen. Ann Rest, DFL-New Hope, said.
"It's bringing stability to the sales tax system which makes it not so dependent on what happens in any particular sector of the economy," Rest said, "which has greatly led to instability in the revenues raised by the sales tax."
While Senate DFL leaders praise the bill as good tax policy, some of their rank-and-file members remain apprehensive about it.
"This is going to be a hard one for me to support," said first-term DFL Sen. Melisa Franzen. Franzen, who represents the swing district of Edina, Minnetonka and Bloomington, worries the bill could harm the state's business climate.
"If the cost of doing business in Minnesota is going to rise and small business is going to be impacted, that is something that I have to take into account," Franzen said.
Sen. Greg Clausen, DFL-Apple Valley, worries about the income tax portion of the bill, but said he thinks many of his constituents could live with it since the bulk of the extra spending is dedicated to education.
"There certainly are people out there that say 'no new taxes.' Whenever they see a tax they don't support that," Clausen said. "But I think there is also a group of people who recognize that there are needs in our state."
“We think this is an overreach of gargantuan proportion. They're raising taxes on everybody.”Senate Minority Leader David Hann, R-Eden Prairie
Republicans are working to create an even greater sense of uneasiness among the DFL caucus. Senate Minority Leader David Hann, R-Eden Prairie, characterized the bill as shameful because it would hit nearly every Minnesotan.
"We think this is an overreach of gargantuan proportion. They're raising taxes on everybody," Hann said. "The middle class is going to get hit with income tax increases. There are sales tax increases on clothing, oil changes, haircuts, you name it."
The Senate Tax Committee is expected to vote on the bill on Wednesday. The full Senate is expected to vote on it next week. Then, the measure must be reconciled with the House and the governor's plans.
Unlike the Senate plan, the House plan includes a temporary income tax surcharge on the very wealthy and an alcohol tax increase. The House will vote on its bill on Wednesday. House Majority Leader Erin Murphy, DFL-St. Paul, said she does not think her members will back the Senate's plan.
"The House has been pretty clear and there probably isn't a lot of support in the caucus about what we're hearing in the Senate, but there's a lot of work left to do in the month ahead of us," Murphy said.
Dayton said he is taking a wait-and-see approach to the proposals in both bills. He's been cool to expanding the sales tax and raising taxes on alcohol but told reporters this week that he is open to discussing both issues.