After backing off a proposal to expand the state sales tax, it looks like DFL Gov. Mark Dayton will now rely on an income tax increase on top earners to erase a projected deficit and following through on his pledge to boost education funding.
Details of the governor's revised budget plan are expected on Wednesday.
Republicans blasted Dayton for six weeks over the sales tax and are now shifting their criticism to the income tax portion of his plan.
Business owners, who for the first time would have been paying sales taxes on their transactions with other businesses, were among the loudest critics of Dayton' s original budget proposal. Even though that issue generated the most heat, Senate Minority Leader David Hann, R-Eden Prairie, insists that those same business owners are just as concerned about an income tax increase.
"These things are additional burdens on an economy that is already struggling. We are generating more revenue as the economy continues to grow," Hann said. "Our focus has been to continue to do things that encourage that growth. We don't think that additional taxes are helpful."
The governor's original budget proposal would raise $1.1 billion by requiring the wealthiest Minnesotans pay 2 percent more in income taxes. The increase would apply to individuals with more than $150,000 of taxable income, and couples with more than $250,000. According to the Minnesota Department of Revenue, people in that top income group currently pay a smaller percentage of their income in taxes than everybody else.
Sen. Dave Thompson, R-Lakeville, said he is concerned that many of the people at the upper income levels are running small companies that provide much-needed jobs.
"These things are additional burdens on an economy that is already struggling... We don't think that additional taxes are helpful."
"These kinds of taxes tend to hurt small business people, and they give folks incentive to engage in activities in other states, whether it be individuals that can live in other states or move businesses to other states," Thompson said.
Democrats have also been listening to the concerns of business owners on taxes. House Speaker Paul Thissen, DFL-Minneapolis, said he too heard the complaints about the governor's sales tax proposal, but that he heard a different message about income taxes.
Thissen said corporate executives have told him they could live with paying higher income taxes, and he expects it to pass this session.
"They know that we need to make investments in our work force, investments in education and job creation. They understand you can't do that without additional resources," Thiessen said. "I expect that based on the conversations we've had for the past two months they will be there to say we need a balanced package, which is what most Minnesotans want."
Senate Majority Leader Tom Bakk, DFL-Cook, has met with many of the same CEOs, and said he would be disappointed if they were now to criticize an income tax increase that was not a concern in those earlier meetings. Bakk also suggested that the increase could affect more taxpayers than the governor has intended.
"His position is the top 2 percent. I think at one point he talked about the top 5 percent," Bakk said. "I think there will be some significant conversation in the Senate tax committee whether the top 2 percent of filers is the right number, or is it something more than that?"
Bakk is also not closing the door on a sales tax expansion to some business services, but he did not specify which ones are still possibilities. Bakk stressed that just because the governor is taking those taxes off the table does not mean the Senate will do the same.
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