Live-blogging Midday: The governor’s budget

MPR’s Midday is discussing Gov. Tim Pawlenty’s reworked budget plan. I’ve live-blogging it in search of the salient nuggets.

Guests are Sen. Dick Cohen, DFL-St. Paul, chair of the Senate Finance Committee and Sen. Geoff Michel,, R-Edina, assistant minority leader.

I would anticipate some discussion of Tom Scheck’s story that the governor’s proposal assumes property tax increases.

11:07 a.m. – “The governor set an appropriate direction,” Michel said. “We’re starting to see specific proposals and we’re starting to digest what the federal money means.”

Cohen says Pawlenty uses one-time money and says in the next biennium, “the budget falls off the cliff.”

11:10 a.m. – Sen. Michel, asked if one-time money is preferable to a state-wide tax increase, he said a recession is not the right time to raise $2 billion in taxes. “At a minimum we should expect state government should live within its means and set some priorities.” That may be a shot against the Pogemiller budget proposal that called for an across-the-board cut.

Cohen says using one-time money for a secure budget “makes no sense.” Michel says the DFL is saying “the governor should cut more, but he’s cut too much.”

11:16 a.m. – Cohen says he’s prefer tax increases to the use of one-time money. He says to raises taxes on the wealthiest is preferable “to kicking people who are least able to take care of themselves off the programs they need.”

11:19 a.m. – The tax incidence study is being kicked around.

Listener questions

Q: Why are human services the first to be cut?

A: “That’s the portion of the budget which is racing away at an unsustainable rate — 22% was the projected increase over the next two years,” Michel said. “This is the PacMan of the state budget.”

“If we cut everything in state budget by 5% that’s $1.5 billion… you’re still short of solving the problem,” Cohen said. Pressed on the lack of priorities in the Senate budget, Cohen said “it’s a work in progress.”

11:25 a.m. – Could K-12 be cut to restore some human service cuts? “There’s been a lot of trimming going on in K-12,” Sen. Michel said. Cohen says “at the end of the day when we pass K-12 out of the Senate, we’ll have a smaller cut than what we show now.”

11:39 a.m. – Do business owners have to have $250,000 in profit in order not to be included in an income tax increase for people making more than $250,000

According to MIchel, “92% of small businesses report business income on personal income tax. To lay out this tax increase as just a tax increase on the rich is wrong.” Cohen notes businesses can deduct expenses so the number reaching adjusted gross income of $250,000 is much smaller.

11:42 a.m. South Dakota caller cites the number of businesses moving to South Dakota and says “Sen. Cohen is the best politician South Dakota can hope for.

“South Dakota is a state losing population,” Cohen said.

11:46 a.m. – Caller says the state’s economy has been doing down since the state cut taxes. Proper application of cause-and-effect?

11:49 a.m. – For every wealthy taxpayer the state loses, according to Cohen, “we have to fill that hole with 86 middle-income taxpayer.

11:51 a.m. – “Republican governors throughout the country have attempted to have a mixture of budget cuts and tax increases to deal with budget problems. That’s why Minnesota has fallen behind; Governor Pawlenty has refused to look at anything,” Cohen said.

11:56 a.m. – Michel asks, “what is reasonable” in the size of the budget?

11:57 a.m. – “Why not just paper over the budget, avoid taxes, under the assumption the economy will get better?” Eichten asks.

“It’s a false premise,” Cohen says. “You can’t have a budget of that sort and not continue to run a significant deficit over the next two years. There is no economic projection to say the economic problems won’t continue.”

Says Michel” “We’ve got to deal with the jobs deficit. It’s the only thing we should be working on for the next two months.

  • Bonnie

    The issue of small businesses getting caught in the increased tax rate over 250,000 continues to be communicated in a misleading manner. I missed the portion of the discussion, so perhaps Gary was able to clarify. I don’t question the stat of 92% small business owners reporting their in come as a sole proprietor, partner in a partnership or shareholder in an “S” Corporation. But their adjusted gross income, and of course taxable income is AFTER all business expenses. And a very small percentage of that 92% is going to be pulling 250,000 plus out of their business (yes, profit).

  • Alison

    Is there any movement toward having small business owners pay business taxes rather than combining their business and personal taxes? I’m not a an accountant, so can anyone comment on whether this would this work? Would it clarify the situation?

  • Ryan Melena

    I am the S-Corp owner who sent in the question this afternoon. Bonnie is absolutely correct. Small businesses (S-Corp, Partnership, LLC, etc) do transfer business earnings to the individual shareholders’ personal income tax but, as she says, it is profit remaining after all deductions (FICA taxes, unemployment taxes, expenses, salaries, etc). In other words, it is business PROFIT.

    Sen. Geoff Michel dodged my question and didn’t state what percentage of small business owners would be subject to the proposed tax increase. Instead he quoted the “92% of small businesses report business income on personal income tax” statistic which had absolutely no bearing on the topic. My guess is he didn’t answer the question because the number of small business owners affected would be minimal which would completely undermine his argument.

  • Al

    So Ryan, if a small business owner spent money to further grow the business until they get down to $250K profit they could avoid paying the tax? Does this proposal really apply only to those small business owners who decide to take more $250K out of the business?

  • Ryan

    Al,

    if a small business owner spent money to further grow the business until they get down to $250K profit they could avoid paying the tax?

    If they spent that money on deductible expenses then yes.

    Does this proposal really apply only to those small business owners who decide to take more $250K out of the business?

    Kind of, I think you’ve got the right idea. You don’t always actually have to “take the money out”. At least in an S-Corp you can leave the profit in the business and your shares just become worth that much more. Same idea though, it is profit that you have made and it transfers to your personal income taxes as income.

  • Al

    Thanks, Ryan.