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Gov. Mark Dayton was mum on specifics regarding his upcoming budget during his State of the State address. And that's in keeping with the word around Capitol halls.

Dayton’s budget options limited

 Peter Bartz-Gallagher)

Gov. Mark Dayton, shown here arriving for last week’s State of the State address, has offered few public signals regarding the mixture of tax increases and budget cuts he’ll propose Tuesday in his first budget submission to the Minnesota Legislature. (Staff photo: Peter Bartz-Gallagher)

Governor’s office plays it close on revenue, cuts

Gov. Mark Dayton was mum on specifics regarding his upcoming budget during his State of the State address. And that’s in keeping with the word around Capitol halls.

“Dayton’s people have been extremely tight-lipped about what they’re doing,” says a veteran lobbyist who has worked hard to turn up budget clues. “They haven’t even floated any trial balloons to see what the reaction would be. The only thing I’ve heard – and I’ve heard it from several people – is that some of the tax increases they’re looking at aren’t going to yield the kind of revenues they had hoped. But as to whether that means they’re going to cast a broader net to look for revenues, or make deeper cuts, no one seems to have any idea.”

But Dayton’s speech to lawmakers from both chambers on Wednesday did make one thing clear: His plan requires him to spend more money in spite of a historic $6.2 billion deficit.

Joined by education leaders from across the state who were in attendance, Dayton asked the Legislature to help him find the cash needed to increase education funding every year that he is governor, “with no excuses and no exceptions.” Dayton also called on the Legislature to help him increase spending on the state’s roads and bridges and transit, which he called one of the most important “business climate measures.”

Dayton’s budget is due Tuesday and will reflect his best effort to lead the state out of what he characterized as a “horrendous fiscal mess.” While he intends to increase spending on transportation and education, his funding options are limited. He recently ruled out gambling as a source of revenue in his budget, and his campaign promise to raise the income tax on the state’s highest earners garners far less money than he originally anticipated. His plan will likely blend significant tax increases with extensive cuts, a combination that will likely cause objections from legislators on both sides.

“I ask not to be finally judged by the budget I am required to submit next week,” Dayton said during his address. “I ask you to remember that I was not given a blank slate on which to write my best proposals for our state’s future.”

Spending ahead

In his speech, Dayton stressed that investment in schools doesn’t mean more money for the status quo. He asked lawmakers to help him find extra funding for early-childhood education, and announced that he plans to re-establish the Governor’s Council on Early Childhood Education and the Children’s Cabinet.

Dayton named one specific education program that will require cash: all-day kindergarten. “How can states like Alabama, Louisiana and Mississippi fund all-day kindergarten while we in Minnesota do not?” he asked.  In the House session following Dayton’s address Wednesday, DFL Rep. Melissa Hortman of Brooklyn Park was cruising down the chamber aisles looking for co-authors on a bill to establish all-day kindergarten. Her bill would cost $120 million annually, she said, but it was getting little support from Republicans.

Dayton also hopes to increase transportation funding and create a Transportation Finance Authority that would “bring together the best minds and their ideas for financing the transportation improvements.” He didn’t propose any new ideas of his own in that area, but made it clear that his goals would not come without a cost.

To pay for a high-profile road and bridge construction agenda, some around the Capitol halls can envision something similar to the gas tax in 2008, which raised more than $6 billion for transportation projects. While Dayton didn’t mention a gas tax or anything similar, the option is “certainly not outside the realm of possibility,” one lobbyist said.

Searching for revenue

If there’s one thing Capitol watchers can be assured of regarding Dayton’s budget, it’s that he will keep his campaign promise to propose an income tax increase on the state’s highest wage earners.

But Dayton ran into trouble with the proposal on the campaign trail. Figures from the Department of Revenue before the November election showed his plan to bump up the income tax bracket on the wealthiest Minnesotans didn’t reach the $4 billion figure he had originally targeted. Dayton redid the math and found that a 10.95 percent income tax rate hike for individuals making $150,000 annually ($173,000 for joint filers) would bring in $1.9 billion in the next biennium, or about half of what he originally anticipated.

He also recently took possible cash from gambling off of the table, despite the fact that he originally included a state-owned casino at the Mall of America or the Minneapolis-St. Paul International Airport in his campaign budget. Early on, he said such a casino could produce up to $80 million to help solve the budget deficit.

Dayton now says the money won’t come soon enough to help the budget, so he’s leaving it out. While Dayton didn’t give details on the delay, a Capitol policy staffer said even if the governor manages to pass a gambling proposal by end of session, it will likely face a constitutional legal challenge from tribal groups. That would push construction well into the next year. If the state wins a lawsuit, it will take time after that to get construction loans and crews working. “Tribal gambling would have every reason to oppose this in court, and they would have the money to do so,” the source said. “It could be well over a year, or even two, before the first coin is even put into a slot machine.”

Dayton is also unlikely to touch the state’s sales or property taxes, which he called regressive on the campaign trail. He railed at gubernatorial opponents Tom Horner and Tom Emmer for proposals that increased those taxes. That leaves only a few options on the table, including sin taxes, similar to former Gov. Tim Pawlenty’s 75 cent per cigarette pack “health impact fee.” He could also opt to comb through some of the 296 tax breaks on the books. There’s about $11 billion in tax relief and deductions that have been written into state tax law. But a large chunk of that figure comes from sales tax exemptions, which he may leave out of the picture.

Where the ax may fall

Dayton’s speech was scrutinized not only for what was said, but what was left out.

Dayton made no mention of preserving local government aid, and left out any specifics on health care spending, saying only that it’s “far too important to become a political football in the 2012 presidential Super Bowl.” “I’d be worried about [his silence] if I was in the local government or human services area,” one veteran House DFLer noted.

With HHS and LGA the largest portions of the budget outside of education funding, they are the most likely sectors to get slashed. League of Minnesota Cities lobbyist Gary Carlson was struck by the fact that Dayton did not mention the state-local partnership in his speech.

“We’ve been concerned because, through the grapevine, we heard that some of their revenue enhancements that are being considered aren’t panning out,” he said, “which means to balance the budget you have go deeper into state programs, and local government aid is going to be hard to miss.”

At the same time, however, Dayton appeared at a Coalition of Greater Minnesota Cities dinner last Wednesday, and local officials were reportedly encouraged by the governor’s words. Some took his remarks as an indication that any local aid cuts in his ’12-’13 budget would be minimal.

In the end, Hortman thinks Dayton’s plan will reflect the choices of a governor who is more moderate than people think.

“Republicans are going into budget discussions as if Dayton is the DFL version of Pawlenty,” she said. “He’s not handling things like that, and it’s throwing them off.”

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