Political stakes for reforming Minnesota’s tax code

Gov. Dayton is scheduled to deliver his budget plan today. We don’t know specifics yet, but there has been enough chatter to examine some of the possibilities.

As I reported this morning, the politics of this are tricky for Dayton. Dayton has been focused on increasing spending for schools (and his aides are pushing greater investment on early childhood education).

Dayton’s challenge will be to balance his proposed tax hikes with increased spending that he argues would move the state forward. The worry, however, is that higher taxes could also undercut the state’s economic recovery.

But that added spending will come on top of erasing a $1.1 billion projected deficit. Republicans will work to portray Dayton and DFLers in control of the Legislature as out of control tax and spenders.

Here are the political risks for some of the possible changes to the tax code:

Income tax on top earners: Dayton made it a key issue during the election. It will likely go up.

Political stakes: He claims it will make Minnesota’s tax system fairer. Critics say it will deter business spending. They also claim rich are getting whacked on the federal level.

Expanding the sales tax to clothing: Expanding the sales tax to clothing would put Minnesota more in line with other states.

Political stakes: Minnesotans have become accustomed to not paying a sales tax for clothing. Get ready for claims Dayton broke a promise to only increase taxes on the wealthy.

Lowering the sales tax rate but expanding the base: This is another possibility. It would make Minnesota more competitive with other states. Expanding the sales tax to some services like haircuts and other services would deliver more revenue to the state.

Political stakes: It would be seen as a positive for the business community and could be accepted by a public that would be wary of seeing a tax on clothing. The downside is that lowering the rate is expensive.

Lowering the Corporate Income Tax: It would make Minnesota more competitive with other states (MN’s tax rate on corporations doing business in the state is already one of the highest in the country)

Political stakes: He would be throwing a bone to the business community. The downside: Does Apple really need to take home more in profits?

Raising the cigarette tax: Minnesota’s tobacco taxes are lower than most surrounding states (except North Dakota)

Political stakes: The public health community has been pushing for an increase with an aim to deter smoking. It would also only hit about a third of the public. The downside is that many blue collar workers smoke – a key DFL constituency. Dayton also criticized plans to increase the tobacco tax during the 2010 campaign for governor and it goes against Dayton’s pledge to keep the state’s tax system progressive.

Cutting property taxes: Dayton has argued that he wants to lower property taxes. It’s a bit difficult to do since property taxes are raised by local governments. He could, however, work to deliver increased aid to cities and counties or create direct tax breaks for homeowners and hope those governments respond by lowering property taxes.

Political risk: The plan would be popular among seniors and others who are worried about property taxes. The downside is that despite increased aid, local governments may continue to push for property tax increases to pay for local services. Higher property values will also result in higher property taxes for homeowners.