ST. PAUL, Minn. - Gov. Mark Dayton looked to the wealthy to erase about half of a $6.2 billion budget deficit on Tuesday, proposing a new top tax bracket and an income surtax that together would give Minnesota the nation's highest income tax rate.
The Democratic governor's plan would raise nearly $2.9 billion from the top 5 percent of taxpayers, including a new property tax on homes valued at more than $1 million.
It would also increase taxes on health care providers and corporations with foreign operations, while cutting almost $1 billion in spending for programs including MinnesotaCare health care and nursing homes.
The tax increases and spending cuts are contained in Dayton's proposal for a two-year, $37 billion budget that guides more money into education but could also cost about 800 state workers their jobs.
"This is a very tough budget for very hard economic times," Dayton said.
Dayton said his proposal would shield 95 percent of state taxpayers from tax increases, while making the top earners pay a proportionate share of income in state and local taxes. The plan would restore recent levels of state aid to cities and counties, which Dayton said would help stave off local property tax increases.
Top Republican lawmakers gave the new income taxes zero chance of passing the GOP-controlled Legislature.
"I don't want to say it's dead on arrival. I don't think it has much of a heartbeat," said Deputy Senate Majority Leader Geoff Michel, R-Edina.
House Speaker Kurt Zellers said he was taken aback by the "epic" size of the tax hike for those with six-figure incomes. He said Dayton's permanent and temporary increases would shoot Minnesota past Hawaii and Oregon for a dubious distinction for the highest tax rate, causing business leaders and others to flinch.
"This is a feeble and pathetic attempt at going back in time to raise taxes and increase spending in order to balance the budget," said Zellers, R-Maple Grove. "It has not worked. It will not work."
Democratic legislative leaders praised Dayton's approach but wouldn't commit to voting for the tax increases.
Senate Minority Leader Tom Bakk said the governor's budget delivers on the blueprint he sketched during the campaign.
"Anybody that's outraged wasn't listening to Governor Dayton on the campaign trail. And he did win," said Bakk, DFL-Cook. "Well-to-do Minnesotans have been getting a really, really good deal."
Dayton campaigned on raising income taxes on the wealthy. His tax plan would impose a new fourth bracket of 10.95 percent for single filers making $85,000 and up in taxable income and couples who make more than $150,000. It tacks another 3 percent surtax on people with $500,000 or more in taxable income for the next three years, going beyond what he talked about as a candidate last year.
Assistant Revenue Commissioner Matt Massman said the tax increases would be partially blunted by federal tax reductions approved in December. Someone at the bottom end of the new tax bracket could expect to pay $139 more per year in state income tax while a couple with $1 million in taxable income could expect a $37,000 hit, according to his calculations.
The conservative Tax Foundation ranks Minnesota and New York as tied for the country's eighth-highest tax income rate currently. Minnesota's current top tax rate of 7.85 percent applies to taxable incomes starting at $75,000 for individuals and $132,000 for couples.
In all, Dayton would cancel $950 million in planned spending.
He would eliminate MinnesotaCare health coverage for 7,200 adults, including some parents, whose incomes are at least twice the federal poverty guidelines, or $44,000 for a family of four. MinnesotaCare is a state-subsidized health care plan for the working poor, who pay premiums on a sliding scale and get less generous benefits than those on federal health care programs.
Nursing home reimbursement rates would be cut 2 percent. Long-term care providers who work in homes and community-based services would have their reimbursements cut 4.5 percent.
For schools, the plan wouldn't immediately repay $1.4 billion in aid that was delayed as part of last year's budget fix. Dayton said he aims to begin paying that money back in the budget cycle that starts roughly three years from now.
But the governor would raise general fund spending on education to $14.2 billion, a slight bump. That's about 38 percent of the state's entire spending. Dayton's budget also directs money to optional all-day kindergarten for poor students. It would set up a rating system to help parents make informed decisions about early childhood education providers.
State agencies would have to cut up to 10 percent of their budgets, with military and veteran programs exempt. And the state work force would shrink by 6 percent.
Dayton said he tried to aim his spending cuts at the least vulnerable people.
"I'm not willing to make barbaric cuts in the essential services that affect people's lives," Dayton said.
Republicans who took over the Legislature this year aim to hold spending to $32 billion, the amount of taxes the state is due to collect. Dayton's proposal puts the sides $5 billion apart even before they get into the details of how much to spend on specific programs.
Dayton and top legislative Republicans both planned to fly around Minnesota talking about the budget Wednesday. Their travel plans, like their budgeting philosophies, were not scheduled to intersect.
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