ST. PAUL, Minn. - Gov. Mark Dayton will likely call for big changes in the way Minnesota collects revenue, when he unveils his blueprint for the 2014-2015 budget cycle.
"I think he's going to be looking at changing the tax system, making it more stable, making it fairer," Jay Kiedrowski, a government finance expert at the Humphrey School of Public Affairs, told KARE.
Dayton has long advocated higher taxes for the wealthiest Minnesotans. And you'll hear the same argument from the public employees' unions that backed Dayton in the 2010 gubernatorial election.
Now that both chambers of the legislature are controlled by the DFL party changes in the tax code are more likely than ever to come to reality. But the Capitol budget game is far more complex, and Dayton also has his eyes on adding long term stability to the state's finances.
"We have a structural deficit in Minnesota, meaning that in a normal year our revenues would be less than our expenditures," Kiedrowski explained.
He served as State Finance Commissioner in the 1980s during the Rudy Perpich administration, and also worked as finance director for the city of Minneapolis. He also spent years working in the private sector for Wells Fargo Banks.
Kiedrowski said the structural problems with the state's finances goes back more than a decade, which is one of the reasons that every legislature since 2003 has started the session facing some sort of deficit or unpaid debt to schools.
"It goes all the way back to 1999 when we reduced the income tax, and we did it again in 2001," Kiedrowski explained.
"And we haven't had enough revenue in a normal year to pay for the expenditures we have."
On paper it appears the state is facing a $1.1 billion deficit in the two-year cycle, or biennium, that begins July 1. If one factors in inflation it's more like $1.9 billion.
The legislature won't be able to bank on the $1.3 billion projected surplus in the current biennium, because by law it must be used to pay off $2.4 billion in IOUs issued to local school districts.
That so-called "shift" was a means of delaying payment of part of the school aid lawmakers approved but couldn't afford to include in previous budgets. If the schools receive that $1.3 billion surplus, they'll still be owed $1.1 billion by the state.
On the spending side, Dayton is expected to ask for a larger investment in early childhood education. On the revenue side, he may seek an expansion of the sale tax to clothing, but as a trade-off, will call for lowering the overall sales tax rate.
The governor's budget for that two-year period will most likely be in the $36 to $38 billion range, making it the largest in the state's history. However it's could be viewed as modest, compared to the size of the state economy.
"During the 1990s Minnesota state and local government cost each taxpayer 17 cents of their $1 dollar of income," Kiedrowski explained.
"Today that's 15 cents, so state and local government is a bargain in comparison to the 1990s."
Kiedrowski served on the Budget Trends Commission, which concluded several years ago that the state can't cut its way out of the problem, or tax its way out of it.
"We looked at the need to have a balanced approach of increasing revenue and reducing expenditures to solve this structural deficit," he said.
Dayton can't introduce bills, so his budget plan serves as a starting point for the tug-of-war over spending and taxes at the Capitol. It's also an early signal to lawmakers about what bill's he's likely to sign along the way.
Legislative leaders are in the process of vetting tax policy measures, but say they're not likely to take action on any spending bills until after the February fiscal forecast by the Office of Management and Budget.
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