CHICAGO — A tax overhaul with a likely income-tax increase to erase a deficit and generate more funding for schools has cleared both houses of the Minnesota legislature and is headed to a conference committee.

Both chambers also authorized infrastructure funding for the Mayo Clinic’s plan to make over its home city.

The House last week approved its package and the Senate late Monday adopted its own version.

They differ in significant ways from one another and the plan put forth earlier this year by Gov. Mark Dayton to deal with a $627 million deficit and generate more revenue for education and economic development initiatives.

The job of resolving the differences to reach a plan that can pass both chambers and win Dayton’s signature now begins

The Senate plan passed narrowly on its second try along party lines with most Republicans opposed.

The bill raises the income tax rate on the top 7% of earners to 9.4% from 7.85%, hikes the cigarette tax by 94 cents per pack, and broadens the sales tax to cover items like clothing, over-the-counter drugs, and personal services while also lowering the rate to 6% from 6.875%.

The House plan differs substantially from the Senate’s, notably by not making any changes to the sales tax.

While the process of sorting out the differences will be no easy task, most expect it go somewhat smoother than the acrimonious debate two years ago that led to a state government shutdown.

Republican control of the Legislature shifted to the Democratic-Farmer-Labor Party last November and Dayton is a Democrat.

Dayton has not threatened any vetoes, but he opposes extending the sales tax to items like clothing and wants a more limited income tax increase.

“I stand on my proposal, and don’t want to raise taxes on the middle class,” Dayton was cited as saying in published reports.

The Senate package also imposes a 13% wholesale tax on sports memorabilia and requires Internet retailers to collect sales taxes.

The Senate package also earmarks $450 million in aid for local governments and school districts to keep property taxes down.

The package would raise $1.8 billion over the fiscal 2014-2015 biennium that begins July 1 providing enough revenue to wipe out the $627 million deficit, fund property tax relief, and increase spending for education, health care and some other services.

Republicans have argued that the budget can be balanced without tax hikes and the size of the income tax increase will hit the middle class hard.

The bill also provides roughly $400 million in subsidies for the Mayo Clinic’s $6 billion proposal to transform its home base in Rochester.

The clinic initially pursued $500 million in state borrowing aid and $85 million in local support to fund infrastructure improvements as part of a $6 billion expansion and economic development plan dubbed “Destination Medical Center.”

One Republican senator, David Senjen of Rochester, opposed the tax increases but voted for the tax bill because of the Mayo aid for a plan he called “the largest economic development project in this state’s history.”

Dayton wants to limit the income hike to the top 2% earners while the House version further limits the increase to the top 1.1%.

In addition to raising the tax rate to 8.49% from 7.85% on top earners, the House plan also tacks on a 4% temporary income tax surcharge on earners making more than $500,000 a year.

The House plan raises a total of $2.6 billion over the biennium. House leaders argue the extra funds are needed to more quickly repay $850 million in aid still owed to schools. The funds were withheld to help balance the budget two years ago.

Dayton, a Democrat, initially had sought to broaden the sales tax paid by consumers and businesses along with a rate cut to support his $37.9 billion two-year budget.

He dropped the sales tax changes and property tax relief plans after tinkering with the budget plan to reflect rosier revenue projections released in late February. 

Dayton’s revised plan would raise about $1.8 billion in new revenue over the next two years to erase the deficit and fund $640 million in additional spending on education and economic development.

Standard & Poor’s rates Minnesota AA-plus and Moody’s Investors Service rates the credit Aa1 with a negative outlook.

Fitch Ratings rates the state’s $6 billion of GOs AA-plus.

The governor has separately floated a $750 million bonding package for capital projects.

The House plan does not alter the sales tax and it also provides support for Mayo Clinic.

The House version also raises the alcohol tax and its method of providing property tax relief comes from rebates instead of aid to local governments, and it raises the cigarette tax by $1.60 a pack.

While apart on some fronts in the tax bill, the governor and the Legislature are most closely aligned in passing some level of income tax hike, raising the cigarette tax, and providing support for Mayo.

Proponents defend the Mayo aid as warranted based of the plan’s economic development benefits in the form of an estimated 25,000 to 35,000 new jobs and estimated $2.8 billion in new tax revenue.

They also cite Mayo’s role as an economic engine in the state, its national prominence, and role as the state’s largest private employer with 40,000 on its rolls.

Critics contend providing the system with public subsidies sets a bad precedent.

The state would provide aid for infrastructure and transit.

The House version of the measure requires $200 million in private funding before handing over any state funds and the Senate version sets the bar at $250 million.

Both also call for about $150 million in local funding support from the city or county and they differ on governance of approved projects.

The clinic earlier this year launched the sweeping, long-term initiative to broaden its appeal with patients and potential staff by dramatically transforming Rochester.

In addition to its own investment in its facilities of $3.5 billion, the plan banked on $2.1 billion of private investment and originally sought $585 million of mostly bond-financed state and local financial support.

The plan envisions improved lodging, hospitality, entertainment, retail venues, and housing stock for both patients and their families.

The public funding would help draw private investment by covering the costs of parking, transportation, bridge, skyway and streetscape projects. Mayo operates 22 hospitals in Minnesota, Iowa, Wisconsin, Florida, Georgia and Arizona.

“It’s a long-range plan,” the clinic’s manager of treasury services, Rick Haeflinger, said recently.

“Mayo Clinic is investing a lot of capital here and we are asking for a little bit of the tax money to come back and help in the development of infrastructure for Rochester,” he added. “None of the funds would be used by the clinic.”

Standard & Poor’s recently revised its outlook to negative from stable on Mayo’s AA rating in part due to the system’s growing debt load of about $2.8 billion after the sale.

Moody’s Investors Service recently affirmed the clinic’s Aa2 rating and stable outlook.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.